Introduction

International trade acts as a major contributing factor in global economic activity and a catalyst
of economic growth in developing as well as developed countries. Differences in various
conditions, like resource availability, natural climatic conditions, cost of production, etc., act as
the motive behind trade between the countries. International trade has made it all possible and
has provided a large number of employment opportunities as well as several goods and
services for the consumer. Not just this, it has been a major reason for the rising living standards
of people all over the globe. International trade has been a part of human civilization for a very
long time; however, the past few decades have seen rapid development in cross-border trading.
Imports and exports have largely contributed to the growth of GDP, and the credit for the same
goes to imports and exports.

International trade : an overview

1. In layman’s language, international trade is the exchange of goods and services

between different countries.
2. The term “exchange” includes the import as well as export of goods and services. As
quoted by Wasserman and Haltman, international trade can be connoted as transactions
among the inhabitants of different countries.
3. Edgeworth, an Irish-based statistician, defined the term as the phenomenon of trade
between countries.
4. The term ‘international trade’ is an example of economic linkage and can be referred to
as an economic transaction between countries.
5. International trade stands as a crucial determinant of openness among countries and
has been a remarkable factor in economic growth.
6. In recent years, overseas trade has become a strategy of paramount importance for the
growth of the national economy.
7. However, the significance of international trade is not just limited to this, it also helps in
encouraging social and international relations among countries.
8. Increased foreign trade has augmented the process of globalisation.
9. In the early years, political economists like Adam Smith and Ricardo were among the
few people who acknowledged the significance of international trade, which has been
practically affirmed by visible global growth and economic development.
10. Global trade gives consumers the opportunity to experience and enjoy a variety of
goods and services that, for whatever reason, are not available in their country or which
might be a bit costly in their country compared to others.
11. Foreign trade also, to a great extent, curbs the issue of irregular availability and
distribution of resources all over the world by facilitating a smooth flow of raw materials
as well as finished products.
12. The optimum use of abundant raw materials is one more benefit expedited by trading
globally.
 a. Theories of international trade

International trade theories were mainly developed under two categories, namely, classical or
country-based theories and modern or firm-based theories, both of which are further divided into
various categories.

Let’s have a brief overview of the various theories of international trade.

● Classical or country-based theories

The founders of the various theories of the classical country-based approach were mainly
concerned with the fact that the priority should be increasing the wealth of one’s own nation.
They were mainly of the view that the focus should be on economic growth on a priority basis.
The main classical theories in reference to international trade are discussed below.

1. Mercantilism
1. The Mercantilism theory is the first classical country-based theory, which was
propounded around the 17-18th century.
2. This theory has been one of the most talked about and debated theories. The country
focused on the motto that, on a priority basis, it must look after its own welfare and
therefore, expand exports and discourage imports.
3. It stated that an attempt should be made to ensure that only the necessary raw
materials are imported and nothing else.
4. The theory also propounded the view that the first thing a nation must focus on is the
accumulation of wealth in the form of gold and silver, thus, strengthening the treasure of
the nation.
5. To put it simply, it can be stated that the classical economists behind the theory of
Mercantilism firmly believed that a country’s wealth and financial standing are largely
demonstrated by the amount of gold and silver it holds.
6. Hence, economists believe that it is best to increase the reserve of precious metals to
maintain a wealthy status.
7. For this theory to work, the aim to be fulfilled was that a country must produce goods in
such a large quantity that it exports more and should be less dependent on buying
goods and other materials from others, thereby strongly encouraging exports and strictly
discouraging imports.
8. A large number of countries in the past benefited from strictly following the theory of
Mercantilism. History is evident that by implementing this theory, many nations benefited
by strictly following the theory of Mercantilism.
9. Various studies done by economists prove why this theory flourished in the early period.
In the early period, i.e., around 1500, new nations and states were emerging and the
 rulers wanted to strengthen their country in all possible ways, be it through the army,
wealth, or other developments.
10. The rulers witnessed that by increasing trade they were able to accumulate more wealth
and, thus, certain countries became very strong because of the massive amount of
wealth they stored.
11. The rulers were focused on increasing the number of exports as much as possible and
discouraging imports.
12. The British colony is the perfect example of this theory.
13. They utilised the raw materials of other countries by ruling over them and then exporting
those goods and other resources at a higher price, accumulating a large amount of
wealth for their own country.
14. This theory is often called the protectionist theory because it mainly works on the
strategy of protecting oneself.
15. Even in the 21st century, we find certain countries that still believe in this method and
allow limited imports while expanding their exports. Japan, Taiwan, China, etc. are the
best examples of such countries.
16. Almost every country at some point in time follows this approach of protectionist policies,
and this is definitely important.
17. But supporting such protectionist policies comes at a cost, like high taxes and other
such disadvantages.

