Basics of International Trade Qi. What do you understand by International Trade? Explain its feature, need and also discuss Its scope. ‘Ans. Meaning of International Trade : International trade means trade between the wo or more countries. International trade involves different currencies of different countries and Is vagulated by laws. rules and regulations of the concerned countries. Thus, International trade ix more complex. Foreign trade or International Trade is exchange of capital, goods, and services across International borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. International trade is the backbone of our modern & commercial world as the producers are trying to benefit from expanded market & huge demands & making use of Economies of scale of other nations. Definitions : 1. International Business is defined as “Any commercial transaction taking place across the boundary lines of a sovereign entity.” It may take place either between countries or companies or both. Private companies involve themselves in such transactions for revenue, profit and prosperity. 2. According to Wasserman and Haltman, “International trade consists of transaction between residents of different countries”. 7 According to Anatol Marad, “International trade is a trade between nations”. 4. According to Eugeworth, “International trade means trade between nations” Salient Features of International Trade : International trade is characterised by the following features : 1. Territorial specialization : International trade to geographical takes place basically due specinlisation. Livery country specialises in the production of goods and services in which it has a specific advantage. For example, India has specific advantage in the production of jute and tea Therefore, India exports these commodities to U.K India imports steel from U.K. which U.K. can produce at a lower cost than Ind 2. International competition : Producers from many countries complete with another to sell their products, Therefore, there is intense competition in international trade, Here the quality, design, packing. price, advertisement, ete., all play a significant role in deciding the winner in the market. 3. Separation of sellers from buyers : In international trade sellers and buyers belong to different countries. They may have no chance of ‘ever meeting one another. Therefore, they have to depend upon middlemen for transactions. 4. Long chain of middlemen : The procedure of international trade is very long and complex. It is very difficult for buyers and sellers to perform all the formalities themselves. They require the services of expert middlemen such as, indent houses, forwarding agents, clearing agents, foreign exchange banks, etc. 5. Mutually acceptable currency : The currencies of importing and exporting countries generally are different. Therefore, it is necessary to find out a mutually acceptable currency. Generally, dollar and pound sterling are selected. These currencies are known as hard currencies because they are acceptable all over the world. 6. International rules and regulations : Businessmen engaged in international trade require knowledge of international laws and trade restrictions. 7. Government control : The government of every country exercises control over imports and exports for national interest. 8. Several documents : A large number of documents are required in international trade. ‘BBA Vith Semester /International Trade /Unit-!/@ 5BBA Vith Semester / International Trade / Unit-1/ @ 6 Need For International Trade : Generally no country is self-sufficient. It has to depend upon other countries for importing the goods which are either non-available with it or are available in insufficient quantities. Similarly, it can export goods, which are in excess quantity with it and are in high demand outside. All countries need goods and services to satisfy wants of their people. Production of goods and services requires resources. Every country has only limited resources. No country can produce all the goods and services that it requires. It has to buy from other countries what it cannot produce or can produce less than its requirements. Similarly, it sells to other countries the goods which it has in surplus quantities, Thus, International trade is essential for every country. India too, buys from and sells to other countries various types of goods and services. Governments get involved in international trade as they need to maintain their image, dependency and economic growth. Economist tries are strengthened through transactions such as investment, the physical movement of goods and services and the transfer of technology and manufacturing. Scope of International Trade : International trade has a wide spectrum of activities beyond mere exports. Currently, Indian corporations acquire and take over companies based elsewhere. They invest huge amounts to find the right lotation for a cost-effective production base. They are on the lookout for the right joint venture partners. As such, international trade has expanded its scope. Success of nation will depend on its businessmen operating successfully In other countries and establishing their credentials there. Three decades ago, very few companies ventured into the international arena ahd most of those who did restricted themselves to the physical movement of goods and services i.e. exports and imports. Restriction, regulations and other.barriers prevented them from taking risks, Today, the whole world is open. Duties, license quotas and other investment limitations have been gradually lifted, leaving anyone to do business in any part of the world. Risk factors are properly analysed and evaluated and information is abundant. The scopé of aspiring international businessman can go anywhere to explore the opportunities. oN Almost all countries are reforming thei, through LPG ~ Liberalisation, Privatiga*®™n Globalisation. Many southeast ~ Asian oa °” aq China, South Korea and a few Latin atte, countries were quick to introduce the reform India, too injected vigour into its econor industry by introducing an open door iM climinating illness, replacing foreign resting” liberalizing procedures in general. Because of such reforms, manufacturers are required to increase the production capa divert products to various destinations, Policy tions ang in Ing, ity ang Q2. Describe history of Internatioy, Trade or International Business, "”! ‘Ans. Well before the time of Christ, Phoenician ang Greek merchants were sending representative. abroad to sell their goods. In 1960, the British Eas India Company, a newly formed trading firm established foreign branches throughout Asia. 4 number of Dutch companies which had organised in 1590 to open shipping routes to East, formed Dutch East India Company and opened branches in Asia American colonial traders began operating in: similar fashion in 1700s. American FDI was made through English Plants set up be Colt Fire Arms & Ford. Singer sewing machine: was the Jfirst successful American venture into foreign production through a factory built in Scotland in 1868. By 1880. Singer had become a worldwide organisation. Firms established overseas during 1900s were National Cash Register and Burroughs, Ford Motor Company, General Motors and Chrysler. In the 1920s, all cars sold in Japan were made in US by Ford & General Motors and sent to Japan in knock- down kits to be assembled locally. General Electric also had huge investment overseas by 1919. Although ‘American firms were by far the largest foreign investors, European companies were also moving overseas, Bayer purchased an interest in a New York plant in 1865 and now has operations in 70 countries. International firms have increased in number because of increasing globalisation of their production and markets. Global are leading international firms to the global their production and marketing. (a) Advances in computer and communications n Forces : Three interrelated forces jisation ofBBA Vith Semester / International Trade /Unit-!