Foreign Trade

Foreign Trade

Meaning of foreign trade

International trade means exchange of goods and service within the political boundaries of a nation. But foreign trade means exchange of goods and services between different counties across the political boundaries. It is also known as international trade.

Importance and role of foreign trade / business in economic development

1. Stimulation to industrialization-

   If a developing country wants to do the economic development by rapid industrialization then it has to import for industrialization. International trade provides an opportunity for importing capital goods and materials for development purposes. The import of goods with high growth potential confers immense benefits on the developing countries.

2. Increase in national production –

   Export and imports of good can accelerate the rat of economic development. The underdeveloped countries can produce more of those goods in which they enjoy great advantage Consequent increase in production, and employment will lead to increase in demand. Increase in national product is the outcome to increase in foreign trade. Therefore increase in foreign trade leads to increase in national production, national and economic development.

3. Increase in employment and income from exports-

   Gradual increase in exports is the indicator of economic development of the country concerned when the exports of a country are more than its imports. Balance of payments of the country is favourable. More exports increase the national income of the country. Because of increase in income, rate of investment accelerates which in turn leads to increase in employment opportunities.

4. Helpful in capital formation –

   At the root of capital deficiency is shortage of savings. The level of per capital income being quit low. Most of it is spent in satisfying the bare necessities of life leaving a very low of income for capital accumulation. It is said that foreign trade helps to increase capital formations. The capacity to save increase as real income rises through the more efficient resource allocation associated with international trade Foreign trade also provide stimulus for investment and thus it tends to raise the rate of capital formation.

5. Complete utilization of resources –

   Foreign trade adds to the efficiency of production in under developed economics. With the development of trade, use of latest and imported techniques of production becomes possible in agriculture and industrial fields. All this increase the efficiency in the utilization of means of productions. Similarly, many new industries come into being and some of them are meant for the production of goods for exports only. Efficient use of petroleum resources in Arab countries has become possible only on account of trade. As a result these countries have become richest in the world.

6. Modernization of industries-

   Foreign trade makes available, the technology, innovations and latest invention of developed countries to the under developed countries. Use of new technology helps in reducing the cost of production and the country will have an easy access to the foreign markets it a result income and employ result income and employment will increase and the process of economic development will accelerate.

7. Development of export related industries-

   Generally; balance of payments of developing countries is adverse as under developed countries lack capital, technical known how, machinery, raw materials, equipments etc. It has, therefore of payments against the developing countries. A developing country must build up, of course an export surplus of pay for constant pouring imports. It has to build up export industries; the exports of developing countries are traditional and limited. These countries may develop export related industries by importing necessary capital goods, Exchange they can export primary goods and mineral resources produced in their countries. The result is that developing countries can step up the pace of their development by engaging directly in productive activities.

8. Importance of education-

   Foreign trade brings the people of developing countries in contact with the people of developed countries. It has improved the standard of living education, efficiency, organization, customs etc. of the developing countries. In this way foreign trade has helped the developing countries in formation of human capital. It is generally maintained that international trade can serve as a vehicle for the dissemination of education and knowledge can be a big handicap in the development of a country and this deficiency can be effectively removed through contact with more advance countries which is made possible only by foreign trade.

9. Control on monopolies –

   The foreign trade helps an under developed country indirectly be giving birth to healthy competition and checking inefficient monopolies. Health competition is essential for the development of the export sector of such economies for economics for checking inefficient exploitative monopolies that are usually established on the grounds of infant industry protection creates monopolies. When foreign competition is removed, the home manufactures are tempted to combine to reap monopoly profits. Foreign trade encourages countries to have healthy competition in the production of different kinds of goods at lowest cost of production. The home monopoly firms generate lethargy which acts like an opiate. When foreign competition is removed, they do not try to make any improvement and technical progress comes to a standstill.

Harmful effects of foreign trade/ business in economic development

Many economists were of the view that international trade had proved to be most beneficial for the developed countries but it had not made any noticeable contribution for the development of under- developed countries has not only slowed down but also is adversely affected, on account of foreign trade. Foreign trade may benefit the economic development of new countries to some extent but it has proved to be a hindrance in case of most of the under developed countries. The following effects of foreign trade have proved to be harmful for the economic development of underdeveloped countries.

1. Wrong distribution of resources-

   Foreign trade accounts for lopsided development of underdeveloped countries. A small sector of the economies in which export industries have been established has developed but a large sector remains poor and backward. Thus regional inequality in these countries has industries have been established has developed these countries has Increased. Foreign capital led to lopsided pattern of growth in which production of primary products for export was carried on with the aid of substantial investment of foreign capital while led to lopsided pattern of growth in which production of primary products for export was carried on with the aid of substantial investment of foreign capital while the domestic economic development remained far less if not altogether primitive.

2. Losses by competition –

   Foreign trade encourage home industries to check out side competition and even dumping of foreign goods. Dumping tactics resorted to by advanced countries may harm the development of poor countries.

3. Difficulty in war period –

   Foreign trade leads to international Dependence which was armful in times of war. The depression of 1930s becomes universalized because of the economic interdependence of the entire world brought about by international trade relations.

4. Difficulty of breaking into the world market –

   The under developed countries have the difficulty to access the world market The products of under developed countries due to lack of good technical knowledge and modern technology, are unable to compete with the products of developed countries. The under-developed countries lack in competitive power.

5. Difficulty of trade incentive-

   The under developed countries some inherent problem of trade. The developed countries provide various facilities and incentive to the developing countries for the promotion of their trade. The developed countries provide help to the developing countries in the farm of financial aid, concessions in duties, etc. but developing countries are not benefitted from their aids and help.

6. Use of harmful things –

   On an account of foreign trade, the demands of the people of the under developed countries get diverted towards the harmful things.

7. Problem of disposing goods –

   The another reason of the under development of countries is the misuse of the under development of countries is the misuse of resources owing to market imperfections. If is due to market imperfections that the productive efficiency in these countries is low. The manufactures and the entrepreneur are ignorant of the market trends in domestic and world markets. The industrialists and business men are bliss fully ignorant of modern techniques and thus feel terribly handicapped in the economic race. Inadequacy of transport system has also contributed to economic backwardness.

8. Increase in corruption –

   There is a growing tendency of the developed countries to interfere directly or indirectly in the internal and other affairs of the developing countries. They have opened the doors of imperialism and exploitation. The capture the markets of developing countries, they adopt all type of malpractices. They try to enrich themselves at the expense of poor countries.

Important links

• Components of Competition Act 2002
• Combination & Competition Act
• The Consumer Protection Act, 1986
• World Trade Organization (WTO)- Features, Structure etc.
• WTO Agreement (World Trade Organization)
• WTO and GATT | Functions & Objectives of WTO
• Advantages & Disadvantages of international trade
• International Trading Environment & its Need

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