13521113 international trade

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INTERNATIONAL TRADE

SIMILARITIES BETWEEN HOME TRADE AND FOREIGN TRADE:

Objective: Businessmen involved in home trade and foreign trade buy and sell

goods for the same objective. That is to make a profit.

Dependence: Both, home trade and foreign trade depend very much on aids to

trade. That is there is much dependence on transport, insurance, finance,

warehousing, etc,

Specialization: Both, home trade and foreign trade depend very much on

specialization, whether it is national, regional or personal.

DIFFERENCES BETWEEN HOME TRADE AND FOREIGN TRADE:

Meaning: Home trade is buying and selling goods within the country, while

foreign trade means buying and selling goods between countries.

Distance: The distance involved in foreign trade is much greater than the

distance involved in home trade. This means that air or sea transport has to be

arranged in foreign trade, whereas road and rail transport can be used in home

trade.

Trade Barriers: In foreign trade, there are trade barriers like customs duties,

quotas and embargoes, levied on imports and some exports. There are no such

trade barriers in home trade.

Types: Home trade includes wholesaling and retailing, whereas foreign trade

includes importing, exporting and entrepot trade.

Languages: In home trade, there would be no difficulty regarding language, as

the same language is spoken. But in foreign trade, translators would be required

as each country speaks a different language.

Currencies: In home trade, the problem of exchange rate would not arise, as

the same currency is used for payments. But in foreign trade, each country uses

a different currency. So the problem of exchange rate would arise.

Technical Requirements: In home trade, the same technical specifications for

goods are required. But in foreign trade, each country has a different technical

specification. So manufacturers would have to produce goods according to

different technical specifications.

Methods of Payment: In home trade cheques are the most favored means of


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payment. In foreign trade, bills of exchange, letters of credit and cable transfers

are the most suitable means of payment.

Cultural Differences and Requirements: In home trade, there is not

much need for market research as there are no differences in taste and fashion.

But in foreign trade, each country has a different culture, taste and fashion. So

first market research has to be carried out and then goods exported accordingly.

IMPORTANCE OF INTERNATIONAL TRADE

Some raw materials do not occur naturally in the country has to beimported.

It is cheaper to import some goods than to produce them. For example bananas

in UK.

Selling goods and services abroad provides the country with foreign

currency. By selling abroad the country gains the benefits of wider markets.

International trade creates employment opportunities in thecountry

Consumers in the country will have a wider variety of goods from all over the

world.

It increases country's income, which results in a higher standard of

living. It helps to maintain friendly foreign relationships with othercountries. Income can be earned by exporting the excess goods and

services.

THE INTERDEPENDENCE OF COUNTRIES WITHIN A GLOBAL MARKET

No country in the world is self sustained. By nature, every country has some

resources in its limit and some resources are unlimited by nature. Economics

clearly has defined that resources are scarce in nature; so, countries must be

interdependent if it wants to satisfy the wants and economical needs to the growing

population. No countries can be interdependent in today's market. The best examples

could stand with reference to today's market is, satellite services, foreign soft

drinks. E.g. Coca Cola, cars, electronic goods etc.

Today every country wants to consume goods and services at the cheapest

price and at the best advanced technology. To produce these goods and services in its

own country with the available resources, it may not be possible to achieve the task

due to lack of resources, lack of capital and lack of technological advancement. All

these factors have led to interdependence of countries within a global market.


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VISIBLE TRADE AND INVISIBLE TRADE

International trade

Visible trade Visibletrade

(Trade in goods only) (Trade in services only)

Visible Visible Invisible Invisible

Exports imports Exports imports

1. Foreign trade involves the export and import of both goods (called visible trade) and

services (called invisible trade).

2. Visible trade involves trading in goods, such as wheat, and it can be divided into:

(a) Visible exports which involves the sending of goods (raw materials, semi

manufactured goods, machinery or other manufactured goods) from the home country

for sale abroad by the exporter.

(b) Visible imports which involves the buying of goods (raw materials, semi

manufactured goods, machinery or other manufactured goods) from abroad into the

home country.

3. Invisible trade involves trading in services, something which cannot be seen such

as tourism, education services, insurance services, transport services and the like. It

can be divided into:

(a) Invisible exports which occurs when nationals of other countries use the services

offered by companies or individuals of the home country. Singapore exports shipping

services when foreigners send goods in ships owned by Singapore nationals.

(b) Invisible imports which occurs when nationals of the home country use the

services provided by foreign individuals or companies owned by foreigners.

Singapore imports education services when Singapore students go overseas to the

UKto study at the Britishuniversities.


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4. The money which a country earns from her exports, both visible and invisible, will

be used to pay for her imports both visible and invisible.

BALANCE OF TRADE AND BALANCE OFPAYMENTS

1. The Balance of Payments figures for a country show the amount of currency being

received from other countries and that being paid to other countries as a result of

many different types of transactions over a given period, usually a year.

The Balance of Payments can be broadly divided into two main

sections: (a) The Current Account consists of:

(i) The Balance of Trade (difference between visible exports and visibleimports)

(ii) The Balance of Services or Invisible Balance (difference between invisible exportsand invisible imports)

(iii) Transfersitems

(b) The Capital Account consistsof:

(i) The capital items (inflows oroutflows)

(ii) Official financing (adding to or drawing from foreignreserves)

2. The difference in value between visible exports and visible imports is called Balance

of Trade. If the visible export value exceeds the visible import value, the Balance of

Trade is said to be favourable or in surplus. If the visible import value exceeds

the visible export value, then the Balance of Trade is said to be unfavourable or in

deficit.

