- Explain how domestic trade differs from international trade.
Discuss of comparative cost as propounded by David Richardo. The theory states that a country should specialize in the production of goods and services for which it has cost advantage over another country. This, he pointed out will bring about the production of goods at cheaper cost. For example, Nigeria purchases goods like automobiles and electronics from overseas countries and sells commodities like cocoa, groundnut and crude oil to them.
TYPES OF INTERNATIONAL TRADE
There are two major types of international trade. These are:
- Bilateral international trade: Bilateral international trade is a trade agreement in which two countries
exchange goods and services. It occurs when each country tries to balance its payments and receipts separately and individually with each other.
- Multilateral international trade: Multilateral international trade is a type of international trade in which a country trades with many other countries. This ensures international division of labour. It is a type of trade in which many countries exchange their goods and services e.g. Nigeria trades with USA, Britain and Japan. Multilateral international trade is necessary if the total volume of world trade is to be raised to its maximum.
Definition: Internal trade, also known as domestic trade or home trade involves the exchange of goods and services among the people within a particular country. Internal trade involves the buying and selling of goods and services within a particular country e.g. Nigeria. The items of Internal trade include those goods which are produced and sold or locally. In Nigeria for example, the , are yam, coffee, maize and rice which are locally manufactured goods.
SIMILARITIES AND DIFFERENCES BETWEEN INTERNATIONAL TRADE AND INTERNAL TRADE
- Both international trade and internal trade involve the use of money as a medium of exchange.
- They both involved a degree of specialization between the trading partners, since specialization causes exchange.
- Both forms of trade involve the activities of middlemen.
- Both trades involve the buying and selling of goods and services.
- Both of them arise due to inequitable distribution of natural endowments and production resources.
- Foreign trade involves the exchange of goods and services across national frontiers while internal trade involves the exchange of goods within the borders of a country.
- In foreign trade, buyers and sellers use different currencies whereas buyers and sellers in home trade use the same type of currency.
- There is possibility of restriction – tariffs, import duties, export duties, quotas, embargoes – when goods are exchanged across national boundaries while this does not occur in home trade.
- There are differences in systems of weighing and measuring in one country vis-a-vis another. A country has only one system of such weighing and measuring.
- Differences in transport cost due to distance between buyers and sellers, documentation requirement, need for insurance in respect of foreign trade distinguish foreign trade from home trade.
- There are also differences in legal systems and culture under international trade but the legal system are the same in domestic trade.
- Foreign trade requires knowledge of new languages and interpretations while in domestic trade, a common language is used.
REASONS OR BASIS FOR INTERNATIONAL TRADE
Countries engage in international trade for the following reasons:
- Uneven distribution of natural resources: Natural resources unevenly distributed. While sc countries are naturally blessed, others have little or no natural resources, necessitates international trade.
- Differences in climatic condition: climatic condition of the earth caries fid one region to another. This variation gives rise to another. This variation j rise to growth of different crops, hencethe need for exchange.
- Differences in technology: The of technology differs from one nation the world to another. Some countries with advanced technology can produce some industrial products at reduced cost and sell to the less developed countries.
- Differences in skills: The inhabitants of a region may develop special skills in the production of a commodity such that it acquires special reputation for its skill. This can necessitate foreign trade.
- Expansion of market for products: Foreign trade came into existence because of the need to widen the market for goods produced by a country.
- Differences in the efficient use of natural resources: Foreign trade may arise because of differences in efficiency in the use of natural resources.
- Differences between patterns of production and consumption: The differences between patterns of production and consumption in different countries necessitate international trade.
- Differences in taste: Differences in the taste of various countries call for international trade.
BARRIERS OR PROBLEMS OF INTERNATIONAL TRADE
- Language Problems: Different languages are spoken by different countries of the world. Communication between, business men from various countries with different linguistic background may be difficult.
- Problems of Distance: It may take days or weeks before one moves from one country to another because of the long distances involved. This may delay quick exchange of goods and services, e.g. Nigeria and Japan.
- Numerous Documents: The documents used in international trade are too many. This makes the processing of foreign trade too long and sometimes cumbersome e.g. bills of exchange, ship manifest and certificate of origin.
