Chapter 9 International Trade

Trade, as you've learned, is a tertiary activity involving the voluntary exchange of goods and services between two parties, typically a seller and a buyer. This exchange is usually mutually beneficial.

Trade operates at two primary levels: national (within a country) and international (between countries across national borders).

Countries engage in international trade to acquire goods they cannot produce efficiently themselves or to purchase items more cheaply from another country.

The earliest form of trade was the barter system, where goods were exchanged directly without money. This required a "double coincidence of wants," meaning both parties needed what the other had to offer.

The inefficiencies of barter led to the development of money as a medium of exchange. Before standard currency, various rare items with high intrinsic value, such as flintstones, precious shells, metals, and even salt, served as early forms of money.

The word "salary" originates from the Latin word "Salarium," which meant payment in salt. This highlights the historical value of salt before widespread production methods were known.

History Of International Trade

In ancient times, long-distance trade was limited due to the risks involved in transporting goods. Trade primarily occurred in local markets, and people spent most resources on basic necessities. International trade was largely confined to luxury items for the wealthy.

The Silk Route is a significant early example of extensive long-distance trade, connecting Rome and China over approximately 6,000 km. Traders exchanged high-value goods like Chinese silk, Roman wool, and precious metals, facilitated by intermediate trading points in areas like India, Persia, and Central Asia.

Following the decline of the Roman Empire, European commerce expanded during the 12th and 13th centuries. Developments in shipbuilding and navigation led to increased trade between Europe and Asia and facilitated the discovery of the Americas.

From the 15th century onwards, European colonialism emerged, bringing a new and darker form of trade: the slave trade. European powers forcibly transported African natives to the Americas to work on plantations. This highly profitable practice lasted for over two centuries before being gradually abolished by various countries starting in the late 18th and early 19th centuries.

The Industrial Revolution increased the demand for raw materials like grains, meat, and wool, but their value decreased relative to manufactured goods.

Industrialized nations became importers of primary products for their factories and exporters of higher-value manufactured goods back to less industrialized regions (often their colonies).

In the latter half of the 19th century, industrialized nations also became important trading partners for each other.

During World War I and II, countries imposed protectionist measures like trade taxes (tariffs) and limits on import quantities (quantitative restrictions).

In the post-war era, international organizations like the General Agreement on Tariffs and Trade (GATT), which later became the World Trade Organisation (WTO), were established to promote free trade by reducing tariffs and other trade barriers.

Why Does International Trade Exist?

International trade fundamentally exists because countries specialize in producing certain goods or services based on their resources and capabilities. This specialization benefits the global economy by allowing countries to produce what they are best at.

Trade arises from this specialization and is based on principles such as:

• Comparative Advantage: Countries trade because they can produce some goods relatively more efficiently (at a lower opportunity cost) than others.
• Complimentarity: Different regions have different resources or capabilities that complement each other's needs.
• Transferability: The ability to move goods and services from where they are produced to where they are demanded.

In theory, international trade should be mutually beneficial to the participating countries.

In the modern era, trade is a cornerstone of the global economic structure and is often closely linked to a nation's foreign policy. With advanced transportation and communication, countries are increasingly integrated into the global trading system and benefit from participation.

Basis Of International Trade

Several factors contribute to the reasons why international trade occurs between nations:

