INTERNATIONAL TRADE

SIMILARITIES BETWEEN HOME TRADE AND FOREIGN TRADE:

Objective: Businessmen involved in home trade and foreign trade buy and sell goods
for the same objective. That is to make a profit.

Dependence: Both, home trade and foreign trade depend very much on aids to trade.
That is there is much dependence on transport, insurance, finance, warehousing, etc,

Specialization: Both, home trade and foreign trade depend very much on
specialization, whether it is national, regional or personal.

DIFFERENCES BETWEEN HOME TRADE AND FOREIGN TRADE:

Meaning: Home trade is buying and selling goods within the country, while foreign
trade means buying and selling goods between countries.

Distance: The distance involved in foreign trade is much greater than the distance
involved in home trade. This means that air or sea transport has to be arranged in
foreign trade, whereas road and rail transport can be used in home trade.

Trade Barriers: In foreign trade, there are trade barriers like customs duties, quotas
and embargoes, levied on imports and some exports. There are no such trade barriers
in home trade.

Types: Home trade includes wholesaling and retailing, whereas foreign trade includes
importing, exporting and entrepot trade.

Languages: In home trade, there would be no difficulty regarding language, as the

same language is spoken. But in foreign trade, translators would be required as each
country speaks a different language.

Currencies: In home trade, the problem of exchange rate would not arise, as the
same currency is used for payments. But in foreign trade, each country uses a
different currency. So the problem of exchange rate would arise.

Technical Requirements: In home trade, the same technical specifications for goods
are required. But in foreign trade, each country has a different technical specification.

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Commerce Students Guide

Madhrasathul Ifthithaah

Department of Business and Computing /

So manufacturers would have to produce goods according to different technical

specifications.

Methods of Payment: In home trade cheques are the most favored means of
payment. In foreign trade, bills of exchange, letters of credit and cable transfers are
the most suitable means of payment.

Cultural Differences and Requirements: In home trade, there is not much need for
market research as there are no differences in taste and fashion. But in foreign trade,
each country has a different culture, taste and fashion. So first market research has to
be carried out and then goods exported accordingly.

IMPORTANCE OF INTERNATIONAL TRADE

Some raw materials do not occur naturally in the country has to be imported.

It is cheaper to import some goods than to produce them. For example bananas in
UK.

Selling goods and services abroad provides the country with foreign currency.

By selling abroad the country gains the benefits of wider markets.

International trade creates employment opportunities in the country

Consumers in the country will have a wider variety of goods from all over the world.

It increases countrys income, which results in a higher standard of living.

It helps to maintain friendly foreign relationships with other countries.

Income can be earned by exporting the excess goods and services.

THE INTERDEPENDENCE OF COUNTRIES WITHIN A GLOBAL MARKET

No country in the world is self sustained. By nature, every country has some
resources in its limit and some resources are unlimited by nature. Economics clearly has
defined that resources are scarce in nature; so, countries must be interdependent if it wants
to satisfy the wants and economical needs to the growing population.
No countries can be interdependent in todays market. The best examples could stand
with reference to todays market is, satellite services. E.g. Coca Cola, cars, electronic goods
etc.
Today every country wants to consume goods and services at the cheapest price and
at the best advanced technology. To produce these goods and services in its own country
with the available resources, it may not be possible to achieve the task due to lack of

International Trade

resources, lack of capital and lack of technological advancement. All these factors have led
to interdependence of countries within a global market.
VISIBLE TRADE AND INVISIBLE TRADE
International trade

Visible trade

Visible trade

(Trade in goods only)

(Trade in services only)

Visible

Visible

Invisible

Invisible

Exports

imports

Exports

imports

1. Foreign trade involves the export and import of both goods (called visible trade) and
services (called invisible trade).
2. Visible trade involves trading in goods, such as wheat, and it can be divided into:
(a) Visible exports which involves the sending of goods (raw materials, semi manufactured
goods, machinery or other manufactured goods) from the home country for sale abroad by
the exporter.
(b) Visible imports which involves the buying of goods (raw materials, semi manufactured
goods, machinery or other manufactured goods) from abroad into the home country.
3. Invisible trade involves trading in services, something which cannot be seen such as
tourism, education services, insurance services, transport services and the like. It can be
divided into:
(a) Invisible exports which occurs when nationals of other countries use the services
offered by companies or individuals of the home country. Singapore exports shipping
services when foreigners sends goods in ships owned by Singapore nationals.
(b) Invisible imports which occurs when nationals of the home country use the services
provided by foreign individuals or companies owned by foreigners.
Singapore imports education services when Singapore students goes overseas to the UK to
study at the British universities.
4. The money which a country earns from her exports, both visible and invisible, will be used
to pay for her imports both visible and invisible.

