INTERNATIONAL TRADE

SIMILARITIES BETWEEN HOME TRADE AND FOREIGN TRADE: Objective: Businessmen involved in home trade and foreign trade buy and sell goods for the same objective. That is to make a profit. Dependence: Both, home trade and foreign trade depend very much on aids to trade. That is there is much dependence on transport, insurance, finance, warehousing, etc, Specialization: Both, home trade and foreign trade depend very much on specialization, whether it is national, regional or personal. DIFFERENCES BETWEEN HOME TRADE AND FOREIGN TRADE: Meaning: Home trade is buying and selling goods within the country, while foreign trade means buying and selling goods between countries. Distance: The distance involved in foreign trade is much greater than the distance involved in home trade. This means that air or sea transport has to be arranged in foreign trade, whereas road and rail transport can be used in home trade. Trade Barriers: In foreign trade, there are trade barriers like customs duties, quotas and embargoes, levied on imports and some exports. There are no such trade barriers in home trade. Types: Home trade includes wholesaling and retailing, whereas foreign trade includes importing, exporting and entrepot trade. Languages: In home trade, there would be no difficulty regarding language, as the same language is spoken. But in foreign trade, translators would be required as each country speaks a different language. Currencies: In home trade, the problem of exchange rate would not arise, as the same currency is used for payments. But in foreign trade, each country uses a different currency. So the problem of exchange rate would arise. Technical Requirements: In home trade, the same technical specifications for goods are required. But in foreign trade, each country has a different technical specification. So manufacturers would have to produce goods according to different technical specifications. Methods of Payment: In home trade cheques are the most favored means of

payment. In foreign trade, bills of exchange, letters of credit and cable transfers are the most suitable means of payment. Cultural Differences and Requirements: In home trade, there is not much need for market research as there are no differences in taste and fashion. But in foreign trade, each country has a different culture, taste and fashion. So first market research has to be carried out and then goods exported accordingly. IMPORTANCE OF INTERNATIONAL TRADE Some raw materials do not occur naturally in the country has to be imported. It is cheaper to import some goods than to produce them. For example bananas in UK. Selling goods and services abroad provides the country with foreign currency. By selling abroad the country gains the benefits of wider markets. International trade creates employment opportunities in the country Consumers in the country will have a wider variety of goods from all over the world. It increases country's income, which results in a higher standard of living. It helps to maintain friendly foreign relationships with other countries. Income can be earned by exporting the excess goods and services. THE INTERDEPENDENCE OF COUNTRIES WITHIN A GLOBAL MARKET No country in the world is self sustained. By nature, every country has some resources in its limit and some resources are unlimited by nature. Economics clearly has defined that resources are scarce in nature; so, countries must be interdependent if it wants to satisfy the wants and economical needs to the growing population. No countries can be interdependent in today's market. The best examples could stand with reference to today's market is, satellite services, foreign soft drinks. E.g. Coca Cola, cars, electronic goods etc. Today every country wants to consume goods and services at the cheapest price and at the best advanced technology. To produce these goods and services in its own country with the available resources, it may not be possible to achieve the task due to lack of resources, lack of capital and lack of technological advancement. All these factors have led to interdependence of countries within a global market.

VISIBLE TRADE AND INVISIBLE TRADE

International trade

Visible trade trade

Visible

(Trade in goods only) (Trade in services only) Visible Exports Visible imports Invisible Invisible Exports imports

1. Foreign trade involves the export and import of both goods (called visible trade) and services (called invisible trade). 2. Visible trade involves trading in goods, such as wheat, and it can be divided into: (a) Visible exports which involves the sending of goods (raw materials, semi manufactured goods, machinery or other manufactured goods) from the home country for sale abroad by the exporter. (b) Visible imports which involves the buying of goods (raw materials, semi manufactured goods, machinery or other manufactured goods) from abroad into the home country. 3. Invisible trade involves trading in services, something which cannot be seen such as tourism, education services, insurance services, transport services and the like. It can be divided into: (a) Invisible exports which occurs when nationals of other countries use the services offered by companies or individuals of the home country. Singapore exports shipping services when foreigners send goods in ships owned by Singapore nationals. (b) Invisible imports which occurs when nationals of the home country use the services provided by foreign individuals or companies owned by foreigners. Singapore imports education services when Singapore students go overseas to the UK to study universities. at the British

4. The money which a country earns from her exports, both visible and invisible, will be used to pay for her imports both visible and invisible.

BALANCE OF PAYMENTS

TRADE

AND

BALANCE

OF

1. The Balance of Payments figures for a country show the amount of currency being received from other countries and that being paid to other countries as a result of many different types of transactions over a given period, usually a year. The Balance of Payments can be broadly divided into two main sections: (a) The Current Account consists of: (i) The Balance of Trade (difference between visible exports and visible imports) (ii) The Balance of Services or Invisible Balance (difference between invisible exports and invisible imports) (iii) items Transfers

(b) The Capital Account consists of: (i) The capital outflows) items (inflows or

(ii) Official financing (adding to or drawing from foreign reserves) 2. The difference in value between visible exports and visible imports is called Balance of Trade. If the visible export value exceeds the visible import value, the Balance of Trade is said to be favourable or in surplus. If the visible import value exceeds the visible export value, then the Balance of Trade is said to be unfavourable or in deficit. 3. A country's Balance of Trade can be assessed from annual statistical records obtained from customs declaration forms for imports and exports. The Balance of Trade is very important because: (a) All imports have to be paid for with the proceeds received from the sale of exports. (b) Thus, in the long run, a country cannot import more than it exports. (c) If the Balance of Trade has been unfavourable for many successive years, then the government has to take steps to discourage imports and encourage exports. 4. A country also exports and imports services: shipping, educational, tourist, etc. Singapore exports shipping services when a foreigner travels in a Singaporean ship.

