3. International Trade
A transaction of any kind between two or more parties is called trade. It may takes place at two main levels - international and national. International trade is the exchange of goods and services among two or more countries of the world. There are various reasons although economic causes like availability and lower price are generally the main cause for international trade to take place.
The initial form of trade in primitive societies was the barter system, where direct exchange of goods took place. It was the system prevailing in the beginning and is considered the forerunner of modern trade. The barter system of exchange was a difficult and cumbersome process. One had not only to search for sellers and buyers but also carry a lot of weight amid any season of the year. There were other difficulties as well like making enquiries to find out what was required and what not. All this was overcome with the introduction of money. In the olden times, before paper and coin currency came into being, rare objects with very high intrinsic value served as money, like, flint stones, obsidian, cowrie shells, tiger’s paws, whale’s teeth, dogs teeth, skins, furs, cattle, rice, peppercorns, salt, small tools, copper, silver and gold.
The Silk Route was an excellent example of early organised international trade between distant lands. The 6,000 km long Silk Route linked Rome to China with other connecting points like India, Persia and Central Asia. The traders transported through this route Chinese silk, Roman wool and precious metals and many other high value commodities. After disintegration of Roman Empire, ascendancy of Europe began in 12th and 13th centuries. Trade flourished along with naval warfare. There was considerable rise in Asian and European trade which helped the discovery of new land including Americas.
Fifteenth century onwards, the European colonialism began and along with trade of exotic commodities, a new form of trade emerged which was called slave trade. The Portuguese, Dutch, Spaniards, and British captured African natives and forcefully transported them to the newly discovered Americas for their labour in the plantations.
After the Industrial Revolution the demand for raw materials like grains, meat and wool also expanded, but their monetary value declined in relation to the manufactured goods. The industrialised nations imported primary products as raw materials and exported the value added finished products back to the non-industrialised nations. In the later half of the nineteenth century, regions producing primary goods were no more important, and industrial nations became each other’s principle customers.
During the World Wars I and II, there were concerns about security, taxes and quantitative restrictions imposed by many countries for the first time. As a result of these concerns organisations like General Agreement for Tariffs and Trade (GATT) later christened the World Trade Organisation (WTO) came into being. Their first task was to work towards reducing tariff, which many countries had imposed. International trade is the result of specialisation in production. It benefits the world economy if different countries practise specialisation and division of labour in the production of commodities or provision of services. Thus, international trade is based on the principle of comparative advantage, complimentarity and transferability of goods and services and in principle, should be mutually beneficial to the trading partners.
Trends in Growth in Trade Volumes
3.1. Factors influencing International Trade
There are many factors which influence the international trade. Important among these are described below:
Inequality in Natural Resources: The distribution of natural resources is uneven in the world. Due to diversity in geological structure, climate, natural vegetation, soil, etc., different types of natural resources are found in different countries. Some countries possess some resources more than their requirement. These countries export their products to the countries which are either poor in reserves or do not have any reserve. Hence, inequality in natural resources is the main base of international trade. This inequality is on account of three important reasons:
1) Geological structure: The diversity of relief is influenced by geological structure which is turn determines mineral resources base and diversity of agriculture and crops as well animals raised. For e.g. Lowlands have greater agricultural potential. Mountains attract tourists and promote tourism.
2) Mineral resources: They are unevenly distributed the world over. The availability of mineral resources provides the basis for industrial development.
3) Climate: It influences the type of flora and fauna that can survive in a given region. It also ensures diversity in the range of various products, e.g. wool production can take place in cold regions, bananas, rubber and cocoa can grow in tropical regions.
Population factors: Population size, distribution, diversity as well as people's tastes, likes and dislikes determine the type and volume of goods traded. Two important population factors are:
a) Cultural factors: Distinctive forms of art and craft develop in certain cultures which are valued the world over, e.g. China produces the finest porcelains and brocades. Carpets of Iran are famous while North African leather work and Indonesian batik cloth are prized handicrafts.
b) Size of population: Densely populated countries have large volume of internal trade but little external trade because most of the agricultural and industrial production is consumed in the local markets. Standard of living of the population determines the demand for better quality imported products because with low standard of living only a few people can afford to buy costly imported goods.
Stage of Economic Development: At different stages of economic development of countries, the nature of items traded undergoes changes. In agriculturally important countries, agro products are exchanged for manufactured goods whereas industrialised nations export machinery and finished products and import food grains and other raw materials.
Extent of foreign investment: Foreign investment can boost trade in developing countries which lack in capital required for the development of mining, oil drilling, heavy engineering,
and lumbering and plantation agriculture. By developing such capital intensive industries in developing countries, the industrial nations ensure import of food stuffs, minerals and create markets for their finished products. This entire cycle steps up the volume of trade between nations.
Production more than Requirement: Some countries produce more than their requirement because of their favourable environment conditions, technological efficiency and skilled labour. Hence, these countries export their surplus products to other countries.
Shortage of Goods: No country is independent in all its requirement of goods. There exists shortage of some or the other goods. For example, Japan has technology for producing best quality steel and other means, but it lacks iron ore and coal. Hence, it overcomes the shortage of raw materials by importing them from India and Australia.
Development of Transport and Communication: Transport and communication are the main bases of international trade. Surface, water, air and pipeline transport are required for transferring goods from surplus producing countries to the countries of shortage.
Technological Inequality: Some countries have developed some specific type of technology which could not be developed by other countries. For example, United States of America and France have high level technology for building passenger aeroplanes. Other countries of the world purchase aeroplanes from these countries so as to meet their demand.
Trade Policies: Developing countries provide some concessions to exporters for boosting their export e.g. tax concessions, economic aid, etc. Such policies of the government aim to balance the trade in the country's favour or to enhance the foreign currency reserve, because export help to earn more foreign money. Many countries levy heavy taxes on goods of import so as to check their import and promote their local industries.
Economic Demand: Notwithstanding these bases, if there is no economic demand of goods, its international trade is impossible in such a situation. A country may have any quantity of surplus production but without demand, it cannot be goods of trade. When it becomes an economic demand, the country tries to procure it.
3.2. Components of International Trade
International trade has three very important aspects. These are volume, sectoral composition and direction of trade.
Volume of Trade: Volume of trade can be measured in three different ways: (a) Actual tonnage of goods traded; (b) Total volume and value of goods and; (c) Value on per capita basis. However, services traded cannot be measured in tonnage. Therefore, the total value of goods and services traded is considered to be the volume of trade.
Composition of Trade: The nature of goods and services imported and exported by countries have undergone changes during the last century. There has been a steady rise in the volume and prices of manufactured goods. On account of rapid growth of trade of manufactured goods there has been rapid growth of manufacturing industries. Thus, the prices of manufactured goods on account of large supplies are coming down. The trend of decrease in prices of manufactured goods is also on account of decrease in tariff barriers under the World Trade Organisation (WTO).
Direction of International Trade: Historically, the developing countries of the present used to export valuable goods and artefacts, etc. which were exported to European countries. During the nineteenth century there was a reversal in the direction of trade. European countries started exporting manufactured goods for exchange of foodstuffs and raw materials from their colonies. However, during the second half of the twentieth century, Europe lost its colonies
while India, China and other developing countries started competing with developed countries. The nature of the goods traded has also changed.