/@ technology. (b) Progressive reduction of barriers to investment and trade by most governments (©) Trend towards the unification and socialisation of the global community. The impact of this rush do globalisation had been ‘on explosive growth in international business, Explosive Growth : There has been an explosive growth in both the size and the number of intemational concerns. FDI determines where and how fast internationalisation is taking place. The division on transnational corporations and investments, a specialised agency of UN estimates there are at least 000 international firms in the world. As a result of expansion, the foreign company’s subsidiaries have become increasingly important in the industrial and economic life of many nations, developed and developing. In the 20" century, there has been a marked liberalisation of government policies and attitudes toward foreign investment in both developed and developing nations. Recent Development : India is one the crest of FDI ware. FDI inflows into India rose from $6 billion in 2004-05 to $19 billion in 2006-07. India is the most attractive FDI destination after China, pushing the US to the third position. It’s widely believed that India will soon catch up with China and this may also happen as China attempts to cool the economy and its protectionism measures. With rising wages and high land prices in the eastern regions, China may be losing its edge as a low cost manufacturing hub. Americans were the biggest investors in electrical and electronic equipment directly or indirectly via subsidiaries in Mauritius, accounting for over 60% of investment in Ind Q3. Discuss the objective and importance of International Trade. ‘Ans. There is always a need for industrial trade because the countries have different capabilities and they specialize in producing different kings. To compensate for what they do not produce, the have to involve in trade with other countries. For example, not all the countries have oil resource, the rest of the countries import oil from the oil producers. Most of the oil producers on the other hand import finished g00ds because they do not produce enough. Similar example is of agricultural products, in which the countries who do not produce the items in demand of the local people, have to import those items from the countries who produce them Objectives of International Trade : The basic objectives for which any country indulges in Internattonal trade are : 1. Tomaximize its exports and increase its market share in the world. 2. To grow small scale industries ~ The small scale industries and exporters also get the benefit of growing. 3. To increase their geographical reach in different countries and get foreign exchange. 4. To encourage entrepreneurs ~ The entrepreneurs are also encouraged by a country’s exports and hence they get more opportunity to develop and establish themselves. 5. To improve i bility - The images and credibility are also improved in the different countries and regional blocks and the country gets a chance to take part in the strengthening competition and perform better. Importance of International Trade : International trade is defined as an exchange of goods, services and capital across international territories or borders. For the majority of countries, international trade represents a huge share of the GDP, or gross domestic product. Without it, countries would have to rely entirely on the resources present and services or goods produced inside their own territory. As a result of international trade, there has been significant growth in globalization over the last few decades. This is partly due to a range of factors : 1, Advancement in communications and transportation technologies 2. Global competition, increased opportunities and better prices 3. Consumers are aware of and demand foreign goods or services 4. Removal of international business restrictions by governments 5. Provision of services simplifying international business 6. Cooperation and agreements on an international level These factors have also resulted in improved political relationships between countries, and inBBA Vith Semester /International Trade /Unit-l/ @ 8 particular between some of the major economic powers. Intemational trade is of therefore of vital importance to. continual growth in globalization. It presents consumers with an opportunity to access products and services not available in their own countries and therefore gives businesses greater opportunities to market their products. As a result of this, competition increases and prices are more competitive, an advantage for consumers It is also important in a technological aspect, as both increased competition and greater distances to be covered in the transport of goods lead to an increase in development and innovation of new, more advanced or altogether better products, manufacturing techniques or processes, services and means of transportation. In addition, international trade has an important influence on the international political climate. As restrictions regulating business across borders are lifted, and countries cooperate and come to agreements on a commercial level, they are more likely to cooperate on other levels, and political relationships are enhanced and improved. Q4. Critically explain the significance of International Trade. Ans. Significance of International Trade : The buying & selling of goods & services across national borders is known as International trade, It is the backbone of our modern & commercial world as the producers are trying to benefit from expanded market & huge demands & making use of Economies of scale of other nations. . The benefits of International trade have been the major drivers of growth for the last half of the 20% century. Also called Global trade, it can become one of the major contributors to the reduction of poverty. David Ricardo, a classical Economist, in his Principle of Comparative Advantage explained how the trade can benefit all parties such as individuals, companies & countries involved in it, As long as goods are produced with different relative costs, the net benefits from such activity is known as gains from trade. Adam Smith, another classical Economist stated that a country could benefit from trade, if it has the least possible cost of production of goods unit input yields a higher volume of output,” P® Following is the significance of Internatio, Trade are : ; _ (a). Enhances the domestic competitiveness, (b). Takes advantage of International traq, Technology. (©). Increase sales & profits. (@). Extend sales potential of the existing products. _ (c). Maintain cost competitiveness in domestic market. (). Enhance potential for expansion of the business. (g). Gains a global market share. (h). Reduce dependence on existing markets, (i). Stabilize seasonal market fluctuations, Althoughwith some advantages, Internationa! Trade also results some disadvantages, which are as follows : 1. One may need to wait for long term gains, 2. Need to hire staff to launch international trading 3. Need to modify the product or packaging according to culture, values, beliefs of the target nation, 4. Need to develop new promotional strategies. 5. Incur added administrative costs. 6. Dedicate personnel for traveling. : 7. Wait long for payments / retums. 8. Apply for additional financing & credit. 9. Deal with special licenses & regulations. Q5. What are the classifications of International Trade? Ans. Various Types of International Business: The exchange of goods of services between one country & another is called ‘International business(Trade)’. International business(Trade) consists of transaction between residents of different countries. International Business (Trade) includes all commercial transaction — Private or Governmental between two or more countries. Private company undertakes such transactions for profit, government may or may not do the same in their transactions. These transactions includes sales, investment and transportation.BBA Vith Semester / International Trade /Unit-1/ @ Following are the important types of International Trade : 1. Exporting : When a trader from home country sells his goods to a trader located in another country, it is called export trade. For example, a trader from India sells his goods to a trader located in China, 2. Importing : When a trader in home country obtains or purchase goods from a trader located in another country, it’s called import trade. For example, a trader from India purchases goods from a trader located in China. 