Commerce Students Guide

Madhrasathul Ifthithaah

Department of Business and Computing /

BALANCE OF TRADE AND BALANCE OF PAYMENTS

1. The Balance of Payments figures for a country show the amount of currency being
received from other countries and that being paid to other countries as a result of many
different types of transactions over a given period, usually a year.
The Balance of Payments can be broadly divided into two main sections:
(a) The Current Account consists of:
(i) the Balance of Trade (difference between visible exports and visible imports)
(ii) the Balance of Services or Invisible Balance (difference between invisible exports and
invisible imports)
(iii) transfers items
(b) The Capital Account consists of:
(i) the capital items (inflows or outflows)
(ii) official financing (adding to or drawing from foreign reserves)
2. The difference in value between visible exports and visible imports is called Balance of
Trade. If the visible export value exceeds the visible import value, the Balance of Trade is
said to be favourable or in surplus. If the visible import value exceeds the visible export
value, then the Balance of Trade is said to be unfavourable or in deficit.
3. A country's Balance of Trade can be assessed from annual statistical records obtained
from customs declaration forms for imports and exports. The Balance of Trade is very
important because:
(a) All imports have to be paid for with the proceeds received from the sale of exports.
(b) Thus, in the long run, a country cannot import more than it exports.
(c) If the Balance of Trade has been unfavourable for many successive years, then the
government has to take steps to discourage imports and encourage exports.
4. A country also exports and imports services: shipping, educational, tourist, etc. Singapore
exports shipping services when a foreigner travels in a Singaporean ship. The total value of
services exported within a year forms the invisible exports, whilst that of services imported
forms the invisible imports.
5. 'Transfer items' refers to interest, profits and dividends sent abroad as a result of
foreigners investing in the home country. It also includes the repatriation of interest, profits
and dividends from abroad to the home country as a result of its nationals investing abroad.

International Trade

6. 'Capital items' refers to the amount of money which have flowed into or out of a country.
(a) Examples of capital outflows are as follows:
(j) Nationals invest in businesses abroad, buy properties or shares abroad.
(ii) The government in the home country gives monetary aid to other countries.
(iii) Nationals in the home country lend to nationals or organizations or governments of other
countries.
(b) Examples of capital inflows are as follows:
(i) Nationals sell off their properties, businesses and shares abroad and bring the money
home.
(ii) The government in the home country receives monetary aid from overseas.
(iii) Nationals or government in the home country borrow from abroad.
7. It is very unlikely that total receipts will exactly be equal to total payments over a particular
year.
(a) If total payments exceed total receipts, we have a Balance of Payments deficit.
(b) If total receipts exceed total payments, there is a surplus in the Balance of Payments.
8. A country's balance of payments is of utmost importance.
(a) If the country continues over a period of years to experience a Balance of Payments
deficit, it will eventually not have enough foreign exchange to pay its creditors.
(b) No country wishes this to happen for it will cause economic ruin in the long run.
9. If a country does not have sufficient foreign currency to pay its creditors abroad, it can
temporarily borrow money from the International Monetary Fund (IMF) which is specially set
up to help countries having Balance of Payments problems. However, this would mean that
foreigners can now control the economic policies of the government of such a country.
10. The calculation of Balance of Trade and Balance of Payments can be seen as follows:
Illustration
Country A
Balance of Payments for the Year 1998
Value of goods exported

$4,000 million

Value of goods imported

$4.800 million

Balance of Trade 1998

-$800 million

Value of services exported

$8,000 million

Value of services imported

$7.000 million

Invisible balance

+$1,000 million
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Commerce Students Guide

Madhrasathul Ifthithaah

Net transfers
Balance on Current Account

Department of Business and Computing /

- $ 50 million
+$150 million

Capital items

+$200 million

Total currency flow (net)