2. Adam smith’s Absolute cost advantage theory

1. In 1776, the economist Adam Smith criticised the theory of mercantilism in his
publication, “The Wealth of Nations”, and propounded the theory of Absolute advantage.
2. Smith firmly believed that economic growth in reference to international trade firmly
depends on specialisation and division of labour.
3. Specialisation ensures higher productivity, thereby increasing the standard of living of
the people of the country.
4. He proposed that the division of labour in small markets would not cater for
specialisation, which would otherwise become easy in the case of larger markets. This
increase in size fostered a more refined specialisation and thus increased productivity all
around the globe.
5. Smith’s theory proposes that governments should not try to regulate trade between
countries, nor should they restrict global trade.
6. His theory also encapsulated the consequences of the involvement and restraint of the
government in free trade.
7. Also, he firmly believed that it is the standard of living of the residents of a country that
should determine the country’s wealth and the amount of gold and silver that a country’s
treasure has.
8. He states that trading should depend on market factors and not the government’s will.
 9. Smith was firmly against the mercantilist theory, and he argued that diminishing
importation and just focusing on exports was not a great idea, and thus restricting global
trade is not what needs to be done.
10. He proposed that even though we might succeed in forcing our country’s people to buy
our own goods, however, we may not be able to do so with foreigners, and hence it is
better that we make it a two-way trade and just focus on exports.
11. In relation to the restrictions imposed on import, Smith stated that even though the
restrictions on import may benefit some domestic industries and merchants when looked
at from a broad spectrum, it will result in decreasing competition.
12. Along with this, it will increase the monopoly of some merchants and companies in the
market.
13. Another disadvantage is that the increase in the monopoly will cause inefficiency and
mismanagement in the market.
14. Smith completely denied the promotion of trade by the government and restrictions on
free trade.
15. He reiterated that it is wasteful and harmful to the country.
16. He proposed that free trade is the best policy for trading unless, otherwise, some
unfortunate or uncertain situations arise.

3. David ricardo’s Comparative advantage theory

1. The theory of comparative advantage flourished in the 19th century and was
propounded by David Ricardo.
2. This theory strengthened the understanding of the nature of trade and acknowledges its
benefits.
3. The theory suggests that it is better if a country exports goods in which its relative cost
advantage is greater than its absolute cost advantage when compared with other
countries.
4. For instance, let’s take the examples of Malaysia and Indonesia. Let’s say Indonesia can
produce both electrical appliances and rubber products more efficiently than Malaysia.
5. The production of electrical appliances is twice as much as that of Malaysia, and for
rubber products, it is five times more than that of Malaysia.
6. In such a condition, Indonesia has an absolute productive advantage in both goods but a
relative advantage in the case of rubber products.
7. In such a case, it would be more mutually beneficial if Indonesia exported rubber
products to Malaysia and imported electrical appliances from them, even if Indonesia
could efficiently produce electrical appliances too.
8. What Ricardo proposed is that even though a country may efficiently produce goods, it
may still import them from another country if a relative advantage lies therein.
9. Similar is the case with export, even if a country is not very efficient in certain goods from
other countries, it may still export that product to other countries.
10. This theory basically encourages trade that is mutually beneficial.
4. Heckscher-Ohlin factor endowment theory (Factor Proportions
theory)