The total value of services exported within a year forms the invisible exports, whilst that of services imported forms the invisible imports.

5. 'Transfer items' refers to interest, profits and dividends sent abroad as a result of foreigners investing in the home country. It also includes the repatriation of interest, profits and dividends from abroad to the home country as a result of its nationals investing abroad. 6. 'Capital items' refers to the amount of money which has flowed into or out of a country. (a) Examples of capital outflows are as follows: (j) Nationals invest in businesses abroad, buy properties or shares abroad. (ii) The government in the home country gives monetary aid to other countries. (iii) Nationals in the home country lend to nationals or organizations or governments of other countries. (b) Examples of capital inflows are as follows: (i) Nationals sell off their properties, businesses and shares abroad and bring the money home. (ii) The government in the home country receives monetary aid from overseas. (iii) Nationals or government in the home country borrow from abroad. 7. It is very unlikely that total receipts will exactly be equal to total payments over a particular year. (a) If total payments exceed total receipts, we have a Balance of Payments deficit. (b) If total receipts exceed total payments, there is a surplus in the Balance of Payments. 8. A country's balance of payments is of utmost importance. (a) If the country continues over a period of years to experience a Balance of Payments deficit, it will eventually not have enough foreign exchange to pay its creditors. (b) No country wishes this to happen for it will cause economic ruin in the long run. 9. If a country does not have sufficient foreign currency to pay its creditors abroad, it can temporarily borrow money from the International Monetary Fund (IMF) which is specially set up to help countries having Balance of Payments problems. However, this would mean that foreigners can now control the economic policies of the government of

such a country. RESTRICTIONS ON INTERNATIONAL TRADE: Tariffs: These are import duties, such as the customs and excise duties of the United Kingdom. These have the effect of raising the price of the imported goods and therefore making them less competitive when compared to home products. Quotas: These are physical restrictions on the amount of goods that can be imported into a country over a period of time. For example, the United Kingdom has set a limit on the number of Japanese cars that can be imported into the United Kingdom. Subsidies: These are given to home producers, which makes their goods cheaper and therefore more competitive when compared with the prices of overseas products. Embargoes: These are bans on importing certain items from overseas. Reasons for restricting trade: To raise tariffs. To protect competition. revenue existing from industries from overseas

To protect infant industries which are not yet strong enough to compete with established overseas firms. To restrict goods. dumping of foreign

DIFFICULTIES FACED BY EXPORTERS: Distance: The distance involved in transporting goods from one country to another country is greater than in domestic trade. Air transport and sea transport have to be arranged. Overseas representatives also may have to be appointed. There are charter agents available at the Baltic Exchange who find ships for goods and goods for ships. Language Differences: Every country speaks a different language. Communications with overseas traders have to be carefully translated. Publicity material and instructions have to be prepared in many languages. Hence translators have to be found. Exporters can contact the Central Office of Information where information of translators is available. Cultural Differences and Local Requirements: Every country follows a different culture and requires various goods. Market research has to be carried

out. This is quite difficult and expensive. The services of the Department of Trade and Industry can be sought in this case. Technical Differences: Different governments may have different technical specifications for goods sold in their country. An exporter of electrical goods, dealing with several countries has to produce the goods according to the required specification of each country. Trade Barriers: Tariffs and quotas are a considerable obstacle to trade. Tariffs are taxes levied on imports and quotas are a limit imposed on imported goods. These increase the price of goods that are imported. These barriers can be overcome by exporting to countries where the tariffs are low and where there are no quotas. Customs Regulations: All goods exported and imported have to go through customs regulations. This creates more work for the exporter. Documentation: Documents used in international trade are more complex than those used in domestic trade. Handing over the work to a freight forwarder can solve these problems. Payment: This is a big problem faced by exporters. Every country uses a different currency. So currency must be exchanged in the foreign exchange market. The problem of the changing exchange rate comes into existence. Exporters can make future dealings to overcome this problem. Insurance: The risks involved in foreign trade are more than the risks in domestic trade. So insurance has to be taken out. The Department of Trade and Industry and Lloyds of London can overcome these problems. Risk of Non-Payment: The importer may not pay the exporter for the following reasons: i. Because he does not want to pay. ii. Because he becomes insolvent. iii. Because payment is prevented by the importer's government. iv. Because of war. v. Because the import license has been cancelled by the government. This causes a big problem for the exporter and can be solved by taking out a Comprehensive policy at the Export Credit Guarantee Department. CUSTOMS AUTHORITIES: Functions:

Statistics: They collect a wide range of statistical data showing the pattern of trade and the movement of goods. Control: They supervise the movement of goods in and out of the country ensuring that prohibited goods are not imported or exported. Revenue: The customs authorities collect the duty payable on imports. Enforcement of Quotas: The customs authorities ensure that the goods imported are according to the limit imposed by the government. Bonded Warehouses: The customs authorities control these warehouses by supervising the withdrawal of goods. Public Health: They have certain functions in connection with the control of infectious diseases.