What is Foreign Trade?

External Trade Meaning

Foreign trade is nothing but trade between the different countries of the
world. It is also called as International trade, External trade or Inter-Regional
trade. It consists of imports, exports and entrepot. The inflow of goods in a
country is called import trade whereas outflow of goods from a country is called
export trade. Many times goods are imported for the purpose of re-export after
some processing operations. This is called entrepot trade. Foreign trade
basically takes place for mutual satisfaction of wants and utilities of resources.
3 Types of Foreign Trade
Foreign Trade can be divided into following three groups :-
1. Import Trade : Import trade refers to purchase of goods by one country
from another country or inflow of goods and services from foreign
country to home country.
2. Export Trade : Export trade refers to the sale of goods by one country to
another country or outflow of goods from home country to foreign
country.
3. Entrepot Trade : Entrepot trade is also known as Re-export. It refers to
purchase of goods from one country and then selling them to another
country after some processing operations.
Need and Importance of Foreign Trade
Following points explain the need and importance of foreign trade to a
nation.
1. Division of labour and specialisation
Foreign trade leads to division of labour and specialisation 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 division of labour and specialisation.
2. Optimum allocation and utilisation of resources
Due to specialisation, unproductive lines can be eliminated and wastage
of resources avoided. In other words, resources are channelised for the
production of only those goods which would give highest returns. Thus there is
rational allocation and utilization of resources at the international level due to
foreign trade.
3. Equality of prices
Prices can be stabilised by foreign trade. It helps to keep the demand and
supply position stable, which in turn stabilises the prices, making allowances
for transport and other marketing expenses.
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.
Thus quality and standardised goods are produced.
6. Raises standard of living of the people
Imports can facilitate 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 labour and resources. It generates direct employment
in import sector and indirect employment in other sector of the economy. Such
as Industry, Service Sector (insurance, banking, transport, communication),
etc.
8. Facilitate economic development
Imports facilitate 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, i.e. agriculture, industry and service sector.
9. Assitance 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 outflow of foreign exchange, it
also deals in export for the inflow of foreign exchange.
11. Brings reputation and helps earn goodwill
A country which is involved in exports earns goodwill in the international
market. For e.g. 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 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.
Introduction to India's Foreign Trade
Foreign Trade is one of the significant macro fundamental variable of an
economy. India till recently was predominantly a primary goods exporting and
mainly an industrial goods importing country.
In 1950s, India's share in the world trade was 1.78% which was decline
to 0.59% in 1990 and continues to remain around 0.60% till now. India's share
in world exports was 0.8% in 2006.
A. Composition of India's Exports
Britishers strongly believed that India was a country well suited to
supply raw materials and other primary goods and a good market place for
British manufacturers. So at the time of our independence our exports were
predominantly of primary goods and imports were of manufacturers. At the
time of independence agricultural commodities and light manufactured
consumer goods dominated India's export basket. During the post
independence period India's composition of exports changed.
Now exports of India's are broadly classified into following four categories.