3. Entrepot Trade : When goods are imported from a country and then re-exported after doing some processing, it’s called entrepot trade. It can also be called “Re-export of processed imported goods.” For example, an Indian trade (from India) purchases some raw material from a Japanese trader (form Japan), then assembles it i.e. converts it into finished goods and then re-exports to American trade (in USA). 4. Licensing & Franchising : Under licensing, a firm in one country permits a firm in another country to use its intellectual property (such as patent, trademarks, copyrights etc.) whereas franchising is a form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner. S. Contract Manufacturing : In this, a company enters into international marketing contract with firms. in foreign countries to manufacture or assemble products while retaining the responsibility of marketing the product. 6. Management Contracting : In this, the firm providing the management know-how may not have any equity stake in the enterprise being managed. 7. Turnkey Contract : A Turnkey operation is an agreement by the seller to supply a buyer with a fac fully equipped and ready to be operated by the buyer personnel. 8 Wholly owned manufacturing facilities : Companies with long term and substantial interest in the foreign market, normally establishes fully owned manufacturing facilities there. 9. Assembly operation : A manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does want to go that firm may find it desirable to establish overseas assembly facilities in select markets. 10. Joint Ventures : Establishing a firm that is jointly owned by two or more independent firms. Advantages of Joint Ventures : + Benefits from local partner's knowledge of host country local business environment (including business systems). + Share global costs of product development and marketing with Various local partners. + Regulatory restrictions on FDI. Disadvantages of Joint Ventures + Risk of giving of its technology to the partner + Restricts use of globally coordinated strategies + Shared ownership with partners having different strategies. 11. Wholly owned Subsidiaries (FDI) : Either set up a new venture or through an acquisition. Advantage of Wholly owned Subsidiaries : + Where technological competence is the source of competition advantage, there is low risk of losing control over the competence. + Gives tight control over operations in multiple countries. + Allows firms to leverage location and experience curve economies across the value chain. Disadvantage of Wholly owned Subsidiaries: + Most expensive method of serving a foreign market capital cost and various risks. Q6. Discuss the advantages and disadvantages of international trade. Ans, Advantages of International Trade : 1, Free Flow of Capital : International trade helps in free flow of capital from one country to the other. It helps the investors to get a fair interest rate or dividend and the global companies to acquire finance at lower cost of capital. Further, international trade increases capital flows from surplus countries to the needy countries, which in turn increases the global investment. 2, Free Flow of Technology : International trade helps in the flow of technology from advanced countries to the developing countries. It helps the developing countries to implement new technology. 3. Increase in Industrialization : Free flow of capital along with the technology enable the developing countries to boost-up industrialization in their countries. This ultimately increases global industrialization,BBA Vith Semester /Intornational Trade /Unit-4/m@ 10 s Throughout the Globe : International trade of production, Hl the global countries depending upon the location ang vat 4. Spread up of Production Facil to spread up of manufacturing facilities in a favourable production factors. ; ital, technology, S Balanced Development of World Economies: Will ap! BY, ANd oon : \dustrialize their economies" manufacturing facilities in developing countries, the develof , mies, The is turn leads to the balanced development of all the co ization on balanced lives inthe globe inp 6. Balanced Human Development : Increase in im i the skills of the people of developing countries. , 1 output inereases 7. Gains of Specialization ~ Each trading company gains when tte aes ui sale 2 re division of labour and specialization. These gains are 1n the form o! aly hy the flow of ci ping countries in goods. political relations, . (ei ional 8, Better International polities: It helps in harmonizing international of international trade is the absence o¢ Disadvantages of International Trade : ve to be tackled. Some of these Problems 1. Heterogeneity of Problems : A major hurdle in the path universally accepted set of solutions of the problems which hay happen to be political and social ones. | 2. Reluctance of Developed Countries : Though advocating te sa or : fice ba ech it i ff the world are themselves Fi orton and competitive markets, rich economies 0 ves ests. They are not account of monopoly forces, huge subsidies, and a variety of Vésiet st 7 1 accommodate the poorer countries of the world on criteria of economic faimess. =e are frequent in of their enacting unfair and discriminatory legislation against competitive imports from developing counirie and resorting to other unfair practices. 3. Factor Mobility : International tra countries feel that unrestricted mobility of capital and countries are apprehensive about the effects of unrestricted immigration of low wage labor. *s. Chain Reaction : With interdependence, every economy is exposed to ill-effects of disturbance e damage is more when the disturbance originates from a big economy anj de leads to unhindered international factor mobility, Develop, finance can be damaging for them, while develope eS originating in rest of the world. The its effects are felt by a small one. : _ 5S. Risks and Uncertainties : Progress towards IT is also hindered by uncertainties relating to a possible shift in political and economic philosophy of some member countries, the fear of nationalization by the | MNCs, the resistance to cultural invasion associated with unrestricted inflow of foreign capital and enterprise, and so on. Q7. “International trade permits more people to live, to gratify more varied taste and to enjoy a higher standard of living that would not be possible in its absence", | Discuss. Ans. International trade permits more people to live, to gratify more varied taste and to enjoy a hight standard of living that would not be possible in its absence because of its advantages over internal trade. The Following are the Advantages of International Trade which Enhances the Higher Standard of Living : 1. Specialization of Production : . Every nation seaks to increase the material standard of living of i ivi it st n ig of its people. Li d: jerease a5 function of productivity. So accounting to this theory countries don't ry ie prods i he ott require. Specialization is more efficient and, in effect, raises the standard of living by providing certain through import, while providing certain goods & services nationally. These sheltered business include t provision of services such as health care, government administration and goods distrib ti Absolute productivity improvements can increase living standards: ig ‘ctemationally ‘traded sectBBA vith Semester /intemational Tracte /Unit-/m 44 lute productivity improvements may not he suftic os be measured relative to other's production oo ratve advange ient fo improve living standards. Productivity improvernent Of the same gonds ‘This is the hasia of the theory of sins Specialization and Trade : law ‘of compa: ve Teen stievone Sone, advantage states that every nation henefits when specialization & trade eee aoe tof both nation isang Produce any good more efficiently than another can, it is still in the TE ‘ons for each in specialization and the advantage are achieved an the basis of one “ ction factors ~ ce * © pore production factors ~ natural resources, technology, capital mianagerial know-how or labour { xmtral Resources : gure randomly more different regions of the world with natural resources. The natural riches of a ancebestow upon