• Difference in National Resources:
  • Natural resources are distributed unevenly across the globe due to variations in geology, relief, soil, and climate.
  • Geological structure influences mineral availability and creates diverse landscapes (mountains, plains) suitable for different crops, animals, or tourism.
  • Mineral resources are concentrated in specific regions, forming the basis for industrial development in those areas, leading to trade of minerals and manufactured goods.
  • Climate determines the types of plants and animals that can thrive, leading to regional specialization in products like wool (cold regions) or bananas, rubber, cocoa (tropical regions).
• Population Factors:
  • The characteristics of a country's population, including its size, distribution, and cultural diversity, impact the volume and type of goods traded.
  • Cultural factors can lead to the development of unique art and craft forms (e.g., Chinese porcelains, Iranian carpets) that are valued and traded internationally.
  • Countries with large, dense populations may have substantial internal trade but less external trade if most production is consumed domestically. The population's standard of living also affects demand for imported goods; higher living standards can lead to increased demand for better quality or luxury imports.
• Stage of Economic Development:
  • As countries develop economically, the nature of their exports and imports changes.
  • Agriculturally focused countries often export raw agricultural products and import manufactured goods.
  • Industrialized nations typically export machinery and finished products while importing raw materials and foodstuffs.
• Extent of Foreign Investment:
  • Investment from foreign countries (foreign investment) can stimulate trade, especially in developing nations that lack the capital to develop resource-intensive industries like mining, oil drilling, heavy engineering, forestry, and plantation agriculture.
  • By investing in these sectors in developing countries, industrialized nations secure sources of food, minerals, and raw materials for import, while also creating markets for their own manufactured goods, thereby increasing global trade volume.
• Transport:
  • Historically, limited transport restricted trade to local areas; only high-value, low-bulk items like gems, silk, and spices were traded over long distances.
  • Improvements in transportation (rail, ocean, air) and related technologies (refrigeration, preservation) have drastically expanded the geographical scope of international trade, making it feasible to trade a wider range of goods over greater distances.

Important Aspects Of International Trade

International trade can be analyzed based on three key aspects:

• Volume of Trade:
  • This refers to the total quantity of goods traded. While goods can be measured by tonnage, services cannot.
  • Therefore, the volume of trade is commonly measured by the total value of goods and services exchanged between countries.
  • Historical data shows a steady increase in the total value of world trade over recent decades.
• Composition of Trade:
  • This describes the types of goods and services that are imported and exported.
  • The composition of global trade has evolved significantly. Early international trade was dominated by primary products. Over time, manufactured goods became more prominent.
  • Currently, while manufactured goods still account for a large portion of global trade, the trade in services (including travel, transport, and other commercial services) is showing a clear upward trend in importance.
• Direction of Trade:
  • This refers to the flow of trade between countries and regions.
  • Historically, the flow was primarily from what are now developing countries (colonies) exporting raw materials and artifacts to European nations.
  • In the 19th century, the direction reversed, with European countries exporting manufactured goods and importing foodstuffs and raw materials from their colonies.
  • Europe and the U.S.A. became the dominant trading powers in manufactured goods.
  • The latter half of the 20th century saw further shifts, with former colonies gaining independence and countries like India and China becoming significant competitors in international trade, altering traditional trade routes and patterns.

Balance Of Trade

The Balance of Trade is an accounting record of a country's imports and exports of goods and services with other countries over a specific period.

There are two possible outcomes for a country's balance of trade:

• Negative or Unfavourable Balance of Trade: Occurs when the total value of a country's imports is greater than the total value of its exports.
• Positive or Favourable Balance of Trade: Occurs when the total value of a country's exports is greater than the total value of its imports.

The balance of trade (and the broader balance of payments) has crucial implications for a country's economic health.

A persistently negative balance means a country is spending more foreign currency on buying goods and services from abroad than it is earning from selling its own goods and services. This can lead to a depletion of the country's foreign exchange reserves, potentially causing economic instability.

Types Of International Trade

International trade can be classified based on the number of countries involved:

Bilateral Trade

Bilateral trade involves trade specifically between two countries. These countries typically enter into formal agreements outlining the specific commodities or volumes of trade that will occur between them. For example, Country A might agree to export a certain raw material to Country B in exchange for a specific manufactured good.

Multi-Lateral Trade

Multi-lateral trade involves trade conducted between more than two countries. In this system, a single country can trade with numerous other countries simultaneously. A country might also grant "Most Favoured Nation" (MFN) status to specific trading partners, meaning they agree to treat that nation's trade as favourably as that of any other country.

