Foreign Trade, and Why Countries Do It

Types of For­eign Trade#

Import#

Import­ing is the pur­chas­ing of goods or ser­vices made in another coun­try. For exam­ple, India imports edi­ble oil from other coun­tries to meet demand at home.

Export#

Export­ing is sell­ing domes­tic-made goods in another coun­try. For exam­ple, Hameem Gar­ments exports Ready­made Gar­ments (RMG) prod­ucts to West­ern Coun­tries.

Impor­tance of For­eign Trade#

The fol­low­ing points explain the need for and impor­tance of for­eign trade to a nation.

1. Divi­sion of Labor and Spe­cial­iza­tion

For­eign trade leads to the divi­sion of labor and spe­cial­iza­tion at the world level. Some coun­tries have abun­dant nat­ural resources.

They should export raw mate­ri­als and import fin­ished goods from coun­tries which are advanced in skilled man­power. This gives ben­e­fits to all the coun­tries and thereby lead­ing to the divi­sion of labor and spe­cial­iza­tion.

2. Opti­mum Allo­ca­tion and Uti­liza­tion of Resources

Due to spe­cial­iza­tion, unpro­duc­tive lines can be elim­i­nated, and wastage of resources avoided. In other words, resources are canal­ized for the pro­duc­tion of only those goods, which give the high­est returns.

Thus there is ratio­nal allo­ca­tion and uti­liza­tion of resources at the inter­na­tional level due to for­eign trade.

3. Equal­ity of Prices

For­eign trade tends to even out prices between coun­tries. It keeps the demand and sup­ply posi­tion sta­ble, so prices in dif­fer­ent coun­tries move towards the same level, allow­ing for trans­port and other mar­ket­ing costs.

4. Avail­abil­ity of Mul­ti­ple Choices

For­eign trade helps in pro­vid­ing a bet­ter choice to the con­sumers. It helps in mak­ing avail­able new vari­eties to con­sumers all over the world.

5. Ensures Qual­ity and Stan­dard Goods

For­eign trade is highly com­pet­i­tive. To main­tain and increase the demand for goods, the export­ing coun­tries have to keep up the qual­ity of goods.

6. Raises Stan­dard of Liv­ing of the Peo­ple

Imports can facil­i­tate the stan­dard of liv­ing of the peo­ple. This is because peo­ple can have a choice of new and bet­ter vari­eties of goods and ser­vices.

By con­sum­ing new and bet­ter vari­eties of goods, peo­ple can improve their stan­dard of liv­ing.

7. Gen­er­ate Employ­ment Oppor­tu­ni­ties

For­eign trade helps in gen­er­at­ing employ­ment oppor­tu­ni­ties by increas­ing the mobil­ity of labor and resources. It gen­er­ates direct employ­ment in export indus­tries and indi­rect employ­ment in other sec­tors of the econ­omy, such as indus­try and ser­vices (insur­ance, bank­ing, trans­port and com­mu­ni­ca­tion).

8. Facil­i­tate Eco­nomic Devel­op­ment

Imports facil­i­tate the eco­nomic devel­op­ment of a nation. This is because, with the import of cap­i­tal goods and tech­nol­ogy, a coun­try can gen­er­ate growth in all sec­tors of the econ­omy, agri­cul­ture, indus­try, and ser­vice sec­tor.

9. Assis­tance Dur­ing Nat­ural Calami­ties

Dur­ing nat­ural calami­ties such as earth­quakes, floods, famines, etc., the affected coun­tries face the prob­lem of short­age of essen­tial goods.

For­eign trade enables a coun­try to import food grains and med­i­cines from other coun­tries to help the affected peo­ple.

10. Main­tains Bal­ance of Pay­ment Posi­tion

Every coun­try has to main­tain its bal­ance of pay­ment posi­tion.

Since every coun­try has to import, which results in an out­flow of for­eign exchange, it also deals in export for the inflow of for­eign exchange.

11. Brings Rep­u­ta­tion and Helps Earn­ing Good­will

A coun­try which is involved in exports earns good­will in the inter­na­tional mar­ket.

For exam­ple, Japan has earned a lot of good­will in for­eign mar­kets due to its exports of qual­ity elec­tronic goods.

12. Pro­motes World Peace

For­eign trade brings coun­tries closer. It facil­i­tates the trans­fer of tech­nol­ogy and other assis­tance from devel­oped coun­tries to devel­op­ing coun­tries. It brings dif­fer­ent coun­tries closer due to eco­nomic rela­tions aris­ing out of trade agree­ments.

Thus, for­eign trade cre­ates a friendly atmos­phere for avoid­ing wars and con­flicts. It pro­motes world peace as such coun­tries try to main­tain friendly rela­tions among them­selves.

Key terms#

Trade Facil­i­ta­tion Agree­ment (TFA)

Trade Facil­i­ta­tion Agree­ment will improve trade effi­ciency world­wide, encour­ag­ing eco­nomic growth by cut­ting red tape at bor­ders, increas­ing trans­parency and tak­ing advan­tage of new tech­nolo­gies.

Dis­tricts as Export Hubs (DEH)

Under the 'Dis­tricts as Export Hubs Ini­tia­tive', prod­ucts and ser­vices (includ­ing GI prod­ucts, agri­cul­tural clus­ters, toy clus­ters etc.) with export poten­tial have been iden­ti­fied in all dis­tricts of the coun­try in con­sul­ta­tion with the stake­hold­ers includ­ing the States/UTs.

Duty-Free Import Autho­riza­tion (DFIA)

Duty Free Import Autho­riza­tion is a scheme under which duty free import of inputs, fuel, oil, energy sources, a cat­a­lyst which is required for the pro­duc­tion of export goods is allowed.

Export Pro­mo­tion Cap­i­tal Goods Scheme (EPCG)

Export Pro­mo­tion Cap­i­tal Goods (EPCG) scheme is a scheme which allows an exporter to import of cap­i­tal goods includ­ing spares for pre-pro­duc­tion, pro­duc­tion and post-pro­duc­tion at zero Cus­toms duty, for exports.

Com­mon ques­tions#

What are the major impacts of for­eign trade?#

For­eign trade increases the num­ber of mar­kets avail­able to com­pa­nies to dis­play their prod­ucts, which enhance the process of pro­duc­tion and sale of prod­ucts locally and inter­na­tion­ally. That con­tin­u­ous growth of busi­ness in turn sup­ports eco­nomic devel­op­ment.