3. A country's Balance of Trade can be assessed from annual statistical

records obtained from customs declaration forms for imports and exports. The Balance

of Trade is very important because:

(a) All imports have to be paid for with the proceeds received from the sale of

exports.

(b) Thus, in the long run, a country cannot import more than it exports.

(c) If the Balance of Trade has been unfavourable for many successive years, then

the government has to take steps to discourage imports and encourage exports.

4. A country also exports and imports services: shipping, educational, tourist, etc.

Singapore exports shipping services when a foreigner travels in a Singaporean ship.


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The total value of services exported within a year forms the invisible exports, whilst that

of services imported forms the invisible imports.

5. 'Transfer items' refers to interest, profits and dividends sent abroad as a result of

foreigners investing in the home country. It also includes the repatriation of interest,

profits and dividends from abroad to the home country as a result of its nationals

investing abroad.

6. 'Capital items' refers to the amount of money which has flowed into or out of a

country.

(a) Examples of capital outflows are as follows:

(j) Nationals invest in businesses abroad, buy properties or shares abroad.(ii) The government in the home country gives monetary aid to other countries.

(iii) Nationals in the home country lend to nationals or organizations or governments of

other countries.

(b) Examples of capital inflows are as follows:

(i) Nationals sell off their properties, businesses and shares abroad and bring the

money home.

(ii) The government in the home country receives monetary aid from overseas.

(iii) Nationals or government in the home country borrow from abroad.

7. It is very unlikely that total receipts will exactly be equal to total payments over a

particular year.

(a) If total payments exceed total receipts, we have a Balance of Payments deficit.

(b) If total receipts exceed total payments, there is a surplus in the Balance of

Payments.

8. A country's balance of payments is of utmostimportance.

(a) If the country continues over a period of years to experience a Balance of Payments

deficit, it will eventually not have enough foreign exchange to pay its creditors.

(b) No country wishes this to happen for it will cause economic ruin in the long run.

9. If a country does not have sufficient foreign currency to pay its creditors abroad, it

can temporarily borrow money from the International Monetary Fund (IMF) which isspecially set up to help countries having Balance of Payments problems. However, this

would mean that foreigners can now control the economic policies of the government of


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such a country.

RESTRICTIONS ON INTERNATIONAL TRADE:

Tariffs: These are import duties, such as the customs and excise duties of the United

Kingdom. These have the effect of raising the price of the imported goods and therefore

making them less competitive when compared to home products.

Quotas: These are physical restrictions on the amount of goods that can be imported

into a country over a period of time. For example, the United Kingdom has set a limit on

the number of Japanese cars that can be imported into the United Kingdom.

Subsidies: These are given to home producers, which makes their goods cheaper and

therefore more competitive when compared with the prices of overseas products.

Embargoes: These are bans on importing certain items from overseas.

Reasons for restricting trade:

To raise revenue fromtariffs.

To protect existing industries from overseascompetition.

To protect infant industries which are not yet strong enough to compete with

established overseas firms.

To restrict dumping of foreigngoods.

DIFFICULTIES FACED BY EXPORTERS:

Distance: The distance involved in transporting goods from one country

to another country is greater than in domestic trade. Air transport and seatransport have to be arranged. Overseas representatives also may have to be

appointed. There are charter agents available at the Baltic Exchange who find

ships for goods and goods for ships.

Language Differences: Every country speaks a different language.

Communications with overseas traders have to be carefully translated. Publicity

material and instructions have to be prepared in many languages. Hence

translators have to be found. Exporters can contact the Central Office of

Information where information of translators is available.

Cultural Differences and Local Requirements: Every country follows a

different culture and requires various goods. Market research has to be carried


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out. This is quite difficult and expensive. The services of the Department of

Trade and Industry can be sought in this case.

Technical Differences: Different governments may have different technical

specifications for goods sold in their country. An exporter of electrical goods,

dealing with several countries has to produce the goods according to the

required specification of each country.Trade Barriers: Tariffs and quotas are a considerable obstacle to trade. Tariffs

are taxes levied on imports and quotas are a limit imposed on imported goods.

These increase the price of goods that are imported. These barriers can be

overcome by exporting to countries where the tariffs are low and where there

are no quotas.

Customs Regulations: All goods exported and imported have to go through

customs regulations. This creates more work for the exporter.

Documentation: Documents used in international trade are more complex than

those used in domestic trade. Handing over the work to a freight forwarder can

solve these problems.

Payment: This is a big problem faced by exporters. Every country uses a

different currency. So currency must be exchanged in the foreign exchange

market. The problem of the changing exchange rate comes into existence.

Exporters can make future dealings to overcome this problem.

Insurance: The risks involved in foreign trade are more than the risks in

domestic trade. So insurance has to be taken out. The Department of Trade and

Industry and Lloyds of London can overcome these problems.

Risk of Non-Payment: The importer may not pay the exporter for the following

reasons:

i. Because he does not want to pay.

ii. Because he becomes insolvent.iii. Because payment is prevented by the importer's government.

iv. Because of war.

v. Because the import license has been cancelled by the government.

This causes a big problem for the exporter and can be solved by taking out a

Comprehensive policy at the Export Credit Guarantee Department.

CUSTOMS AUTHORITIES:

Functions:


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Statistics: They collect a wide range of statistical data showing the pattern of

trade and the movement of goods.

Control: They supervise the movement of goods in and out of the country

ensuring that prohibited goods are not imported or exported.

Revenue: The customs authorities collect the duty payable on imports.

Enforcement of Quotas: The customs authorities ensure that the goodsimported are according to the limit imposed by the government.

Bonded Warehouses: The customs authorities control these warehouses by

supervising the withdrawal of goods.

Public Health: They have certain functions in connection with the control of

infectious diseases.


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