1. The theories founded by Smith and Ricardo were not efficient enough for the countries,
as they could not help the countries determine which of the products would benefit the
country.
2. The theory of Absolute Advantage and Comparative Advantage supported the idea of
how a free and open market would help countries determine which products could be
efficiently produced by the country.
3. However, the theory proposed by Heckscher and Ohlin dealt with the concept of
comparative advantage that a country can gain by producing products that make use of
the factors that are present in abundance in the country.
4. The main basis of their theory is on a country’s production factors like land, labour,
capital, etc.
5. They proposed that the approximate cost of any factor of resource is directly related to
its demand and supply.
6. Factors which are present in abundance as compared to demand will be available at a
cheaper cost, and factors which are in great demand and less availability will be
expensive.
7. They proposed that countries produce goods and export the ones for which the
resources required in their production are available in a much greater quantity. Contrary
to this, countries will import goods whose raw materials are in shorter supply in their own
country as compared to the one from which they are importing.
8. For example, India has a large number of labourers, so foreign countries establish
industries that are labour-intensive in India.
9. Examples of such industries are the garment and textile industries.
 ● Modern or firm-based theory

The emergence of modern or firm-based theories is marked after period of World War II. The
founders of these theories were mainly professors of business schools and not economists.
These theories majorly came up after the rising popularity of multinational companies. The
Country based classical theories were mainly focused on the country, however, the modern or
firm-based theories address the needs of companies. The following are the modern or
firm-based theories propounded by various business school professors:

[Link] vermon’s Product Life Cycle Theory

This theory was developed by Raymond Vernon in the Mid 1960's, he was a Harvard Business
School professor. This theory was developed after the failure of Hecksher Ohlin's Theory. The
theory, detailed that a product goes through various stages in the course of its progress. These
stages are: (1) new product stage, (2) maturing product stage, and (3) standardized product stage.
This theory assumed that the production of a new product would take place in the nation where it
was innovated.

In the 1960's this was a very useful theory. At that time, United States of America was dominating
the whole globe in terms of manufacturing after the World War II.

Stage I: New Product

The stage begins with introducing a new product in the market. A corporation will begin from
developing a new good. The market for which will be small and sales will be comparatively low.
Vernon assumed that innovation or invention of products will mostly be done in developed nations,
because of the economy of the nation. To balance the effect of less sales, corporations would keep
the manufacturing local. As the sales would increase, the corporations would start to export the
goods to different nations in order to increase the revenue and sales.

Stage II: Mature Product Stage

The product enters this stage when it has established demand in developed nations. The
manufacturer, would need to open manufacturing plants in each nation where the product has
demand. Due to local production, labour costs and export costs will decline which will in result
reduce the per unit cost and increase the [Link] stage may include product development.
Demand for the product will continue to rise in this stage. demand can also be expected from less
developed nations. Local competition with other cooperation's will begin.

Stage III: Standardized Product Stage

In this stage exports to nations various developed and under developed nations will begin. Foreign
product competition will reach its peak due to which the product will start losing its market. The
demand in the nation from where the product originated will start declining and eventually diminishes
as a new product grabs the attention of the people. The market for the product is now completely
finished.
Then, the cycle of a new product begins.
6. National competitive theory [Porter’s diamond]

The theory emerged in the 1990s with the aim of explaining the concept of national competitive
advantage. The theory proposes that a nation’s competitiveness majorly depends upon the
capability and capacity of the industry to come up with innovations and upgrades. This theory
attempted to explain the reason behind the excessive competitiveness of some nations as
compared to others. The main determinants proposed in this theory were local market resources
and capabilities, local market demand conditions, local suppliers and complementary industries,
and local firm characteristics. The theory also mentioned the crucial role of government in
forming the competitive advantage of the industry.

The diamond theory was given by Micheal Porter. This theory states that the qualities of the
home country are vital for the triumph of a corporation. This theory was given its name because
it is in the shape of a diamond. It describes the factors that influence the success of an
organization. There are Six Model Factors in this theory which are also known as the
determinants.

The following are the determinants:

1. Factor Condition;
2. Demand Conditions;
3. Related and Supporting Industries;
4. Firm Strategy, Structure, and Rivalry;
5. Chance; and
6. Government.
Conclusion:
The theories discussed above have aided economists, government and industries to
comprehend trade internationally in a healthier way.

