Module – 5
Dr Priyanka Saharia
What is international Trade
• International trade is an exchange of goods, services and capitals conducted
between at least two different countries and more than that. The exchanges can be
exports and imports.
• Import : When a country buys goods and services from another country. Eg: India
imports petroleum, coal.
• Export : When a country is selling goods and services to other countries. Eg:
refined petroleum, gems and jewelry, pharmaceuticals, IT services etc.
Importance of International Trade
• The importance of international trade is growing rapidly with globalization.
International trade promotes economic growth by allowing countries to specialize
in what they do best, increase consumer choices and lowers price due to rise in
competition, enables access to resources, technology and larger markets.
• Critiques of globalization addresses the challenges of globalization. Does getting
cheaper and/or better products and service from abroad justify sacrificing
domestic jobs? Why are some people in some countries very rich and obese while
others dismally poor and starving?
• Labor migration leads to the more efficient utilization of labor. it also leads to job
losses and lower wages for less-skilled labor in advanced nations and harms the
nations of emigration.
• Globalization is also criticized for growing human and environmental problems
throughout the world.
Internal Trade and International Trade
• Internal trade can be referred as domestic trade. Exchange of goods and services
within a single country’s border. International trade is exchange of goods and
services between two or more nations.
• Balance of Trade (BoT)
• The difference between the value of exports and the value of imports of visible
goods of a country for a given period. Positive balance of trade contributes to
economic growth positively and negative balance of trade impact the economic
growth negatively.
• BoT = Value of exports – value of imports
• Factors affecting BoT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at home
Balance of Payments (BoP)
• Balance of payment is the systematic record of all the economic transactions
between a country and the rest of the world over a specific period. BoP includes
import and export of goods and services, capital flows and other financial
transactions.
• BoP is divided into two components : current account, capital account and
financial account
• Current account: Records transactions of trade in goods, services, income and
transfers
• Capital account: The capital account records all international transactions that
involve a resident of the country concerned changing either his assets with or his
liabilities to a resident of another country. Transactions in the capital account
reflect a change in a stock – either assets or liabilities. Eg : foreign aid, debt
forgiveness, grants.
Balance of Payments (BoP)
• Financial Account: It keeps a record of foreign direct investment, foreign portfolio
investment, reserves assets like gold or foreign currency assets.
• Factors affecting BoP
• a)Conditions of foreign lenders.
• b)Economic policy of Govt.
• c) all the factors of balance of trade
Free trade
Free trade is a policy where countries allow goods and services to move across
borders without tariffs, quotas, or other restrictions.
To promote international trade based on comparative advantage — each country
produces what it’s best at and trades for the rest.
•No import or export duties
•No restrictions on foreign goods
•Encourages competition and efficiency
•Consumers get more choices at lower prices
•Increases global efficiency and economic growth
•Promotes innovation through competition
•Example: Trade under WTO rules, or regional agreements like ASEAN Free
Trade Area (AFTA) or NAFTA (now USMCA).
Arguments For and Against Free trade
• For free trade
• Increased efficiency
• Greater specialization
• Enhanced consumer choices
• Economic growth
• Against Free trade
• Job displacement
• Income inequality
• Environmental concerns
• Loss of domestic industries
• Cultural Identity
Contd..
• “Theories of free trade assume efficient markets but in practise there
are immobilities for labor to move from old (inefficient industries) to
new ones.
• “The older theories, for instance, simply ignored risk, and assumed
that workers could move seamlessly between jobs… But when there is
a high level of unemployment, and especially when a large percentage
of the unemployed have been out of work long-term (as is the case
now), there can’t be such complacency – Joseph Stiglitz (Wrong side
of the globalization)
Protectionism
Protectionism is a policy where a country restricts imports to protect its domestic
industries from foreign competition.
To safeguard local jobs, industries, and national security.
Tools of Protectionism
• Tariffs: Taxes on imports to make them more expensive
• Quotas: Limits on the amount of goods that can be imported
• Subsidies: Financial aid to domestic producers to lower their costs
• Import bans or regulations: Restricting certain foreign goods
Arguments For Protection
• Protecting domestic employment
• Protecting economy from low-cost labor
• Protecting infant industries
• Prevent dumping (the practice of selling underpriced goods to people
in the short run to undercut competition and gain market share)
• Protect product standard
• Raise government revenue
• Correct balance of payment deficit
Against Protectionism
• Market distortion and loss of economic efficiency
• Reduction in market access for producers
• Extra cost for exporters
• Adverse effect on poverty
• Retaliation and trade wars
• Higher prices for consumers
Methods of Trade Restrictions
• Tariff and non-tariff restrictions
• Non- tariff restrictions are quota, subsidies, trade policy, import ban or
regulations.