itumigue economic advantages. But nations are grouped as communities organized on the grabundance or lack of natural resources she most outstanding example is the abundance of oil in the middle east. In raw material exchanges based oe natural resources, even if both nations have the same natural resources, one country may be better off ina the other because of the various physical characteristics of the resource. The important point here is that aye natural resources of a country can permit it to engage in international trade from an advantageous position + ye ono 4 Technology : \anufacturers in different countries have different production costs as a result of the unevenness of sesinological advances. Differences in production scale, run lengths, distribution structure, product mix & ‘chnological development capability among other things determine productivity differences among producers «Managerial know-how : People who bring capital, labour and resources together to fashion them into a productive organization that mus face the risks of an uncertain world, occupy strategic positions. Thus given the same inputs, a country with superior management will do better than one with weak management. The importance of managerial now-how can be illustrated by the airlines industry. Most airlines of the free world use the same planes & ly offer the same services while charging common prices. essential 6 Large size of market : Market size depends because of foreign trade which results in further economies of scale by cost cutting method and can promote development. This helps industrialization of the country along with balanced growth ‘These are some of the basic few elements covered which show the importance of the comparative cost theory in understanding international trade. Q8. In international trade, it is easier to trade with countries which are almost at the same level of development. Do you agree with above statement. Aas. International trade is the branch of economics concerned with the exchange of goods & services with foreign countries, Foreign trade plays a crucial role in the economic development. Poor countries can ‘tain higher rate of development by adopting the policies of imports substitution. Significant Contribution of International Trade: International trade has made significant contribution to the development of less developed countries during the 19th and 20th centuries. It provides the means to develop. The foreign trade contributes to development in the following ways : |. Widen the size of Market : The size of domestic market in less developed countries is small. This leads to low Inducement to investment & perpetuates the vicious circle of poverty. The size of market is also small because of low precipitate income & purchasing power: International “a.ts BBA Vith Semester / international Trade / Unit-l/ 12 widens the size of market & increases the inducement to invest through more efficient ‘Allocation gp resources, Through international trade, an under-developed country can export its surplus production primary goods in exchange for imports manufactured goods which it cannot produce. of 2, Magnetization of subsistence section : International trade provides market for farm products thereby inerease the income & standard of living of farmers. Thus foreign trade also helps in yy ‘magnetization of rural sector, Not only this, a number of internal & external economics accrue to thy economy with increase in the size of market 3. Development imports : In the initial stages of econom scarcity of machines & capital goods, industrial raw material and other international products which are very essential for economic development. The underdeveloped countries can import machingy & raw material from advanced countries in exchange of their primary commodities. The | export increases the imports of capital equipment without endangering the balance of payments & the greater degree of freedom makes it easier to plan domestic investment for development, 4. Benefit of Foreign Skill & Experience : Under developed countries are not only deficient in capital goods but they also lack in critical skill needed for development. Foreign trade helps these countries to overcome this deficiency. The less developed countries can import necessary. 5. Flow of Foreign Capital : International trade facilitates the flow of foreign capital from the advanced countries to developing countries. In the absence of foreign trade foreign capital will not come ina country. Foreign capital helps a country in increasing output and employment. It also smoothen the balance of payment & inflationary pressure. 6. A check on efficient U: Interriational trade increases competition in domestic market & thereby check the growth of inefficient industrial units & monopolies. 7. Helps in controlling inflation : When the prices of consumer goods begin to rise in the domestic market due to scarcity then price rise can be checked by imports of scarce consumer goods. 8. Natural calamities : Intemational trade helps a country to deal with the periods of natural calamities like floods, earthquakes etc. through imports of food grains, medicines & other necessary consumer goods. There is no evidence to show that the development of the export sector has adversely affected the development of other sectors. The demonstration effect provides the necessary urge & will to develop less developed countries. It encourages the people to take initiative of establishing new enterprises. The adoption of high consumption standard of rich countries influences the agricultural sector favourably. This favourable effect on agriculture sector increases the inducement to invest in agricultural & allied activities. Increased investment in agriculture sector lead to increase in income & employment which in turn leads to further capital formation. development of poor countries there jy Conclusion : From the above discussion, it can be said that the foreign trade helps rather than retard economic development in less developed countries. It has been an engine of economic growth. It encourages specialization & facilitates economic growth. International trade provides developing countries the necessary urge, capital good and skill to utilize their unutilized or under utilized natural & other resources in the process of economic development. The contribution of the international trade to national well being isso great that few countries could became self- sufficient even with the greatest efforts.BBA Vith Semester / International Trade /Unit-1/ m 13 Q9. What are the main differences between Internal and International Trade? Explain in detail. ‘Ans. Differences between Internal and International Trade : ‘Sources of Domestic Trade Tnternational Trade Difference _| or Internal Trade 1. Meaning Domestic trade is the exchange off international trade is the trade between twol domestic output within the political]or more nations. boundaries of a nation. 2. Political Domestic trade takes place within|International trade occurs between thel Differences the same political unit, as it is an|different political units, as it is a trade exchange of output within the| political boundaries of nation. between two or more nations. 3. Heterogeneous groups. Domestie trade is not between heterogeneous groups as it is a trade within the country, among the same ‘group of people (same nationality International trade is between ___the| Heterogeneous groups as it is a trade between countries and takes place between differently cohered groups. It is trade between US and| them. 4. Different Rules |5.Different Currencies The rules remains the same in domestic trade The currency used in the domestic trade does not vary In International trade the ules differ| markedly as the laws and policies relating to trade, commerce, industry, taxation, etc. differ between countries. International trade involves the use of different types of currencies and each country follows different foreign exchange policies. 6. Tax and Duties Taxes are not levied on domestically} Heavy taxes and duties are levied on the| 10. Difference in Procedures & Documentation roduced goods or domestic goods. imports and exports of goods and services. 