Features, Advantages and Disadvantages of International Trade

International Trade: Features, Advantages and Disadvantages of International Trade

By Smriti Chand

Internal and International Trade:

By internal or domestic trade are meant transactions taking place within the geographical boundaries of a nation or region. It is also known as intra-regional or home trade. International trade, on the other hand, is trade among different countries or trade across political frontiers.

International trade, thus, refers to the exchange of goods and services between one country or region and another. It is also sometimes known as “inter-regional” or “foreign” trade. Briefly, trade between one nation and another is called “international” trade, and trade within the territory (political boundary) of a nation “internal” trade.
For all practical purposes, trade or exchange of goods between two or more countries is called “international” or “foreign” trade.
International trade takes place on account of many reasons such as:
1. Human wants and countries’ resources do not totally coincide. Hence, there tends to be interdependence on a large scale.
2. Factor endowments in different countries differ.
3. Technological advancement of different countries differs. Thus, some countries are better placed in one kind of production and some others superior in some other kind of production.
4. Labour and entrepreneurial skills differ in different countries.
5. Factors of production are highly immobile between countries.
In short, international trade is the outcome of territorial division of labour and specialisation in the countries of the world.

Salient Features of International Trade:

The following are the distinguishing features of international trade:

(1) Immobility of Factors:

The degree of immobility of factors like labour and capital is generally greater between countries than within a country. Immigration laws, citizenship, qualifications, etc. often restrict the international mobility of labour.
International capital flows are prohibited or severely limited by different governments. Consequently, the economic significance of such mobility of factors tends to equality within but not between countries. For instance, wages may be equal in Mumbai and Pune but not in Bombay and London.
According to Harrod, it thus follows that domestic trade consists largely of exchange of goods between producers who enjoy similar standards of life, whereas international trade consists of exchange of goods between producers enjoying widely differing standards. Evidently, the principles which determine the course and nature of internal and international trade are bound to be different in some respects at least.
In this context, it may be pointed out that the price of a commodity in the country where it is produced tends to equal its cost of production.
The reason is that if in an industry the price is higher than its cost, resources will flow into it from other industries, output will increase and the price will fall until it is equal to the cost of production. Conversely, resources will flow out of the industry, output will decline, the price will go up and ultimately equal the cost of production.
But, as among different countries, resources are comparatively immobile; hence, there is no automatic influence equalising price and costs. Therefore, there may be permanent difference between the cost of production of a commodity.
In one country and the price obtained in a different country for it. For instance, the price of tea in India must, in the long run, be equal to its cost of production in India. But in the U.K., the price of Indian tea may be permanently higher than its cost of production in India. In this way, international trade differs from home trade.

(2) Heterogeneous Markets:

In the international economy, world markets lack homogeneity on account of differences in climate, language, preferences, habit, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, be different.

(3) Different National Groups:

International trade takes place between differently cohered groups. The socio-economic environment differs greatly among different nations.

(4) Different Political Units:

International trade is a phenomenon which occurs amongst different political units.

(5) Different National Policies and Government Intervention:

Economic and political policies differ from one country to another. Policies pertaining to trade, commerce, export and import, taxation, etc., also differ widely among countries though they are more or less uniform within the country. Tariff policy, import quota system, subsidies and other controls adopted by governments interfere with the course of normal trade between one country and another.

(6) Different Currencies:

Another notable feature of international trade is that it involves the use of different types of currencies. So, each country has its own policy in regard to exchange rates and foreign exchange.
For the sake of brevity, features of international trade are mentioned in Chart 1.

Differences between Internal Trade and International Trade:

Characteristically, there are marked differences between internal and international trade as stated below:

1. Specific Terms:

Exports and Imports. Internal trade is the exchange of domestic output within the political boundaries of a nation, while international trade is the trade between two or more nations. Thus, unlike internal trade, the terms “export” and “import” are used in foreign trade. To export means to sell goods to a foreign country. To import goods means to buy goods from a foreign country.

2. Heterogeneous Group:

An obvious difference between home trade and foreign trade is that trade within a country is trade among the same group of people, whereas trade between countries takes place between differently cohered groups. The socio-economic environment differs greatly between nations, while it is more or less uniform within a country. Frederick List, therefore, put that: “Domestic trade is among us, international trade is between us and them.”

