International Trade

• Trade may be conducted at two levels: international and national.

• International trade is the exchange of goods and services among
countries across national boundaries.
• Countries need to trade to obtain commodities, they cannot produce
themselves or they can purchase elsewhere at a lower price.
• Initial form of trade was the barter system – where direct exchange of
goods took place.

History of International Trade

• In ancient times, transporting goods over long distances was risky,
hence trade was restricted to local markets.

• The Silk Route is an early example of long distance trade connecting

Rome to China – along the 6,000 km route. The traders transported
Chinese silk, Roman wool and precious metals and many other high value
commodities from intermediate points in India, Persia and Central Asia.

• Fifteenth century onwards, the European colonialism began and along

with trade of exotic commodities, a new form of trade emerged which
was called slave trade.

• Slave trade was abolished in Denmark in 1792, Great Britain in 1807 and
United States in 1808.

• After the Industrial Revolution the demand for raw materials like grains,
meat, wool also expanded. The industrialised nations imported primary
products as raw materials and exported the value added finished
products back to the non-industrialised nations.

• During the World Wars I and II, countries imposed trade taxes and
quantitative restrictions for the first time. During the post- war period,
organisations like General Agreement for Tariffs and Trade (which later
became the World Trade Organisation), helped in reducing tariff.
Why Does International Trade Exist?
• International trade is based on the principle of comparative advantage,
complimentarity and transferability of goods and services and in
principle, should be mutually beneficial to the trading partners.
• In modern times, trade is the basis of the world’s economic organisation
and is related to the foreign policy of nations.

Basis of International Trade

1) Differences in National Resources of countries due to their varied
geology, relief, soil, climate.
→ Geological structure: It determines mineral resource base and
topographical difference ensure different types of crops and animal
raised.
→ Mineral Resources: Unevenly distributed and provides the base for
industrial development.
→ Climate: It influences the type of flora and fauna of a region and thus
influence primary products.

2) Population factor: The size, distribution and diversity of people between

countries affect the type and volume of goods traded.
→ Cultural factors: Distinctive forms of art and craft develop in certain
cultures which are valued the world over.
→ Size of population: Densely populated countries have large volume of
internal trade but little external trade because most of the agricultural
and industrial production is consumed in the local markets.

3) Stages of economic development: At every stage of development, the

types of items traded change. In the developing countries, agro products
are exchanged for manufactured goods and vice versa for developed
nations.
 4) Extent of foreign investment: Foreign investment can boost trade in
developing countries which lack in capital required for the development
of mining, oil drilling, heavy engineering, lumbering and plantation
agriculture. By developing such capital intensive industries in developing
countries, the industrial nations ensure import of food stuffs, minerals
and create markets for their finished products.
5) Transport: With expansion of rail, ocean and air transport, better means
of refrigeration and preservation, trade has experienced spatial
expansion.

Important Aspects of International Trade

• Volume, sectoral composition and direction of trade are important
Aspects of International Trade.

Volume of Trade
• The total value of goods and services traded is considered to be the
volume of trade.
• The total volume of world trade has been steadily rising over the past
decades.

Composition of Trade
• During the last century, the nature of goods and services imported and
exported by countries have undergone changes. Trade of primary
products was dominant in the beginning of the last century.
• Later manufactured goods gained prominence and currently, though
the manufacturing sector commands the bulk of the global trade, service
sector which includes travel, transportation and other commercial
services have been showing an upward trend.
Direction of Trade
• Historically, the developing countries of the present used to export
valuable goods and artefacts, etc., which were exported to European
countries. During the nineteenth century there was a reversal in the
direction of trade.
• The world trade pattern underwent a drastic change during the second
half of the twentieth century. Europe lost its colonies while India, China
and other developing countries started competing with developed
countries.

Balance of Trade
• Balance of trade records the volume of goods and services imported as
well as exported by a country to other countries.
• If the value of imports is more than the value of a country’s exports, the
country has negative or unfavourable balance of trade. If the value of
exports is more than the value of imports, then the country has a positive
or favourable balance of trade.
• A negative balance would ultimately lead to exhaustion of its financial
reserves.