7, Heterogeneous | Domestic Trade has a In International trade the world markets lack word Markets | homogeneous market homogeneity on account of differences in climate, language Preferences, habits, customs, weights and measures, etc. 8. Factor Factors are less mobile in case of _ | Factors such as factors of production like Immobility | domestic trade labour and capital are greater between the countries than within the country. 9. Greater There is a lesser degree of risk There is greater degree of risk involved in Degree of Risk | involved in domestic marketing _| international marketing due to : Difference in procedures and documentation is lesser in case of domestic trade. 1. Large volume of transaction and higher value of these transactions 2. Longer time period involved in these transaction due to longer time in transit. 3. Comparatively less knowledge about the parties reputation and credibility. Differences in Procedures and documentation are more in case of International trade because each country has its own procedures and documentary requirements,BBA Vith Semester (International Trade / Unit-I/' Q10. What do you understand by trade barrier? How does tariff barrier differs from non-tariff barrier ? Ans. Trade Barrier = Trade barriers are measures that governments oF public authorities introduce to make| imported goods or services less competitive than locally produced goods and services. Not everything that prevents or restricts trade can be characterised as a trade barrier. ‘A trade barrier may be linked to the very product or service that is traded, for example technical requirements. ‘A barrier can also be of an administrative nature, for example - rules and procedures in connection with the transaction. In a number of areas, special international ground rules have been agreed, which limit the ways in which countries can regulate trade. It means that some barriers are legal while others. are illegal. Trade barriers within the Europian Union(EU) are subject to special rules that apply to the internal market of the EU. Sometimes it may also be possible to assist companies that face obstacles to trade that do not fall under the definition of actual trade barriers. The international trading environment impose trade barriers : * to protect domestic industries from foreign competition, * to promote development, = to conserve the foreign exchange resources of the country, ~ + to make the balance of payments position favorable, + to curb conspicuous consumption, + to mobiles revenue for the government and + to discriminate against certain countries. indigenous research & There are two types of trade barriers : 1. Tariffs barrier 2. Non-tariff barrier Tariff Barrier : Tariffs refer to taxes levied on goods moved between nations. The most important of these is the tax usually called the customs duty, which is levied by the importing nation. But a tax may also be imposed by the exporting nation, and that is called an export x mt India has had one of the highest tariff walls in the world, The govt. following the recommendation of the Tax reforms committee steadily reduced the pea, level of tariffs from over 30% in 1991 to 50% jn 1995. Different nations handle tariff barrier differently, Acountry may have asingle tariffsystem forall goods from all sources. This is called a single-column tariff, ‘A tariff maybe worked out on the basis of a tax permit, called, specific duty or as percentage of the value of the item, which is referred to as advalorem duty . for Protection : oney at home argument : To prevent national wealth from being transferred in exchange with another nation for goods. Home-market argument : To encourage home industry to perpetuate. Equalization-of-costs-of-production argument. To make local goods complete fairly against imports, which otherwise may be cheaper because of technological advantages or other similar Arguments 1. Keep m Yn ye reasons. Low-wage arguments : To foreign products. National security argument : To be on one’s ‘own for national security reasons such as war or natural calamities. Infant - industry argument : To encourage new industry in the country. Non-Tariff Barriers : - These include quotas, import equalization taxes, road taxes, laws road taxes, law giving preferential treatment to domestic suppliers, administration of antidumping measures, exchange controls & a variety of "invisible" tariffs that impede trade. Some principals of non tariff barriers are : 1. Specific Limitation on Trade : Included in this category are the measures that limit the allowable amount of imports, such as quotas, referring to quantity a value allowed for specific imported products during a specific period, . 2. Customs & Administrative Entry Procedures: This category includes procedural Fequirements comprising valuation of imports, antidumping practices, tariff classification etc. 3. Standards : This category includes unduly discriminatory health, safety, and quality prevent dumping of n 2 7BBA Vith Semester / International Trade /Unit-1/ 15 standards, such as standard disparities, applying packaging, labeling and marketing standards of the 4 Government Participation in Trade : This category includes government involvement in trade through * Srecurement policies favoring domestic products over the imported ones ive. export subsidies 5. Charges on Imports : The category consists of various types of charges levied on imports to make * them less competitive agents the domestic products including prior import deposit requirements, bord, tax adjustment, administrative fee ete 6. Other Categories : These categories include recent measures employed by unsporting counties to discourage imports, such as voluntary export restraints. iff bar rand Not Difference between Tai Tariff barrier _Non-tariff b 7 Wao aart rier ] “Tolvensure revenue fora government. | 1. Itdoes not bring any revenue — 2. They are more transparent in nature. | 2, They are country specific that can serve to sour Lo oe relations between countries, Q11. What are the reasons of imposition of trade barriers? Ans. Reasons for Imposition of Trade Barriers Various arguments have been forwarded to justify the imposition of trade barriers. Some of them may be valid in certain conditions, but most of them are based on a fundamental misunderstanding of the basic principles underlying international trade. In some cases they only serve to protect the interest of some specific groups in the economy. The various reasons given are as follows : ‘Tariffs are a source of revenue for the government. ‘+ Sometimes compromising on economic welfare becomes essential due to some im For example, national security cannot be compromised by opening up the defe bbe other national concerns that have to be taken care of, for example, preservatior or environment protection. * The fallacy that a country’s economic condition can be improved only if the country enjoys a trade surplus, tempts governments to put up trade barriers. This line of thinking stems from the period when ‘a nation’s wealth used to be measured by the amount of gold it held and any trade surplus or deficit was settled by transfer of gold. This system, called the gold standard, no longer works and hence cannot be taken as a reasonable excuse to put up trade barriers, Free international trade has a few major implications. The first one is factor Price equalization. As intemational demand for a commodity produced in a particular country grows, the price of the factor of Production which is used intensively for that product, increases in that particular country, At the same time, demand for the same product produced in other countries reduces, which lowers down the price Of that factor in those countries. Hence, the factors of production which are comparatively inefficient suffer in terms of reduced compensation. Another implication is that in the event of an increase in the productivity of one of the factors of production, there is a reduction in the production of goods which intensively use the other factor. These implications give rise to a demand from those sectors for protection of domestic industries, local jobs and the levels of factor prices. These sectors serve as very powerful lobbying groups for putting up trade barriers, * Tariffs are « popular means of retaliation for other countries putting