- Difference in Currency: Every country has its own currency which is different from the currency of other countries. In foreign trade, the currency must be converted before meaningful transactions can take place.
- Tariff: A country can impose import duties (tariff) on imported goods and this will make the goods to be more expensive.
- Trade Imbalance: International trade often leads to trade imbalance among nations with the effect that viable countries may not transact business with the weaker ones.
- Government Policy: Foreign trade can be hindered by the political ideologies of different countries. As country can deliberately decide not to trade with another country because of its political differences, e.g. the USA and Libya in 1988.
- Weight and measures: There is no international uniformity in the system of weighing and measuring of goods. The system is not standardized, hence it has to be converted and this hinders trade.
- Artificial Barriers: Foreign trade can be hindered through the imposition of outright ban on products, quota system or imposition of licenses on goods.
- Transport/Communication: Businessmen from different countries, especially African countries, find it difficult to contact their partners in other countries because of poor communication and transport facilities. This hinders foreign trade greatly.
- Religion/Culture: Religious beliefs and culture differ from one country to another and these can constitute a hindrance to International trade.
ADVANTAGES OF INTERNATIONAL TRADE
- Source of Revenue: International trade is a source of revenue for nations of the world. Nigeria derives 90% of its
revenue from the sale of crude oil to other countries. Taxes can also be imposed on exported and imported
- Promotion of economic development: International trade helps countries to gain technical knowledge which accelerates economic developments e.g. farmers in Nigeria can now import tractors,
harvesters, etc. practice large scale farming.
- Provision of employment opportunities: As a result of international trade contacts, foreign investors can
establish firms in sister countries which will create employment opportunities for its citizens.
- It leads to international specialization: Through international trade, countries will specialize in the
production of goods for which they have comparative advantage over others. This will make prices of such goods cheaper.
- Increase in world output: countries specialize in goods and services in which they comparative advantage and where utilization of resources is made, world output will increase.
- Availability of variety of goods: Through foreign trade, wide variety of goods are made available. West countries can import cars, electronics, shoes and equipment etc. from countries. New products are for markets.
- Acquisition of skills and ideas: Through international trade, new ideas, skills and techniques can be acquired to improve the quality of goods services.
- It fosters closer international relationship: Foreign trade brings about prospects for peace in the world. There is familiarity, understanding, and harmony in the world when from different races trade together.
- Increase in standard of living: there is exchange of different goods services among countries, the standard of living increases. People can get what they need which they cannot ordinarily produce.
- Equitable distribution of national resources: Natural resources found in one country of the world through foreign trade.
DISADVANTAGES OF INTERNATIONAL TRADE
- Encouragement of Dumping: International trade can lead to dumping of goods into the less developed countries by multi-national companies from the developed nations. This countries therefore become dumping grounds for all kinds of products.
- It affects infant industries: Foreign trade also affects newly established industries (infant industries) negatively as they cannot complete favourably with their well- established foreign counterparts.
- Destruction of cultural values of a country: Importation of a certain goods such as x-rated films and immoral fashion can destroy the moral and cultural values of a country. It can thus lead to decadence in social norms. For example in Nigeria, massive importation and use of indecent attire or clothes from Western World is anti-cultural and against our social norms.
- Importation of dangerous or harmful goods: Through foreign trade, harmful or dangerous goods can be imported into a country by unscrupulous businessmen.
- Creation of balance of payment deficit: This is possible when foreign trade is not restricted and the level of import is higher than export. This may lead to a drain in the foreign exchange reserve which can result in balance of payment problems.
- Unemployment: Foreign trade can lead to unemployment because continued importation of cheaper products from foreign countries may reduce the level of production of local industries producing similar products and this may result in retrenchment of workers.
- Reduction of effort to attain self- reliance: Uncontrolled and unrestricted
inflow of goods can reduce effort to attain self-reliance because the people can always get what they want from abroad, hence the culture of self- sufficiency will be destroyed.
- It leads to exploitation: The developed nations which are highly industrialized may use their advantageous position to exploit the less developed countries.