The composition of India's export can be summarised as follows :-

1. Agricultural and Allied Products
The share of agriculture items in the total exports of India has declined
between 1990-91 to 2005-06. The share of agriculture exports was 19.5% in
1990-91. It came down to about 10.2% in 2005-06.
The top items of agriculture exports include :-
1. Fish Products,
2. Rice,
3. Oil Cakes,
4. Fruits and Vegetables
The most important export item in 'Agriculture and Allied products'
group over the period 1991-92 to 2005-06 has been 'Fish and Fish
Preparations'. From $ 585 millions in 1991-92 export earnings from fish and
fish preparations rose to $ 1,589 millions in 2005-06. However, in percentage
terms, their share fell slightly from 3.3 percent in 1991-92 to 1.5 percent in
2005-06. As far as agricultural exports are concerned, a significant
development during the period since 1991 has been the considerable exports of
rice in certain year. In fact, exports of rice were as high as $ 1,366 millions in
1995-96 which was 4.3 percent of total export earning in that year. In 2005-06,
exports of rice were worth $ 1,405 millions which was 1.4 percent of total
export earning in that year.
2. Ores and Minerals
The overall export performance of ores and minerals is not satisfactory.
In percentage terms, the export performance of ores and mineral has increased
from 4.4% in 199091 to 5.2% in 2005-06.
A major share of ores and minerals exports comes from the export of iron ore.
3. Manufactured Goods
The share of manufactured items in the total export earnings of India is
on the increase. In 1990-91, the share of manufactured items in the total
export earnings was about 73% of the total export earnings.
In 2005-06, the share of manufactured items in the total export earnings of
India remained stagnant at 72%.
The top manufactured export items include :-
1. Engineering Goods,
2. Gems and Jewellery,
3. Chemicals and Allied products, and
4. Readymade Garments
The export of engineering goods increased from $ 2,234 millions in 1991-
92 to $ 21,315 million in 2005-06. In percentage terms the share of
engineering goods rose from 12.5% in 1991-92 to 20.7% in 2005-06. Over the
period 1991-92 to 2002-03, engineering goods occupied the second position in
India's export earnings after gems and jewellery. However, thereafter
engineering goods have occupied the first place. In 2005-06 they contributed
20.7% (i.e. one-fifth) of total export earnings.
For most of the period since 1991, largest export earnings came from the
exports of gems and jewellery. The share of gems and jewellery in India's total
export was 15.3% in 1991-92 and 15.1% in 2005-06. However, gems and
jewellery industry is a highly import intensive industry requiring large amount
of imports of pearls and precious stones.
Exports of chemicals and allied products rose significantly from $ 1,583
millions in 1991-92 to $ 11,935 millions in 2005-06. In percentage terms, their
share stood at 11.6% in 2005-06 and they occupied the third place in India's
export earnings in this year.
In percentage terms, readymade garments maintained an almost
constant share all through the period since 1991. They contributed 12.3% of
export earnings in 1991-92 and 12.5% of export earnings in 2000-01. In 2003-
04, their share fell to 9.8% and in 2005-06 to 8.3%.
4. Mineral Fuel and Lubricants
There has been an improvement in the export of mineral fuels and
lubricants both in terms of value and in terms of percentage. In percentage
terms, its share has increased from less than 2.9% in 1990-91 to 11.5% in
2005-06.
Some other facts regarding structural change in India's export since 1991 are
as follows :-
1. There are indication that during 1990s, some of Indian exports have
moved upwards in value addition chain whereby instead of exporting raw
materials, the country has switched over to export of processed goods.
2. There were significant compositional shift within the major
manufactured product groups such as engineering. goods, chemicals and
allied products, etc.
B. Composition of India's Imports ↓
 In 1947-48 the main items of India's imports were machineries, oil,
grains, cotton, cutlery, hardware implements, chemicals, etc. They constituted
70% of India's imports. After that due to the emphasis on industrialisation
during the second 5-Year plan necessitated the imports of capital goods.
Now imports of India's are broadly classified into following four categories.

The composition of India's imports can be summarised as follows :-

1. Petroleum Products
Imports of petroleum oil and lubricants rose significantly from $ 5364
millions in 199192 to $ 43,963 millions i.e. more than eight times.
Due to high price of crude oil, the POL imports jumped to $ 15,650 millions in
2000-01. In 1990-91, petroleum products accounted for nearly 25% of total
imports of India. In 2005-06, it has further increased to nearly 31% of the total
import bill of India.
2. Capital Goods
The imports of capital goods was $ 3,610 millions in 1991-92. In 1995-
96 due to sharp rise in non-electrical machinery imports, the imports of capital
goods jumped upto $ 8,458 millions. However due to slowing domestic demand
imports of capital goods fell subsequently. The capital goods and related items
were 24.1% of the total imports of India in 1990-91, which has come down
slightly in 2005-06 to about 22.3%.
3. Pearls and Precious Stones
To meet the requirements of the gems & jewellery industry pearls and
precious stones are imported in large quantities. In 1990-91, the share of
pearls and precibus stones was 8.7% which has reduced in percentage terms to
6.4% in 2005-06.
4. Iron and Steel
The imports of iron and steel have declined over the years in percentage
terms. In 1990-91, the share of iron and steel imports was 5%, which has come
down to 3% in 2005-06. This is because, a good amount of iron ore is now
extracted in India which has reduced imports.
5. Fertilizers
Import of fertilizers in 1991-92 stood at $ 954 millions. In 2003-04
expenditure on import of fertilizers was $ 635 millions.
The import of fertilizers have declined, which indicates less dependence of India
on imported fertilizers. The share in total imports of fertilizers was 4.1% in
1990-91, which came down to 1.5% in 2005-06.
Conclusion on India's Foreign Trade
Composition of India's foreign trade has undergone a positive change. It
is a remarkable achievement that India have transformed itself from a
predominantly primary goods exporting country into a non-primary goods
exporting country. Under import too India's dependence on food grains and
capital goods has declined.