up barriers against domestic goods. * When some foreign producer is found to be dumping some particular good. ic. selling it at a price that does not even cover his costs (this may be done to secure a foothold in the market), anti-dumping duty may be levied. portant national goals. nce sector. There may n of cultural traditions * When some foreign Country subsidizes its exports (may be to avoid balance of payments problem), theBBA Vith Semester / International Trade / Unit-1/ 8 16 importing country may impose a countervailing duty. 2 * Anation which is large enough to be able to affect world prices may be able to change the terms of in its favour by levying tariffs. Imposition of tariffs would increase the domestic prices beyong the international prices, thus reducing domestic demand. If the domestic demand is large enough, then this fall would induce the world price of that commodity to come down, thus improving the terms Of trady for the large country. In this situation, imposition of tariffs could prove to be an attractive proposition for the large country, at least in the short-term. In the long-term, other big countries may also decide to act in the same manner, resulting in a decline in the economic welfare of all the countries. * Trade barriers may be needed to protect an infant industry with tremendous growth potential, i believed that in the long run it would be able to stand on its own and face international competition, new industry may not be able to withstand the intense competition from well-developed industries op other countries. However, if it is provided an initial period of shelter, it may be able to develop the economies of scale, the skilled labour force, the technological efficiencies and the product adaptation in accordance with consumer tastes, which are required for turning the comparative advantage in its favor. This fact encourages countries to put up trade barriers in that initial period. Barriers can be used to increase the demand for domestic products (by increasing the price of foreign goods by imposing a tariff or by restricting their availability with the help of quotas), in order to increase the domestic employment opportunities, especially during periods of recession. This method of generating employment may, however, involve a huge economic cost. The same result may be achieved by following appropriate monetary and fiscal policies. Besides, intemational trade would cause labour to shift from industries which suffer from comparative disadvantage to those enjoying comparative advantage, This would also result in an improvement in the productivity of labour, thus providing a long-term solution to the problem of unemployment. Restrictive barriers can only provide a short-term solution to the said problem. Restrictions may be put in place to reduce expenditure in foreign currency by the citizens in order to improve the balance of payments situation. Helping the exporters build up world markets can be another reason for putting up of trade barriers, Q12. Explain different types of tariff. Analyse the various effects of a tariff. Ans. Types of Tariff : Tariffs in international trade refers to the duties or taxes imposed on internationally traded commodities, when they cross the national border of country. The different ways of classifying the tariffs are discussed below : 1. Export duties : An export duty is a tax imposed on a commodity originating from the duty levying country destined for some other country. 2. Import duties : An import duty is a tax imposed on a commodity originating abroad and destined for the duty levying country. 3. Transit duties : A transit duty is a tax imposed on a commodity crossing the national frontier originating from and destined for, other countries. 4. Specific duties ; It is a flat sum per physical unit of the commodity imported or exported. 5. Ad-valorem duties : It is levied as a fixed percentage of the value-of commodity imported/ exported. 6. Compound duties : When a commodity is a subject to both specific and ad-valorem duties, the tariff is generally referred to as a compound duty. gle Column tariff : Also known as uni linear tariff system provides a uniform rate of J like commodities without making any discrimination between countries. 8. Revenue tariff : When raising revenue is the primary motive, the-rates of duty generally low, import ‘ duty should be highly discouraged, defeating the objective of mobilizing revenue for the goverment. yy tor allSBA Vith Semester / international Trade / Unit-l/ sfects of Tariff: Tariffs a tax imposed on products imported from other countries. The tax may be levied on the guantity or can be levied on the value of imported Mods. Thus, tariffs make imports dearer. However, Bagh increases the price of imported goods if itis Fevied on the value of imported good and in a way impers free flow of trade. Similarly, if tariffs levied an the quantity of imported goods, it also adversely aafect the foreign trade, us, government should take measures to reduce ar remove tariff on the goods for free flow of trade. However, in the interest of domestic firms, tariffs nay be levied which helps in protecting the indigeneous firm from foreign companies. Thus, in a nutshell, Tariff can have both positive and negative impact on business. Q13. Differentiate between Quotas and Tariffs? Ans. Comparison Between Quotas & Tariffs: ‘Any kind of trade barrier reduces the efficient allocation of world resources and the achievable level of standard of living. Both quotas and tariffs cause this to happen. Yet, there are some differences between the two. 1, The imposition of a tariff generates revenue for the government, which could be used to reduce other taxes or for other welfare activities and thus negate the harmful effect of tariffs on consumers to some extent. While in the case ofa quota being imposed, the only beneficiaries would be the importers who are able to get hold of an import license. 2. Quotas are enforced by allowing imports only against licenses, which are issued ona selective basis. 3. Since the basis of selection for the grant of import licenses is rarely clear, it leaves scope for manipulation. In this aspect, a tariffis better than a quota as it is a more transparent mechanism. 4, Otherwise also, importers would prefer facing a tariff rather than a quota, since a tariff would make the availability of the commodity (though at a higher price) a certainty and eliminate the ambiguity involved in a quota system $8. On the other hand, the local producers for whose benefit the barrier is being put up, ee rather have a quota in place since it bel u ee in planning for their future production leve if they can project the future domestic deman In case of a tariff being in place, the future movements in the world prices and the elasticity of demand for imported goods would also have to be estimated, which would prove to be 2 much more difficult exercise. Q14. Why there is need for separate theory of international trade? Discuss. — Ans, There are several differences between domestic trade and foreign trade, which necessitate the formulation ofa separate theory of international trade: 1. Mobility of Factors of Production : Ricardo advocated a separate theory of international trade on the ground that within the same country, labour and capital are more mobile than they are between different countries. 2. Natural Endowments : Endowments mean factors of production, which are used to produce any good. Natural endowments mean natural factors like geographical areas and climate or temperature or soil resources which are used to produce any good. Difference in advantages of trade to different countries may arise because of natural causes like geographical and climatic conditions. These lead to territorial division of labour and localization of Industries. 3. Human Capabilities : Countries differ in human capabilities too. People in some countries are physically more sturdy, whereas in others they are intellectually superior. Some have greater skill and dexterity and others excel in spirit of enterprise and organizational ability. 4, Stock of Capital : Some countries possess large stock of capital goods like the U.K, and the U.S.A. and others like India suffer from capital deficiency. This makes a great difference in the type of goods produced in different countries. 