DIVISIONS OF INTERNATIONAL TRADE
International trade can be divided into three, import, export and entrepot trades.
- Import Trade
Definition: Import trade is defined as the act of buying goods and services from other countries. It is sometimes restricted to control a country’s balance of payment. The goods are imported either in response to direct orders or on consignment. Import trade is divided into: Visible and invisible trade.
- Visible imports: Visible imports consist of goods that can be seen and touch i.e., tangible goods which come from other countries; Nigeria’s visible import, for example are: automobiles, electronics and plants and machinery.
- Invisible imports: Invisible imports consist of services rendered by other countries that cannot be seen or touched. Examples of invisible imports are banking, tourism and aviation. This will appear in the balance of payments.
- Export Trade
Definition: Export trade may be defined as the act of selling goods and services to other countries. It is the selling of a country’s product abroad. Some governments frequently attempt to encourage exporters by introducing export subsidy. Export can equally be divided into visible and invisible exports.
- Visible Exports: These consist of goods which are sold in overseas markets e.g. to other countries. In Nigeria, visible exports are cotton, groundnut, palm oil, crude oil and textiles.
- Invisible Exports: Invisible exports consist of services rendered to other countries. Such services are transport, banking, insurance and other consulting service.
Definition: Entrepot is a form of foreign trade in which goods shipped to one port are subsequently re-exported to another port. If customs duty had been paid on imported goods which are later re-exported, the duty can be claimed back. Simply put, entrepot is the reexporting of goods imported from other countries.
BALANCE OF TRADE AND BALANCE OF PAYMENT
Balance of trade: Balance of trade refers to the total value of goods sold and bought by a country during a given period, usually a year. When visible exports equal visible imports in monetary terms, we have balance of trade. A positive balance of trade means that a country is exporting more in monetary terms than it is importing while a negative or unfavourable balance of trade means that a country is importing more in monetary terms than it is exporting.
Balance of Payment: Balance of payment may be define as a statement or record showing the relationship between a country’s total payment to other countries and its total receipts from them in a year. A country s’ balance of payment c be grouped into three parts namely cu” account, capital account and monetary movement account.
- Current Account: Current account is composed of receipts and payments for visible and invisible services. Invisible services are insurance, banking, transport, interest payment and tourism while visible goods are automobiles, cocoa, cotton and crude oil.
- Capital Account: Capital account is made up of the inflow and outflow capital both in long and short term consists of capital movement in the form of investments, loans and grants.
- Monetary movement account: account shows how the balance of both current and capital accounts are settled.
- Favourable balance of payment: Favourable balance of payment occurs when the receipts from invisible and visible export trade greater than payments to other countries invisible and visible imports. A credit balance can be used to increase investment abroad or to add to a country’s gold reserve.
- Unfavourable balance of payment: Unfavourable balance of payment is used for debit balance in the balance of payments. It means that payments on visible and invisible import is greater than receipts on invisible exports. It can be referred to as adverse or deficit balance. For more discussion on balance of payment, see previous chapter book.
PROCEDURES FOR INTERNATIONAL TRADE
For international trade to take effect, certain procedures must be followed. The step-by-step procedures are:
- The importer and exporter are brought together through different means e.g. letter of inquiry.
- The next step is for the producer to send quotations to the buyer in response to the letter of inquiry. The quotation will show the description and features of the products.
- After receiving the quotation, the importer will place an order with the manufacturer. The indent will show details of goods, prices and date of delivery.
- The next step is to make arrangement for payment through any agreed means of payment e.g. documentary credit and telegraphic mail transfer.
5) Then, an agreement for the goods to be shipped through a shipping company will be made. The shipping agent will get all the necessary documents like shipping note, calling forward note etc. The goods will then be pack and well arranged in containers.
- The exporter will then prepare and send copies of bill of lading to the importer in advance. Other documents that will accompany the consignment will be prepared and sent.
- When the goods arrive, the clearing agent will process and complete all necessary documents. The agent will check the manifest to ensure that the goods are on board. The customs personnel will assess the consignment and compute the duties to be paid.
- The goods will be taken to the warehouse after all necessary documentations have been completed.