Chapter Notes

International Trade

Trade is the voluntary exchange of goods and services between two or more parties. For trade to happen, one person must sell something, and another must purchase it. This exchange is considered mutually beneficial, meaning both sides gain something from it. Trade can happen at a national level (within a country) or at an international level, which is the exchange of goods and services between countries across national borders.

Countries engage in international trade to get commodities they cannot produce themselves or can buy more cheaply from another country.

The earliest form of trade was the barter system, which involved the direct exchange of goods without using money.

The major difficulty with barter was finding someone who had what you wanted and also wanted what you had. This problem was solved by the introduction of money. Before coins and paper currency, people used rare and valuable objects as money, such as cowrie shells, salt, cattle, silver, and gold.

HISTORY OF INTERNATIONAL TRADE

In ancient times, trade was mostly restricted to local markets because transporting goods over long distances was very risky. Most people spent their resources on necessities like food and clothes. Only the wealthy could afford luxury items like jewellery and expensive dresses, which became the first items of long-distance trade.

• The Silk Route: An early and famous example of long-distance trade, the Silk Route was a 6,000 km route connecting Rome to China. Traders transported high-value goods like Chinese silk, Roman wool, precious metals, and other commodities from India, Persia, and Central Asia.
• European Expansion: After the Roman Empire disintegrated, European commerce began to grow in the twelfth and thirteenth centuries. With the development of ocean-faring warships, trade between Europe and Asia expanded, and the Americas were discovered.
• Colonialism and Slave Trade: From the fifteenth century onwards, European colonialism introduced a new, brutal form of trade: the slave trade. European powers like the Portuguese, Dutch, Spaniards, and British captured African natives and forcibly transported them to the Americas to work on plantations. This was a profitable business for over two hundred years until it was abolished in Denmark (1792), Great Britain (1807), and the United States (1808).
• Post-Industrial Revolution: The Industrial Revolution created a high demand for raw materials like grains, meat, and wool. However, the monetary value of these primary products declined compared to manufactured goods. Industrialised nations began importing raw materials and exporting value-added finished products back to the non-industrialised nations.
• World Wars and After: During World Wars I and II, countries imposed trade taxes and other restrictions. After the wars, organisations like the General Agreement for Tariffs and Trade (GATT) were formed to help reduce these barriers.

Why Does International Trade Exist?

International trade exists because of specialisation in production. It benefits the world economy when different countries focus on producing the goods or services they are best at. This specialisation is based on three key principles:

• Comparative Advantage: Countries trade goods they can produce more efficiently or at a lower cost than others.
• Complementarity: Two regions can trade if one has a surplus of a good that the other needs.
• Transferability: The goods and services must be able to be moved from one place to another.

In modern times, trade is fundamental to the world's economy and is closely linked to the foreign policy of nations. With advanced transportation and communication, no country wants to miss out on the benefits of participating in international trade.

Basis of International Trade

Several factors determine the nature and volume of goods traded between countries.

Difference in national resources

The world's resources are unevenly distributed due to physical differences in geology, climate, and soil.

• Geological structure: This determines a country's mineral resources. Topography also influences what crops and animals can be raised. For example, lowlands are often better for agriculture, while mountains can attract tourists.
• Mineral resources: The availability of minerals provides the foundation for industrial development. Their uneven distribution encourages trade.
• Climate: Climate affects the types of plants and animals that can survive in a region. This leads to a diversity of products, such as wool from cold regions and bananas or rubber from tropical regions.

Population factors

The size, distribution, and culture of a country's population affect trade.

• Cultural factors: Unique forms of art and craft are valued worldwide. For example, China is known for its fine porcelains, Iran for its carpets, and Indonesia for its batik cloth.
• Size of population: Densely populated countries often have a large volume of internal trade but less external trade, as most of what they produce is consumed locally. The population's standard of living also matters; a higher standard of living creates more demand for high-quality imported goods.

Stage of economic development

The types of goods a country trades change as its economy develops.

• Agriculturally focused countries often exchange farm products for manufactured goods.
• Industrialised nations tend to export machinery and finished products while importing food and raw materials.

Extent of foreign investment

Foreign investment can significantly boost trade, especially in developing countries that lack capital. By investing in industries like mining, oil drilling, or plantation agriculture in these countries, industrial nations can secure a supply of raw materials and create new markets for their own finished products.

Transport

In the past, poor transportation limited trade to local areas. Only high-value, low-weight items like gems and spices were traded over long distances. The expansion of rail, ocean, and air transport, along with better refrigeration, has allowed trade to expand globally.

Balance of Trade

The Balance of Trade is a record of the value of goods and services a country imports and exports.

• Negative or Unfavourable Balance: This occurs when the value of a country's imports is more than the value of its exports.
• Positive or Favourable Balance: This occurs when the value of a country's exports is more than the value of its imports.

Types of International Trade

International trade can be categorized into two main types:

• Bilateral trade: This is trade conducted between two countries. They create an agreement to trade specific commodities with each other. For example, Country A might agree to sell raw materials to Country B, which in turn agrees to sell a specific manufactured item to Country A.
• Multi-lateral trade: This is trade conducted with many different countries. A single country can trade with a number of other countries simultaneously. In this system, a country might grant the status of "Most Favoured Nation" (MFN) to some of its trading partners.