5. Political Sovereignty ; In International trade, certain problems arise out of fact that countries are independent sovereign states and can pursue independent policies with respect to movement of goods, wages and prices, fiscal matters, banking law, foreign loans, etc. Several kinds of restrictions mayBBA Vith Semester / international Trade / Unit-l/ 18 be placed on the movement of goods beyond their frontiers by the states. 6. Different Cyrrency and Monetary Systems: In case of internal trade, a single currency, a legal tender, is used as a medium of exchange. The same currency is used throughout the country in the settlement of monetary payments. In case of international trade, things are different. Each country has its own currency and monetary system. Currency of one country is not acceptable as legal tender and medium of exchange in another. For example, Indian Tupee is acceptable as medium of exchange throughout India but not in Pakistan. Similarly, Pakistani rupee is not acceptable as a medium of exchange in India. Key currencies like US dollar and British pounds are widely used in the ‘settlement of foreign obligations’ but these currencies are not legal tender in other countries nor can they be used as a medium of exchange in routine business transactions. The different currency systems, thus, create payment problems. 7. Separate Markets : There are cultural distinctions between markets. The national markets are frequently separate from one another. 8. Economic nationalism : Different countries have their separate national economic life. 9. Trade and Exchange Controls: We find that trade and exchange controls are instituted by almost all modern states which obstruct the movement of goods and services from one country to another this also necessitates a separate theory of international trade. 10. Restrictive Trade Policies : While there is virtually no restriction on the movements of | goods and services within a nation there have been and still there are severe restrictions on the movements of goods and services between the nations. Most nations have adopted a restrictive trade policy. Trade restrictions have not been doubt eased in recent times due to increasing trend of globalization and openness of the domestic economy. Yet, trade restrictions do exist in one form or another. In fact, restrictive trade policies adopted by different nations have been the biggest barrier in free flow of commodities between the nations. Trade restrictions include both direct and indirect measures, Direct measures include prohibiti of import of certain types of goods, particularly the consumer goods, and imposition of quota on import of certain types of goods, particularly the consumer goods, and imposing quota on import of certain goods Indirect measures include imposition of import ang export duties, exchange control and devaluation. The restrictive trade policies are adopted with a view tg protecting domestic industries from foreign competition and also to achieve some level of self. sufficiency and import substitution. ‘All these differences give rise to a separate theory of international trade. Q15. Explain the classical theory of International Trade. OR Elaborate & discuss in detail the theory of competitive advantage with its assumptions and implications. ‘Ans. The classical theories of international trade are divided among two parts. 1. Theory of Absolute cost advantage. 2. Theory of Comparative cost advantage. 1. Theory of Absolute Cost Advantage : Adam Smith was one of the forerunners of the classical school of thought. He propounded a theory of international trade in 1776 that is known as the Theory of Absolute Cost Advantage. He was of the opinion that the productive efficiency among different countries differs because of diversity in the natural and acquired resources possessed by them. A particular -ountry should specialize in producing only those goods that it is able to produce with greater efficiency, that is at lower cost, and exchange those goods with other goods of their requirements from a country that produces those other goods with greater efficiency or at lower cost. This will lead to optimal utilization of resources in both the countries. ‘Adam Smith explains the concept of absolute advantage in a 2-Commodity, 2-Country Framework Country C, Produces : 1 Kg of Rice with 10 Units of Labour OR 1 Kg of Wheat with 20 Units of Labour Country C, Produces : . 1 Kg of Rice with 20 Units of Labour OR 1 Kg of Wheat with 10 Units of LabourBBA Vith Semester /International Trade / Unit-l/ @ 19 100 units of Labour. Equal Each of the countries has b for the production of two amount of labour is used 1 goods in absence of trade in the two countries. In the Absence of Trade - Amount of Production: ‘Rice | Whi “|Skg | 2.5kg OQ 2.5 kg | Ske Total output in two countries : 15 Kg In the Presence of Trade - Amount of [Rice | Wheat 10kg| Nil Nil_| 10kg Total output in two countries : 20 Kg The total output in both the countries will rise because of trade. C; will only produce Rice and exchange a part of the rice output with Wheat from C,. C, will produce only Wheat and exchange a part of Wheat output with rice from C). The Theory of Absolute Cost Advantage explains how trade helps to increase the total output in the two countries. But it fails to explain whether trade will exist if any of the two countries produces both the goods at lower cost. In fact, this deficiency led David Ricardo to formulate the theory of Comparative Cost Advantage. 2. Theory of Comparative Advantage : ~ The classical theory of intemational trade is popularly known as the theory of comparative costs or advantages. It was formulated by David Ricardo in 1815. This theory basically seeks to explain how and why countries gain by trading, The idea of comparative advantage is drawn in view of deficiencies observed by Ricardo in Adam Smith's principles of absolute cost advantage in explaining territorial specialisation as a basis for international trade. To explain the theory the comparative advantage, Ricardo stated a theorem that, other things being equal, a country tends to specialize in and export those commodities in the production of which it has maximum ‘comparative cost advantage or minimum comparative disadvantage. Similarly the country's imports will be of goods having relatively less comparative cost advantage or greater disadvantage. ns of the Theory of Comparative The following are the assumptions of the theory of comparative advantage : 1. Labour in the only productive factor. 2. Costs of production are measure the labour units involved. Labour is perfectly mobile within a country but immobile internationally. Labour is homogeneous. ‘There is unrestricted or free trade. There is full employment equilibrium 7. There are constant returns to sale 8. There is perfect competition. With these assumptions, it is assumed that there are two countries A and B and two goods X and Y to be produced. terms of + ope Implication of Comparative Theory = A country tends to spec in the production of commodities for which it has got a comparative cost advantage i.e., where its cost are lower than in other countries. Let us explain with an example of two countries England & Portugal. Two products Cloth & wine are being produced. The amount of labour required to produce one unit of these items is Cloth Wine England 100 120 Portugal 90 80 It is clear that Portugal can produce both cloth & wine at a lower cost because the amount of labour referred per unit of output is.lower. But if the relative difference in costs between Portugal & England is, ‘compared, it is found that Portugal is more efficient in producing wine because 80/120 creative cost of wine (< 90/100 Creative cost of cloth). The domestic exchange ratio which will reflect the relative costs of production of the two commodities will be Portugal 1 Wine “0.89 Cloth England 1 Wine 1.20 cloth If trade takes place, assuming zero transport cost & no other incidence, the traders in Portugal will find that while by exchanging one unit of wine, they can get only 0.89 unit of cloth domestically, they can getBBA Vith Semester / International Trade / Unit-I/ ™ 20 1.20 units