Case For Free Trade

Free trade, or trade liberalisation, involves reducing government-imposed barriers to international trade, such as tariffs (taxes on imports). The idea is to open up economies to allow goods and services from different countries to compete in domestic markets.

The theoretical arguments for free trade are that it leads to greater efficiency, lower prices for consumers, and overall economic growth based on comparative advantage.

However, the concept of free trade, often linked to globalization, has faced criticism, particularly regarding its impact on developing countries. Concerns include:

• Unequal Playing Field: Free trade agreements might impose conditions unfavorable to developing economies, which may not be ready to compete directly with established industries in developed nations.
• Protectionism by Developed Countries: While advocating for free trade globally, some developed countries maintain protectionist measures to shield their domestic markets from certain foreign products.

Dumping

One specific concern related to trade practices is dumping. This occurs when a company sells a product in a foreign market at a price lower than its price in its domestic market, often below the cost of production. Dumping can harm domestic producers in the importing country by unfairly undercutting their prices.

World Trade Organisation

To promote the reduction of tariffs and other trade restrictions globally, the General Agreement on Tariffs and Trade (GATT) was established in 1948 by several countries.

In 1994, GATT member countries agreed to create a permanent international body to oversee and promote free and fair trade. As a result, GATT was transformed into the World Trade Organisation (WTO), which officially began operations on January 1, 1995.

The WTO is the primary international body responsible for setting the rules for the global trading system and resolving trade disputes between member nations. Its scope includes trade in services (like telecommunications and banking) and issues such as intellectual property rights.

Despite its role, the WTO has been criticized by various groups concerned about the impacts of free trade and economic globalization. Critics argue that free trade benefits wealthy nations and exacerbates the gap between rich and poor, often because powerful nations prioritize their own commercial interests in negotiations.

Furthermore, some developed countries have been accused of not fully opening their markets to products from developing countries, despite the principles of free trade. Concerns are also raised that the WTO framework sometimes neglects important issues like health standards, worker's rights, child labour, and environmental protection.

The WTO Headquarters are in Geneva, Switzerland. As of December 2016, it had 164 member countries. India was one of the founding members of the WTO.

Regional Trade Blocs

In addition to the global framework of the WTO, many countries have formed Regional Trade Blocs. These blocs consist of groups of countries, often geographically proximate, that agree to reduce or eliminate trade barriers among themselves.

The formation of regional trade blocs is intended to stimulate trade between member countries, capitalize on geographical closeness and complementarities in products, and sometimes as a response to perceived limitations or slowness in global trade liberalisation efforts.

There are numerous regional trade blocs worldwide (around 120), accounting for a significant percentage (52%) of global trade.

While these blocs promote free trade among their members by removing internal tariffs, there is a potential future risk that trade between different blocs could become increasingly challenging if external trade barriers are maintained or raised.

Major examples of regional trade blocs include ASEAN, CIS, EU, LAIA, NAFTA, OPEC, and SAFTA.

Concerns Related To International Trade

When conducted effectively and equitably, international trade can bring numerous benefits, including:

• Encouraging regional specialization based on strengths.
• Leading to higher overall levels of production globally.
• Contributing to a better standard of living through access to a wider variety of goods.
• Ensuring worldwide availability of goods and services.
• Potentially equalizing prices and wages across borders.
• Facilitating the diffusion of knowledge and cultural exchange.

However, international trade also carries potential risks and detrimental consequences:

• It can create unhealthy levels of dependence of one country on others.
• It might exacerbate uneven levels of development if benefits are not shared equitably.
• It can lead to exploitation, particularly of labour or resources in less powerful nations.
• Commercial competition can escalate into rivalry and conflict.

Moreover, global trade has significant impacts on the environment and human well-being. Increased production and resource use driven by trade can deplete resources faster than they can regenerate, damage ecosystems (e.g., marine life depletion, deforestation), and increase pollution. The activities of multinational corporations, particularly in sectors like oil, mining, pharmaceuticals, and agribusiness, are sometimes criticized for prioritizing profit over environmental sustainability and health concerns.