Case for Free Trade

The act of opening up economies for trading is known as free trade or trade liberalisation. This is achieved by reducing trade barriers like tariffs (taxes on imported goods). Free trade allows goods and services from all over the world to compete with domestic products.

However, globalisation and free trade can have negative effects, especially on developing countries, if they don't provide an equal playing field. While free trade allows rich countries to enter other markets, some argue that these same developed countries often keep their own markets protected from foreign products.

Countries also need to be cautious about dumping.

World Trade Organisation

In 1948, several countries formed the General Agreement for Tariffs and Trade (GATT) to liberalise world trade from high tariffs and other restrictions. In 1994, the member countries decided to create a permanent institution to promote free and fair trade. As a result, GATT was transformed into the World Trade Organisation (WTO) on 1st January 1995.

• Function: The WTO is the only international organisation that deals with the global rules of trade. It sets the rules for the global trading system and helps resolve disputes between its member nations. It also covers trade in services (like banking and telecommunications) and intellectual property rights.
• Headquarters: Geneva, Switzerland.
• Criticisms: The WTO has faced opposition from those concerned about the effects of globalisation. Critics argue that:
  • Free trade does not make ordinary people's lives more prosperous but widens the gap between rich and poor.
  • Influential nations in the WTO often focus on their own commercial interests.
  • Many developed countries have not fully opened their markets to products from developing countries.
  • Important issues like health, worker's rights, child labour, and the environment are often ignored.

Regional Trade Blocs

Regional Trade Blocs are groups of countries that have come together to encourage trade among themselves. These blocs are often formed by countries that are geographically close, have similar economies, or trade complementary items.

• Purpose: They aim to remove trade tariffs within the member nations and promote free trade among them. They developed partly because global organisations were seen as too slow to increase intra-regional trade.
• Impact: Today, 120 regional trade blocs generate 52 percent of the world's trade.
• Future Concern: While they promote free trade internally, it might become increasingly difficult for free trade to occur between different trading blocs in the future.

Concerns Related to International Trade

International trade can be highly beneficial, but it also carries significant risks and concerns.

Positive Impacts:

• Leads to regional specialisation and higher levels of production.
• Improves the standard of living.
• Makes goods and services available worldwide.
• Helps equalise prices and wages across the globe.
• Promotes the diffusion of knowledge and culture.

Negative Impacts and Concerns:

• Can lead to dependence on other countries.
• May cause uneven levels of development and exploitation.
• Can result in commercial rivalry that leads to wars.
• Environmental Damage: As countries compete to trade more, the production and use of natural resources increase rapidly. This leads to resource depletion, deforestation, and the decline of marine life.
• Unsustainable Practices: Multinational corporations in sectors like oil, mining, and pharmaceuticals often expand their operations without following the norms of sustainable development, leading to increased pollution and long-term environmental and health problems.

GATEWAYS OF INTERNATIONAL TRADE

Ports

Ports and harbours are the chief gateways for international trade. They are the points where cargo and travellers pass from one part of the world to another.

• Function: Ports provide essential facilities like docking for ships, loading and unloading of cargo, and storage. Port authorities are responsible for maintaining navigable channels and providing labour and management services.
• Importance: A port's importance is judged by the size of cargo and the number of ships it handles. The amount of cargo passing through a port is a good indicator of the economic development of its hinterland (the area it serves).

Types of Port

Ports can be classified in several ways, including by the type of cargo they handle, their location, and their specialised functions.

Types of port according to cargo handled:

• Industrial Ports: These ports specialise in handling bulk cargo like grain, sugar, ore, oil, and chemicals.
• Commercial Ports: These ports handle general cargo, which includes packaged products and manufactured goods. They often handle passenger traffic as well.
• Comprehensive Ports: These ports handle both bulk and general cargo in large volumes. Most of the world's great ports fall into this category.

Types of port on the basis of location:

• Inland Ports: These ports are located away from the sea coast and are connected to the sea by a river or a canal. They are accessible to flat-bottomed ships or barges. [!example] Examples include Manchester (linked by a canal), Memphis (on the Mississippi River), and Kolkata (on the Hoogli River).
• Out Ports: These are deep-water ports built away from the main parent ports. They serve the parent port by receiving large ships that cannot reach the main port due to their size. For example, Piraeus is the out port for Athens in Greece.

Types of port on the basis of specialised functions:

• Oil Ports: These ports specialise in processing and shipping oil. Some are tanker ports (like Maracaibo in Venezuela) for loading oil, while others are refinery ports (like Abadan in Iran) where oil is processed.
• Ports of Call: These ports originally developed as stopping points on major sea routes where ships would anchor for refuelling, watering, and getting food. Many later developed into commercial ports. Aden, Honolulu, and Singapore are good examples.
• Packet Station (Ferry Ports): These ports are exclusively used for transporting passengers and mail over short distances across water bodies. They usually exist in pairs, facing each other. [!example] Dover in England and Calais in France are packet stations located across the English Channel.
• Entrepot Ports: These are collection centres where goods are brought from different countries to be re-exported to other destinations. Singapore is an entrepot for Asia, and Rotterdam is one for Europe.
• Naval Ports: These ports have only strategic importance. They serve warships and have workshops for their repair. Kochi and Karwar in India are examples of naval ports.