What is International Trade?
International trade is the exchange of goods, capital, and services among different countries because there is a need or want of goods or services.
Importance of International Trade
Countries have to produce certain commodities and exchange them with other commodities produced by others. Each country produces those in which it has comparative cost advantage and exchanges them with those in which it has a comparative disadvantage.
Differences in endowments which create the need for trade are:
- Differences in climate and soils: Different agricultural products thrive better under certain soils and climatic conditions. For example, cocoa grows well in the tropical climate and soil.
- Differences in natural resource endowment: Some countries are endowed with mineral resources that are not found in other areas, crude oil is produced in large quantities in Saudi Arabia and United Arab Emirates but is not found in commercial quantities in many other European and West African countries.
- Variations in available capital stock: Some countries possess adequate stocks of capital while others do not have adequate capital for exploiting the available resources. Those with less capital stock borrow capital or import goods that they do not produce.
- Variations in levels of industrial development: The industrialized countries export their surplus commodities to the less industrialized ones.
- Variations in level of technical skills: Countries with advanced technical skills in the production of certain commodities are able to produce certain goods at cheaper rates e.g. Switzerland for watches, France for wines.
- The need to satisfy certain wants: A country has to engage in trade with another because certain goods (especially if they are strategic) are not produced in sufficient quantities at home. It therefore imports what it does not produce in sufficient quantities or what it does not produce at all, but is required for the survival of the economy.
Advantage and Disadvantage of International Trade
Advantages of International Trade
- Increase in quantity and variety of goods and services: with specialization and exchange, total world output and consumption increases.
- Expansion of market: A country’s market is expanded by having access to other countries’ markets.
- Source of foreign exchange: By exporting its goods and services, a country is able to earn foreign exchange.
- Acceleration of economic development: Trade facilitates the inflow of foreign capital for socio-economic development.
- Increased utilization of resources: Increased efficient utilization of resources leads to a higher level of output.
- Encouragement of competition: Foreign competition is introduced through trade. There is increased research in order to produce competitive quality goods for the world market and for domestic consumers.
- Increased technical knowledge and gaining of ideas: The less technically advanced countries gain technical knowledge from the advanced countries.
- Creation of employment opportunities: Many people am engaged in production forthe exporting and impeding of commodities.
Disadvantages of International Trade
- Over-dependence of countries: Excessive specialization leads to too much dependence which is dangerous in times of crisis between countries.
- Unbalanced growth and development: Some sectors are developed at the expense of others. The tendency of third world countries to produce primary products has stifled industrial growth.
- Over-production: Excessive specialization could lead to over-production. This may discourage producers because of the lower prices received for imports. It could lead to dumping, i.e. the process whereby a commodity is sold in a foreign market at a price lower than the producers’ cost of production.
- Unemployment: Excessive importation of foreign goods may stifle the growth of domestic industries and create unemployment problems.
- Importation of dangerous commodities and ideas: Dangerous commodities such as cocaine, etc. and indecent ways of dressing and behaviour may be imported. These may aggravate the rate of crime.
Importation may retard the growth of infant industries and thus frustrate the industrialization programme of a government.