INTERNATIONAL TRADE

INTRODUCTION

International trade is the exchange of goods and services as well as resources between countries. It involves transactions between residents of different countries. As distinguished from domestic trade or internal trade which involves exchange of goods and services within the domestic territory of a country using domestic currency, international trade involves transactions in multiple currencies. Compared to internal trade, international trade has greater complexity as it involves heterogeneity of customers and currencies, differences in legal systems, more elaborate documentation, diverse restrictions in the form of taxes, regulations, duties, tariffs, quotas, trade barriers, standards, restraints to movement of specified goods and services and issues related to shipping and transportation. At present, liberal international trade is an integral part of international relations and has become an important engine of growth in developed as well as developing countries.

While some economists and policy makers argue that there are net benefits from keeping markets open to international trade and investments , others feel that trade generates a number of adverse consequences on the welfare of citizens. As students of Economics, we need to have an objective understanding of the claims put forth by both sections. We shall first examine the arguments in support of international trade.

(i)  International trade is a powerful stimulus to economic efficiency and contributes to economic growth and rising incomes. The wider market made possible owing to trade induces companies to reap the quantitative and qualitative benefits of extended division of labour. As a result, they would enlarge their manufacturing capabilities and benefit from economies of large scale production. The gains from international trade are reinforced by the increased competition that domestic producers are confronted with on account of globalization of production and marketing requiring businesses to compete against global businesses. Competition from foreign goods compels manufacturers, especially in developing countries, to enhance efficiency and profitability by adoption of cost reducing technology and business practices. Efficient deployment of productive resources to their best uses is a direct economic advantage of foreign trade. Greater efficiency in the use of natural, human, industrial and financial resources ensures productivity gains. Since international trade also tends to decrease the likelihood of domestic monopolies, it is always beneficial to the community.

(ii) Trade provides access to new markets and new materials and enables sourcing of inputs and components internationally at competitive prices. This reflects in innovative products at lower prices and wider choice in products and services for consumers. Also, international trade enables consumers to have access to wider variety of goods and services that would not otherwise be available. It also enables nations to acquire foreign exchange reserves necessary for imports which are crucial for sustaining their economies.

(iii) International trade enhances the extent of market and augments the scope for mechanization and specialisation. Trade necessitates increased use of automation, supports technological change, stimulates innovations, and facilitates greater investment in research and development and productivity improvement in the economy.

(iv) Exports stimulate economic growth by creating jobs, which could potentially reduce poverty and augmenting factor incomes and in so doing raising standards of livelihood and overall demand for goods and services. Trade also provides greater stimulus to innovative services in banking, insurance, logistics, consultancy services etc.

(v) Employment generating investments, including foreign direct investment, inevitably follow trade. For emerging economies, improvement in the quality of output of goods and services, superior products, finer labour and environmental standards etc. enhance the value of their products and enable them to move up the global value chain.

(vi) Opening up of new markets results in broadening of productive base and facilitates export diversification so that new production possibilities are opened up. Countries can gainfully dispose off their surplus output and, thus, prevent undue fall in domestic prices caused by overproduction. Trade also allows nations to maintain stability in prices and supply of goods during periods of natural calamities like famine, flood, epidemic etc.

(vii) Trade can also contribute to human resource development, by facilitating fundamental and applied research and exchange of know-how and best practices between trade partners.

(viii) Trade strengthens bonds between nations by bringing citizens of different countries together in mutually beneficial exchanges and, thus, promotes harmony and cooperation among nations.

Despite being a dynamic force which has enormous potential to generate economic overall gains, liberal global trade and investments are often criticized as detrimental to national interests. The major arguments put forth against trade openness are:

(i) Possible negative labour market outcomes in terms of labour-saving technological change that depress demand for unskilled workers, loss of labourers’ bargaining power, downward pressure on wages of semi skilled and unskilled workers and forced work under unfair circumstances and unhealthy occupational environments.

(ii) International trade is often not equally beneficial to all nations. Potential unequal market access and disregard for the principles of fair trading system may even amplify the differences between trading countries, especially if they differ in their wealth. Economic exploitation is a likely outcome when underprivileged countries become vulnerable to the growing political power of corporations operating globally. The domestic entities can be easily outperformed by financially stronger transnational companies.

(iii) International trade is often criticized for its excessive stress on exports and profit-driven exhaustion of natural resources due to unsustainable production and consumption. Substantial environmental damage and exhaustion of natural resources in a shorter span of time could have serious negative consequences on the society at large.

(iv) Probable shift towards a consumer culture and change in patterns of demand in favour of foreign goods which are likely to occur in less developed countries may have adverse effect on the development of domestic industries and may even threaten the survival of infant industries. Trade cycles and the associated economic crises occurring in different countries are also likely to get transmitted rapidly to other countries.

(v) Risky dependence of underdeveloped countries on foreign nations impairs economic autonomy and endangers their political sovereignty. Such reliance often leads to widespread exploitation and loss of cultural identity. Substantial dependence may also have severe adverse consequences in times of wars and other political disturbances.

(vi) Welfare of people may be ignored or jeopardized for the sake of profit. Excessive exports may cause shortages of many commodities in the exporting countries and lead to high inflation (e.g. onion price rise in 2014). Also, import of harmful products may cause health hazards and environmental damage. (e.g. Chinese products).

(vii) Too much export orientation may distort actual investments away from the genuine investment needs of a country.

(viii) Instead of cooperation among nations, trade may breed rivalry on account of severe competition

(ix) Finally, there is often lack of transparency and predictability in respect of many aspects related to trade policies of trading partners. There are also many risks in trade which are associated with changes in governments’ policies of participating countries, such as imposition of an import ban or trade embargoes.