Types of International Trade

• Bilateral trade: done by two countries with each other.
• Multi-lateral trade: conducted with many trading countries.

Case for Free Trade

• The act of opening up economies for trading is known as free trade or
trade liberalisation. This
is done by bringing down trade barriers like tariffs.
• Trade liberalisation allows goods and services from everywhere to
compete with domestic products and services.
• The practice of selling a commodity in two countries at a price that
differs for reasons not related to costs is called dumping.
• Countries also need to be cautious about dumped goods; as dumped
goods of cheaper prices can harm the domestic producers.
World Trade Organisation
• In1948, to liberalise the world from high customs tariffs and various
other types of restrictions, General Agreement for Tariffs and Trade
(GATT) was formed by some countries.
• In 1994, it was decided by the member countries to set up a permanent
institution for looking after the promotion of free and fair trade amongst
nation and the GATT was transformed into the World Trade Organisation
from 1st January 1995.

• Functions of WTO
→ It deals with global rules of trade between nations.
→ It sets rules for global trading systems.
→ It dissolves disputes.
→ It also covers services like Telecom, banking and Intellectual property
rights.

• Criticism:
→ Free trade is widening the gulf between rich and poor nations.
→ The influential nations in WTO focus on their interest.
→ Many developed countries have not opened their markets to products
from developing nations.
→ Issues of health, worker’s rights, child labour and environment are
ignored.
• WTO Headquarters are located in Geneva, Switzerland. 164 countries
were members of WTO as on December 2016.
• India has been one of the founder member of WTO.

Regional Trade Blocs

• Regional Trade Blocs have come up in order to encourage trade
between countries with geographical proximity, similarity and
complementarities in trading items and to curb restrictions on trade of
the developing world.
• Today, 120 regional trade blocs generate 52 percent of the world trade.
• India is a member of SAFTA (South Asian Free Trade Agreement).
Concerns Related to International Trade
• International trade can prove to be detrimental to nations of it leads to
dependence on other countries, uneven levels of development,
exploitation, and commercial rivalry leading to wars.
• As countries compete to trade more, production and the use of natural
resources spiral up, resources get used up faster than they can be
replenished.
• If organisations are geared only towards profit making, and
environmental and health concerns are not addressed, then it could lead
to serious implications in the future.

Gateways of International Trade

Ports
• The ports provide facilities of docking, loading, unloading and the
storage facilities for cargo.

• Types of port according to cargo handled:

→ Industrial Ports: These ports specialise in bulk cargo-like grain, sugar,
ore, oil, chemicals and similar materials.
→ Commercial Ports: These ports handle general cargo-packaged
products and manufactured good. These ports also handle passenger
traffic.
→ Comprehensive Ports: Such ports handle bulk and general cargo in
large volumes.

• Types of port on the basis of location:

→ Inland Ports: These ports are located away from the sea coast. They
are linked to the sea through a river or a canal. Such ports are accessible
to flat bottom ships or barges. For example, Manchester is linked with a
canal.
→ Out Ports: These are deep water ports built away from the actual
ports. These serve the parent ports by receiving those ships which are
unable to approach them due to their large size. for example, Athens and
its out port Piraeus in Greece.
 • Types of port on the basis of specialised functions:
→ Oil Ports: These ports deal in the processing and shipping of oil. Some
of these are tanker ports and some are refinery ports. Maracaibo in
Venezuela is an example.

→ Ports of Call: These are the ports which originally developed as calling
points on main sea routes where ships used to anchor for refuelling,
watering and taking food items. Later on, they developed into
commercial ports. Aden, Honolulu and Singapore are examples.

→ Packet Station: These packet stations are exclusively concerned with

the transportation of passengers and mail across water bodies covering
short distances. Example are Dover in England.

→ Entrepot Ports: These are collection centres where the goods are
brought from different countries for export. Singapore is an entrepot for
Asia.

→ Naval Ports: These ports serve warships and have repair workshops for
them. Kochi and Karwar are examples of such ports in India.