A focus solely on profit without addressing environmental and health impacts could have severe negative long-term implications.

Gateways Of International Trade

The primary entry and exit points for international trade flows are the ports and harbours. These act as crucial interfaces between land and sea transport networks, enabling the movement of cargo and travelers between different parts of the world.

Ports

Ports are facilities located on coastlines or navigable waterways that provide essential services for maritime trade. These services include:

• Docking: Providing berths for ships to tie up.
• Loading and Unloading: Handling the transfer of cargo and passengers between ships and land.
• Storage: Providing facilities for storing goods before they are shipped or after they arrive.

Port authorities are responsible for maintaining navigable channels (e.g., dredging), managing tugs and barges to assist ships, and organizing labour and management services.

The significance of a port is often measured by the volume of cargo handled and the number of ships it accommodates. The quantity of cargo passing through a port is a strong indicator of the economic development and productivity of its hinterland (the area that the port serves and from which it collects or to which it distributes goods).

San Francisco is mentioned as an example of a large land-locked harbour.

Types Of Port

Ports can be classified based on various criteria, including the type of cargo they handle, their location, and their specialized functions.

Types Of Port According To Cargo Handled

• Industrial Ports: Specialized in handling large volumes of bulk cargo, such as grain, sugar, metallic ores, oil, and chemicals.
• Commercial Ports: Handle general cargo, including packaged manufactured goods, and also manage passenger traffic.
• Comprehensive Ports: Handle a wide variety of cargo types, including both bulk and general cargo, in large quantities. Most major ports globally fall into this category due to their diverse operations.

Types Of Port On The Basis Of Location

• Inland Ports: Located away from the main sea coast, connected to the sea by a river or canal. These ports are accessible to shallower vessels like flat-bottom ships or barges. Examples include Manchester (linked by canal), Memphis (on the Mississippi River), Mannheim and Duisburg (on the Rhine River), and Kolkata (on the Hoogli River in India).
• Out Ports: Deep-water ports built some distance away from the main, older port, often closer to the sea. They are designed to accommodate larger modern ships that cannot easily access the original port due to depth or size limitations. Piraeus serves as the out port for Athens in Greece.

Types Of Port On The Basis Of Specialised Functions

• Oil Ports: Facilities specifically designed for processing and shipping crude oil and petroleum products. Some are tanker ports (mainly for loading/unloading crude oil from tankers, e.g., Maracaibo, Esskhira, Tripoli), while others are refinery ports integrated with oil refineries (e.g., Abadan on the Gulf of Persia).
• Ports of Call: Originally developed as intermediate stops on major sea routes where ships would pause to refuel, take on supplies (water, food), and make minor repairs. Over time, many of these evolved into significant commercial ports. Examples include Aden, Honolulu, and Singapore.
• Packet Stations (or Ferry Ports): Specialized ports focused on transporting passengers and mail across relatively short distances over water bodies. They typically operate in pairs facing each other across a channel or strait, facilitating ferry services. Examples include Dover (England) and Calais (France) across the English Channel.
• Entrepot Ports: These serve as major collecting and redistribution centers for goods brought from various countries. Goods are imported, stored, and then re-exported, often after some processing or sorting. Singapore is a prominent entrepot for Asia, Rotterdam for Europe, and Copenhagen for the Baltic region.
• Naval Ports: Ports primarily dedicated to serving military warships. Their importance is strategic. They provide docking facilities, maintenance services, and repair workshops for naval vessels. Kochi and Karwar are examples of naval ports in India.

Exercises

This section includes questions and exercises designed to assess understanding of the key concepts related to international trade and its infrastructure.

Choose The Right Answer From The Four Alternatives Given Below

Multiple-choice questions testing knowledge of facts, definitions, and examples provided in the chapter.

Answer The Following Questions In About 30 Words

Short answer questions requiring brief explanations of specific terms or concepts from the chapter.

Answer The Following Questions In Not More Than 150 Words

More detailed questions requiring explanatory and analytical responses on topics discussed in the chapter.