3. Political Differences:

International trade occurs between different political units, while domestic trade occurs within the same political unit. The government in each country is keen about the welfare of its own nationals against that of the people of other countries. Hence, in international trade policy, each government tries to see its own interest at the cost of the other country.

4. Different Rules:

National rules, laws and policies relating to trade, commerce, industry, taxation, etc. are more or less uniform within a country, but differ widely between countries.
Tariff policy, import quota system, subsidies and other controls adopted by a government interfere with the course of normal trade between it and other countries. Thus, state interference causes different problems in international trade while the value of theory, in its pure form, which is laissez faire, cannot be applied in toto to the international trade theory.

5. Different Currencies:

Perhaps the principal difference between domestic and international trade is that the latter involves the use of different types of currencies and each country follows different foreign exchange policies. That is why there is the problem of exchange rates and foreign exchange. Thus, one has to study not only the factors which determine the value of each country’s monetary unit, but also the divergent practices and types of exchange resorted to.

6. Heterogeneous World Markets:

In a way, home trade has a homogeneous market. In foreign trade, however, the world markets lack homogeneity on account of differences in climate, language, preferences, habits, customs, weights and measures etc.
The behaviour of international buyers in each case would, therefore, be different. For instance, Indians have right-hand drive cars, while Americans have left-hand driven cars. Hence, the markets for automobiles are effectively separated. Thus, one peculiarity of international trade is that it involves heterogeneous national markets.

7. Factor Immobility:

Another major difference between internal and international trade is the degree of immobility of factors of production like labour and capital which is generally greater between countries than within the country. Immigration laws, citizenship qualifications, etc., often restrict international mobility of labour. International capital flows are prohibited or severely limited by different governments.

Advantages of International Trade:

The following are the major gains claimed to be emerging from international trade:

(1) Optimum Allocation:

International specialisation and geographical division of labour leads to the optimum allocation of world’s resources, making it possible to make the most efficient use of them.

(2) Gains of Specialisation:

Each trading country gains when the total output increases as a result of division of labour and specialisation. These gains are in the form of more aggregate production, larger number of varieties and greater diversity of qualities of goods that become available for consumption in each country as a result of international trade.

(3) Enhanced Wealth:

Increase in the exchangeable value of possessions, means of enjoyment and wealth of each trading country.

(4) Larger Output:

Enlargement of world’s aggregate output.

(5) Welfare Contour:

Increase in the world’s prosperity and economic welfare of each trading nation.

(6) Cultural Values:

Cultural exchange and ties among different countries develop when they enter into mutual trading.

(7) Better International Politics:

International trade relations help in harmonising international political relations.

(8) Dealing with Scarcity:

A country can easily solve its problem of scarcity of raw materials or food through imports.

(9) Advantageous Competition:

Competition from foreign goods in the domestic market tends to induce home producers to become more efficient to improve and maintain the quality of their products.

(10) Larger size of Market:

Because of foreign trade, when a country’s size of market expands, domestic producers can operate on a larger scale of production which results in further economies of scale and thus can promote development. Synchronised application of investment to many industries simultaneously become possible. This helps industrialisation of the country along with balanced growth.

Disadvantages of International Trade:

When a country places undue reliance on foreign trade, there is a likelihood of the following disadvantages:

1. Exhaustion of Resources:

When a country has larger and continuous exports, her essential raw materials and minerals may get exhausted, unless new resources are tapped or developed (e.g., the near-exhausting oil resources of the oil-producing countries).

2. Blow to Infant Industry:

Foreign competition may adversely affect new and developing infant industries at home.

3. Dumping:

Dumping tactics resorted to by advanced countries may harm the development of poor countries.

4. Diversification of Savings:

A high propensity to import may cause reduction in the domestic savings of a country. This may adversely affect her rate of capital formation and the process of growth.

5. Declining Domestic Employment:

Under foreign trade, when a country tends to specialize in a few products, job opportunities available to people are curtailed.

6. Over Interdependence:

Foreign trade discourages self-sufficiency and self-reliance in an economy. When countries tend to be interdependent, their economic independence is jeopardised. For instance, for these reasons, there is no free trade in the world. Each country puts some restrictions on its foreign trade under its commercial and political policies.