of cloth if the same one unit of wine is sold in the England, Therefore, a gain which can be derived from export of wine from Portugal, as a result of which Portugal will specialize in the production of wine & export it to the England Conversely, the England will specialize in the production of cloth and export the same to Portugal The Ricardian model of comparative costs is based, on only one factor of production namely labour, and the basic hypothesis is that each country will export that product which it can produce at lower average labour cost. In other words, differential labour productivity is the cause of price differences. There are certain limitations of this theory : + It is one factor model i.e. labour cost constitutes as important segment of total cost. + Even though cost difference is attributed to differential labour productivity, this theory does not explain the reasons why labour productivity may differ from country to country. Q16. Critically examine Ricardo’s comparative cost theory of international trade. What is common between Smith’s and Ricardo’s trade theories? Ans. David Ricardo’s Comparative Cost Theory of International Trade : David Ricardo in his, “Principal of political Economy (1817)" gave a more precise formulation of the theory of international trade. He developed the theory of comparative cost out of his labour theory of value. It means value of any commodity depends on the labour cost involved in it. The goods are exchanged against one another according to the relative ants embodied in them. The prices are determined solely by relative labour cost, through the influence on supply and demand. If an industry prices are more than the labour cost, embodied in them, additional labour moves to this industry from other industries, The supply of goods of that industry will expand so long as their prices are equal to labour costs involved in them, According to Ricardo, International Trade takes Place because different countries have different advantages, in the production of different commodities, A country will specialize in that agumodity in which it has a great comparative ‘vantage. Thus, it is clear that the country would export the commodity in which its comparative isadvantage. cardo answered questions that if one country enjoys absolute advantage in the production of both the commodities and another country has got absolute disadvantages in the production of both the commodities, trade would be possible. According 1g Adamsmith, trade is not possible. But Ricardo, is of the belief that due to comparative cost advantage, both the countries will gain from international trade, A country should produce that commodity in which the comparative cost advantage is maximum and other country should produce that product in which its comparative disadvantage is the least. Criticism of Ricardo’s Comparative Cost Theory of International Trade : 1. Ricardo tied his theory of trade to labour cost only, ignoring other factors of production. 2. Ricardo theory dealt with only two countries with two commodities only. 3. Ricardo theory of trade is unsatisfactory because of reliance only on labour cost. 4. The theory is based on the assumption of perfect competition which is wrong. 5. The assumption of perfect mobility of factors of production is also wrong. 6. Ricardo’s theory of international trade is one sided in the sense that it explains principle of international trade only for the supply side and ignores demarai side, Similarities between Adam Smith and Ricardo theory of international trade : 1. Both the theories explains conditions of international trade, specialization and benefits of intemational trade. 2. Both the theories are the part of classical theory of international trade. 3. Both the theories uses 2x2 model i.e. are based on two countries and dealt with only two commodities. 4. Both theories assumes barter system as means of exchange, 5. Both the theories assumes the perfect competition and full employment. 6. Both the theories assumes factors are mobile within the country but.immobile between the countries,BBA Vith Semester /International Trade / Unit-1/ m 21 Qi7. Discuss the importance of comparative cost theory in understanding international trade. ‘Ans. Importance of Comparative Cost Theory in Understanding International Trade : 1. Specialization of Production : Every nation sacks to increase the material standard of living of its people. Living standards increase as a function of productivity. Specialization is more efficient and, in Effect, raises the standard of living by providing certain goods through import while providing certain goods & services nationally. ‘Absolute productivity improvements can increase living standards; in internationally traded sectors, absolute productivity improvements may not be sufficient to improve living standards. Productivity improvement must be measured relative to other's production of the same goods. This is the basis of the theory of comparative advantage. 2. Business Specialization and Trade : The economic law of comparative advantage states that every nation benefits when specialization & trade take place. Even when one nation cannot produce any good more efficiently than another can, it is still in the economic interest of both nations for each to specialization and the advantage are achieved on the basis of one or more production factors - natural resources, technology, capital managerial know-how or labour. 3. Natural Resources : Nature randomly endowed different regions of the world with natural resources. The natural riches of a place provides its unique economic advantages. But nations are grouped as communities organized on the basis of abundance or lack of natural resources. The most outstanding example is the abundance of oil in the middle east. In raw material exchanges based on natural resources, even of both nations have the same natural resources, one country may be better off than the other because of the various physical characteristics of the resource 4, Technology : Differences in production scale, run lengths, distribution structure, product mix & technological development capability among other things other determine productivity differences among producers. __5. Managerial know-how : Thus given the same inputs, a country with superior management will do bejter than one with weak management. The importance of managerial know-how can be illustrated by the airlines industry. Most airlines of the free world use the same planes & essentially offer the same services while charging common prices. Q18. How do theories of absolute advantage & comparative advantage differ from each other? Explain. Ans. The theories of Absolute Advantage and Comparative Advantage differ from each other as: 1. Under Absolute Advantage Theory, A Country can produce more output (of one product) per unit of an input (labour) as compared to another product. Under comparative cost Advantage theory, If one country has an absolute advantage in every type of product, the other country might benefit from specializing-in and exporting these products. 2, Under Absolute Advantage Theory, A country has an absolute advantage economically when it can produce that good at a lower cost. Under comparative Cost Advantage Theory, A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost relative to another country. Here what matters is that is the opportunity cost. Opportunity cost means how much production of 1 good is reduced to produce I more unit of another good. 3. Under Absolute Advantage Theory, Trade is mutually beneficial. Under Comparative Cost-Advantage, Mutually beneficial trade is possible & this theory also explains why it can be beneficial for the 2 countries to trade, if one country has the lower cost of producing the same good. Q19. Explain the Neo-classical theory of International Trade. ‘Ans. Neo Classical Theory of International Trade: Haberler made a significant improvement in the Recardian theory of comparative cost advantage. Haberler has used the concept of opportunity cost of producing a commodity instead of absolute or comparative cost of production. Haberler's theory of trade is called Opportunity Cost Theory or Neo Classical Theory of Trade. . The opportunity costs theory says that if a