The mercantilists view dominated in the 17th and 18th century. Mercantilists held that trade is
not free and its main was to achieve surplus. However, they failed to address various issues.
Adam Smith opposed the Mercantilist Theory and highlighted the importance of free trade in
increasing the prosperity of nations. Smith's theory was criticized by David Ricardo and others.
According to Ricardo, each nation should focus in the production of those goods that yield the
most. Heckscher - 0hlin explained the basis trading in respect to factor endowments. Vernon's
theory scrutinized the effect of technical changes on the pattern of international trade.

The Mercantalists theory, Cost Adavantage and Comparative Advantage theory assumed only
two commodities, factors and countries, and the rest of the factors as constant. On the other
hand, the New theories that consists of Product Life Theory and Porter's Diamond are based on
more explainable assumptions, that talked about changes in factors. Therefore, the new
theories are better at explaining the pattern of world trade today.
B. Lex Mercatoria and Codification of International Trade Law

Lex Mercatoria is the Latin expression for a body of trading principles used by merchants
throughout Europe in the medieval. Literally, it means “merchant law”. It evolved as a system of
custom and practice, which was enforced through a system of merchant courts along the main
trade routes. It functioned as the international law of commerce. It emphasized contractual
freedom, alienability of property, while shunning legal technicalities and deciding cases.

History of Lex Mercatoria

1. The notion of Lex Mercatoria is not new. Some say that it has its precursor in the Roman
gentium, the body of law that regulated the economic relations between foreigners and Roman
citizens. Others go further back in time and trace the origins of the Lex Mercatoria in the Ancient
Egypt or in the Greek and Phoenician sea trade of the Old Ages.
2. In any case, it is in the Law Merchant of the middle Ages where the historical roots of
the Lex Mercatoria can truly be found.
3. The flourishing of international economic relations in Western Europe at the beginning of
the 11th century caused the formation of the ‘Law Merchant’, a cosmopolitan mercantile
law based upon customs and applied to cross-border disputes by the market tribunals of
the various European trade centers.
4. This law resulted from the effort of the medieval trade community to overcome the
obsolete rules of feudal and Roman law which could not respond to the needs of the new
international commerce.
5. Merchants created a superior law, which constituted a solid legal basis for the great
expansion of commerce in the middle Ages.
6. For almost 800 years, uniform rules of law, those of the law merchant were applied
throughout Western Europe among traders.
7. Many of the laws of the Lex Mercatoria were established to evade inconvenient rules of
common law. An example in this regard is that a man could not give what he himself has
not.
8. In other words, a man who has no title to goods cannot give title. Hence, when a person
buys an object, for him to be sure that he is the rightful owner of the title; he had to
enquire into the title of that thing back to its remote possessors, to make sure that no one
in the chain of title had obtained it by fraud.
9. However, as per the laws of Lex Mercatoria, commercial business “cannot be carried on
if we have to enquire into the title of everybody who comes to us with the documents of
title.”
10. The Law merchant established certain documents or chooses in actions which were
transferable by delivery and endorsement or by delivery so that the holder could sue in
his own name and which passed good title to the transferee who took them in good faith,
notwithstanding the transferor had no title.
 11. They could be sued on by their holder in his own name and were not affected by
previous lack of title. This instrument was the original negotiable instrument.
12. Hence, it can be rightly said that the law of negotiable instruments is founded mostly
upon the laws of Lex Mercatoria.
13. With the rise of nationalism and the codification period of the 19th century the ‘law
merchant’ was incorporated into the municipal laws of each country. These laws blended
with the national laws and thus lost its uniform character.
14. When the states took over International trade, the new mercantile laws were applied to
regulate international relations.
15. The development of international trade after World War II showed some of the defects of
the traditional regulation of international contracts.
16. The complexity of the private international law and obsolete character of domestic laws
did not rectify these flaws. The supremacy of national law in international economic
relations began to be questioned
17. . It was then the present traders started adopting alternative solutions to avoid the
application of national law to their transactions.
18. By means of standard clauses, self-regulatory contracts, trade usages and by recourse to
international commercial arbitration, traders were creating their own regulatory
framework independently from national law, which can be called the new Lex Mercatoria

Sources of the Lex Mercatoria

The Lex Mercatoria can be defined as a body of principles which is different in its origin and
content, created by traders to serve the requisites of international trade. There are many concepts
of Lex Mercatoria as it has been discussed by many thinkers dealing with the subject.