+$350 million

(a) The figure shows that the Balance of Trade for Country A in 1998 is unfavourable or
adverse because the cost of goods imported is higher than those exported by $800 million.
(b) In the same period, however, Country A has a net positive balance of $1,000 million from
her invisible trade. Money earned from her export of services abroad exceeded her import of
services from abroad.
(c) The overall amount of net transfers of interest, profits and dividends abroad is $50
million.
(d) Country A has a favourable balance on Current Account of $150 million in 1998.
(e) In 1998, Country A has an overall net inflow of capital of $200 million.
(f) In 1998, Country A has a surplus of $350 million on her Balance of Payments. This means
that Country A receives $350 million more than what she paid out to the rest of the world in
the same period.
(g) Since the Balance of Payments is positive in 1998, this means the central bank of
Country A can build up her reserves of foreign currency. This reserve can be used to pay for
future deficits or to repay funds previously borrowed from the IMF.
TRADING BLOCS
1. Association of South East Asian Nations (ASEAN)
The Association of South East Asian Nations (ASEAN), organized in 1967, comprises
Brunei, Cambodia Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand, and Vietnam. It promotes cooperation in many areas, including industry and trade.
Member countries are protected in terms of tariff and non-tariff barriers. Yet they hold
promise for market and investment opportunities because of their large market size (500
million people). On January 1, 1993, ASEAN officially formed the ASEAN Free Trade Area
(AFTA). AFTAs goal is to cut tariffs on all intrazonal trade to a maximum of 5 percent by
January 1, 2008.
2. The E.U, and EMU
1. The E.U was created aiming at free trade between the member states.
2. Free trade means that there are no barriers in terms of duties, quotas, etc.
3. Free trade requires free movement of labour (no visas), capital (businessmen are treated
equally regardless nationality), and goods and services (same product specifications with no
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International Trade

barriers to entry).
4. The single market was declared so that the member states will enjoy one big domestic
market (France and the U.K, for instance, will be the same as Male and Addu, as no tariffs,
no quotas).
5. The single market requires single currency. Because exchange rate fluctuations might
make it difficult for free trade to take place. The currency used in Male and Addu is the
Rufiyaa, so that the currency used in the U.K and France, for example, should be the same.
6. The starting step was with the ERM, to minimize the problem of exchange rate
fluctuations, but the U.K withdrew itself from that system in 16 September 1992, after two
years of membership.
7. Till today, the U.K is not a member state in the Euro.
8. Now we cannot find French franc or German mark, as they are all replaced by the Euro.
9. The Euro has 12 member states so far (as at 30th January 2003).
10. The main advantage of the Euro is the certainty assured in transactions across the
member states in terms of exchange rate. But the ERM, which led to Euro later, makes it
difficult for countries to control their economies.
11. Euro makes it easy for businesses all over the member states to trade between them. It
is difficult for the U.K businesses now as the pound is struggling with new powerful comer,
the Euro.
12. However, the U.K goods do have the free access into the E.U as it is a member in the
single market.
13. The single market, common specification and the Euro represent challenges, in terms of
competition, to big businesses, and, in fact, a big threat to the smaller ones.
14. Businesses outside the E.U have to use the Euro in exchange. They have to follow
the product specifications approved by the E.U as well. Matching the E.U specifications
increases cost because it requires full revise for the business techniques.
AIMS OF TRADING BLOCKS:

To eliminate customs duties and quotas on the import and export of goods between
member states.

To establish common customs tariff and a common commercial policy towards nonmember countries.

To allow the free movement of persons and capital between member states.

To establish common policies for agriculture and transport.

Commerce Students Guide

Madhrasathul Ifthithaah

Department of Business and Computing /

To prohibit harmful business practices which restrict competition within the Common
Market.

ADVANTAGES OF FREE TRADE:

There are no tariffs and quotas among member countries.

There is free movement of goods and services among member countries.

There is free movement of people among member countries.

Workers can be hired from any member country without any restrictions.

There is free movement of money and capital.

There is better relationship among member countries.

DISADVANTAGES OF FREE TRADE:

Home industries get affected.

Infant industries get affected.

Loss of revenue for the Government when foreign currency goes out.

It sometimes causes unemployment.

It causes imbalance of power among member countries.

There is sometimes a drain of wealth.

