Reasons for International Trade

8/13/2019 Reasons for International Trade

1/4

Reasons for International Trade

Domestic Non-availability

International tradeis the exchange of goods and services between countries. An importis

the UK purchase of a good or service made overseas. An exportis the sale of a UK-made goodor service overseas.

A nation trades because it lacks the raw materials, climate, specialist labour, capital or

technology needed to manufacture a particular good. Trade allows a greater variety of goods

and services.

Principle of Comparative Advantage

Theprinciple of comparative advantagestates that countries will benefit by concentrating on

the production of those goods in which they have a relative advantage.

For instance, France has the climate and the expertise to produce better wine

than Brazil. Brazil is better able to produce coffee than France. Each country benefits by

specializing in the good it is most suited to making.

France then creates a surplus of wine which it can trade for surplus Brazilian coffee.

Protectionism

Rationale /Advantages of Protectionism

Protectionismoccurs when one country reduces the level of its imports because of:

Infant industries. If sunrise firmsproducing new-technology goods (eg computers)

are to survive against established foreign producers then temporary tariffs or quotas may

be needed.

Unfair competition. Foreign firms may receive subsidies or other government

benefits. They may be dumping (selling goods abroad at below cost price to capture a

market).

Balance of payments. Reducing imports improves the balance of trade.

Strategic industries. To protect the manufacture of essential goods.Declining industries.To protect declining industries from creating further structural

unemployment.

Disadvantages of Protectionism


2/4

Prevents countries enjoying the full benefits of international specialization and

trade.

Invites retaliation from foreign governments.

Protects inefficient home industries from foreign competition. Consumers pay more

for inferior produce.

Protection Methods

Tariffs

Tariffs(import duties) are surcharges on the price of imports. The diagram below uses a supply-

and-demand graph to illustrate the effect of a tariff.

Note that the tariff

raises the price of the import;

reduces the demand for imports; a

encourages demand for home-produced substitutes;

raises revenue for the government.

Quotas


3/4

Quotasrestrict the actual quantity of an import allowed into a country. Note that a quota:

raises the price of imports;

reduces the volume of imports;

encourages demand for domestically made substitutes.

Other Protection Techniques

Administrative practices can discriminate against imports through customs delays

or setting specifications met by domestic, but not foreign, producers.

Exchange controls(currency restrictions) prevent domestic residents from acquiring

sufficient foreign currency to pay for imports

ADVANTAGES OF INTERNATIONAL TRADE

Various advantages are named for the countries entering into trade relations on a international

scale such as:

A country may import things which it cannot produce

International trade enables a country to consume things which either cannot be produced

within its borders or production may cost very high. Therefore it becomes cost cheaper to

import from other countries through foreign trade.

Maximum utilization of resources

International trade helps a country to utilize its resources to the maximum limit. If a country

does not takes up imports and exports then its resources remain unexplorted. Thus it helps to

eliminate the wastage of resources.

Benefit to consumerImports and exports of different countries provide opportunities to the consumer to buy and

consume those goods which cannot be produced in their own country. They therefore get a

diversity in choices.

Reduces trade fluctuations

By making the size of the market large with large supplies and extensive demand international

trade reduces trade fluctuations. The prices of goods tend to remain more stable.

Utilization of Surplus produce

International trade enables different countries to sell their surplus products to other countries

and earn foreign exchange.

Fosters International trade

International trade fosters peace, goodwill and mutual understanding among nations. Economic

interdependence of countries often leads to close cultural relationship and thus avoid war

between them.


4/4

DISADVANTAGES OF INTERNATIONAL TRADE

International trade does not always amount to blessings. It has certain drawbacks also such as:

Import of harmful goods

Foreign trade may lead to import of harmful goods like cigarettes, drugs etc, which may run the

health of the residents of the country. E.g. the people of China suffered greatly through opium

imports.It may exhaust resources

International trade leads to intensive cultivation of land. Thus it has the operations of law of

diminishing returns in agricultural countries. It also makes a nation poor by giving too much

burden over the resources.

Over Specialization

Over Specialization may be disastrous for a country. A substitute may appear and ruin the

economic lives of millions.

Danger of Starvation

A country might depend for her food mainly on foreign countries. In times of war there is a

serious danger of starvation for such countries.

One country may gain at the expensive of Another

One of the serious drawbacks of foreign trade is that one country may gain at the expense of

other due to certain accidental advantages. The Industrial revolution is Great Britain ruined

Indian handicrafts during the nineteenth century.

It may lead to war

Foreign trade may lead to war different countries compete with each other in finding out new

markets and sources of raw material for their industries and frequently come into clash. This

was one of the causes of first and Second World War.

Documents

Reasons for International Trade