When relating Lex Mercatoria with national law, there are 2 views that are prevalent, i.e., the
autonomist and positivist concepts. As per the autonomous concept, Lex Mercatoria is having an
autonomous character, independent from any national system of law. Hence, it can be rightly
said that it is a set of general principles, and customary rules spontaneously referred to or
elaborated in the framework of international trade, without reference to any particular national
system of law. The positivist concept regards Lex Mercatoria as a body of rules, transnational in
their origin, but which exists by virtue of state laws, which give them effect. For the supporters
of this view, Lex Mercatoria is ultimately founded on national law.

With regard to its substantive quality, there are three main concepts of Lex Mercatoria. The first
one views Lex Mercatoria as an autonomous legal order. The second one conceives it as a body
of rules capable of operating as an alternative to an otherwise applicable national law. The last
concept characterizes Lex Mercatoria as a conglomerate of usages and expectations in
international trade, which may complement the otherwise applicable law.
The concept of Lex Mercatoria is usually linked with other concepts, which may be similar or
alternative. Some thinkers refer to transnational law as a synonym of the Lex Mercatoria.
Transnational law, however, is a very wide subject which is composed of all law regulating
boundaries actions or events, including private and public international law and other rules
notfitting into those categories. The Lex Mercatoria is a much narrower concept which is used to
indicate that part of transnational law which is unwritten.

The Theory of Lex Mercatoria

It could be said that the theory of Lex Mercatoria is highly controversial. Some authors even
deny its existence. Those who are against the concept of Lex Mercatoria are of the view that it
lacks generality and predictability and that it is vague and incomplete. According to them, Lex
Mercatoria lacks generality due to the existing diversity of standard contracts and trade usages.
Therefore, each standard contract and trade usages reflects the sense of justice of the different
trades or professions, being too diverse to constitute a homogeneous legal source

Similarly, the solutions reached by arbitrators in the application and possibly, in the creation of
Lex Mercatoria only concern the current dispute, not being extrapolable to the generality of
international trade. Few awards are published, making the outcome of future disputes difficult to
predict. Hence, businessmen and arbitrators are not able to refer precedents for guidance, and
arbitrators cannot be expected to apply customary law principles consistently. The Lex
Mercatoria is furthermore accused of being vague and incomplete. Claims have been made that
there are very few general principles of trade law that can be universally recognized; those very
few are as basic and fundamental as to be useless. Even the proponents of the concept of Lex
Mercatoria have agreed that it is incomplete.

Lex Mercatoria does not provide an answer for legal issues such as validity, capacity, or contract
form. Anyway, the major obstacle to the theory of the Lex Mercatoria is its lack of binding force.
It falls within the traditional definition of law. It does not result from the command of the
sovereign as it has not been enacted by a parliament or endorsed in an international convention.
However, many have argued from the point of legal pluralism that the Lex Mercatoria belongs to
the domain of law. The concept of law largely departs from the notion of sanction and social
organizations and is capable of producing its own rules.

Some have objected to this position claiming that legal rules have an obligatory nature.
The rules enacted by the legislator have an intrinsic binding force, whereas customary rules
require opinion iris, the feeling to be bound. This does not happen in the case of the purported
rules of the Lex Mercatoria. Trade usages are a product of party autonomy; they are contractual
practices generally observed and used as a proof of the will of the parties. The latter may
therefore exclude their application by an express stipulation of the contract. Those in support of
Lex Mercatoria have counter-attacked such a statement by noting that societies Mercatoria has
mechanisms of coercion to obtain compliance with its rules such as black lists, damage to
commercial reputation or withdrawal from trade associations’ members’ rights. This result in the
merchants actually feeling bound to observe the rules of the Lex Mercatoria.

Finally, it has to be noted that even if some of the elements may be described as legal rules, the
Lex Mercatoria does not have the quality of a legal system. The societies Mercatoria cannot
present its convictions and notions in a systematic order, as there is not a single international
community of merchants but a plurality instead. At the most, there are only principia Mercatoria.