IMPORTANCE OF FREEPORTS IN INTERNATIONLA TRADE

FREEPORTS:
Definition 1:
A port where no customs duties are levied on goods coming into or leaving it. E.g. Singapore
Definition 2:
An international port or an area within an international port at which, crew, passengers,
baggage, cargo, mail and stores may be disembarked or unloaded, may remain and may be
transhipped, without being subjected to any customs charges or duties. (Examination is
possible for instance to meet security or narcotics control requirements.)
IMPORTANCE
1.

Free ports encourage a fair international trade practices.

2.

Free ports encourage free movement of goods within a trade region.

3.

Good economic relationship can be developed and maintained among countries.

International Trade

RESTRICTIONS ON INTERNATIONAL TRADE:

Tariffs: These are import duties, such as the customs and excise duties of the United
Kingdom. These have the effect of raising the price of the imported goods and therefore
making them less competitive when compared to home products.
Subsidies: These are given to home producers, which makes their goods cheaper and
therefore more competitive when compared with the prices of overseas products.
Quotas: These are physical restrictions on the amount of goods that can be imported into a
country over a period of time. For example, the United Kingdom has set a limit on the
number of Japanese cars that can be imported into the United Kingdom.
Embargoes: These are bans on importing certain items from overseas.
Reasons for restricting trade:

To raise revenue from tariffs.

To protect existing industries from overseas competition.

To protect infant industries which are not yet strong enough to compete with
established overseas firms.

To restrict dumping of foreign goods.

DIFFICULTIES FACED BY EXPORTERS:

Distance: The distance involved in transporting goods from one country to another
country is greater than in domestic trade. Air transport and sea transport have to be
arranged. Overseas representatives also may have to be appointed. There are charter
agents available at the Baltic Exchange who find ships for goods and goods for ships.

Language Differences: Every country speaks a different language. Communications

with overseas traders have to be carefully translated. Publicity material and
instructions have to be prepared in many languages. Hence translators have to be
found. Exporters can contact the Central Office of Information where information of
translators is available.

Cultural Differences and Local Requirements: Every country follows a different

culture and requires various goods. Market research has to be carried out. This is
quite difficult and expensive. The services of the Department of Trade and Industry
can be sought in this case.

Commerce Students Guide

Madhrasathul Ifthithaah

Department of Business and Computing /

Technical Differences: Different governments may have different technical

specifications for goods sold in their country. An exporter of electrical goods, dealing
with several countries has to produce the goods according to the required
specification of each country.

Trade Barriers: Tariffs and quotas are a considerable obstacle to trade. Tariffs are
taxes levied on imports and quotas are a limit imposed on imported goods. These
increase the price of goods that are imported. These barriers can be overcome by
exporting to countries where the tariffs are low and where there are no quotas.

Customs Regulations: All goods exported and imported have to go through customs
regulations. This creates more work for the exporter.

Documentation: Documents used in international trade are more complex than those
used in domestic trade. Handing over the work to a freight forwarder can solve these
problems.

Payment: This is a big problem faced by exporters. Every country uses a different
currency. So currency must be exchanged in the foreign exchange market. The
problem of the changing exchange rate comes into existence. Exporters can make
future dealings to overcome this problem.

Insurance: The risks involved in foreign trade are more than the risks in domestic
trade. So insurance has to be taken out. The Department of Trade and Industry and
Lloyds of London can overcome these problems.

Risk of Non-Payment: The importer may not pay the exporter for the following
reasons:
o because he does not want to pay.
o because he becomes insolvent.
o because payment is prevented by the importers government.
o because of war.
o because the import license has been cancelled by the government.
This causes a big problem for the exporter and can be solved by taking out a

Comprehensive policy at the Export Credit Guarantee Department.

CUSTOMS AUTHORITIES:
Functions:

Statistics: They collect a wide range of statistical data showing the pattern of trade
and the movement of goods.

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International Trade

Control: They supervise the movement of goods in and out of the country ensuring
that prohibited goods are not imported or exported.

Revenue: The customs authorities collect the duty payable on imports.

Enforcement of Quotas: The customs authorities ensure that the goods imported are
according to the limit imposed by the government.

Bonded Warehouses: The customs authorities control these warehouses by

supervising the withdrawal of goods.

Public Health: They have certain functions in connection with the control of infectious
diseases.

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