INTERNATIONAL TRADE

WHAT IS INTERNATIONAL TRADE?

International trade also known as Foreign trade refers to the exchange of goods and services across the border of two or more countries by their residents and government. The principle underlying international trade is that a country should specialise in the production of those goods for which it has the greatest advantage over other countries. Through Foreign trade or International trade, a nation can obtain goods that they have no capital to produce. It can also be defined as the exchange of goods and services between people of different countries. Foreign trade or International trade involves exports and import. For Example; Nigeria can sell crude oil to America and purchased electronics from her.

WHAT ARE THE FORMS OR TYPES OF FOREIGN TRADE?
  1. Bilateral trade: This involves the exchange of goods and services between two countries. It takes place when each country tries to balance its payment and receipts separately and individually with every other country. E.g. trade between Nigeria and Russia is a bilateral trade agreement.
  2. Multilateral trade: This involves the exchange of goods and services between many countries. It is a type of trade which occurs when countries are perfectly free to trade with one another. This ensures that international division of labour is carried out to the fullest. The dividend of this type of trade is that the total combined output of what countries is it maximum. E.g. Nigeria as multilateral trade agreements with countries like America, China, Russia, Britain and Holland

WHAT ARE THE BASIS OR IMPORTANCE OF INTERNATIONAL TRADE?

  1. Human capabilities: Countries differ in human capabilities. For instance people in Nigeria may be physically sturdy, where has the Germans may be intellectually superior or vice versa.
  2. Availability of adequate market: Most developed countries ship their products to Africa because of availability of market for such products.
  3. Differences in climatic conditions: There is variation in the climatic conditions of different countries. For instance, the Agricultural production of Nigeria is different from that of Cameroon, thus international trade becomes inevitable so as to afford countries the opportunity of enjoying what they do not have.
  4. Technical Knowledge: Some countries, mostly the developed countries have a good supply of technically sound experts than the developing countries. As a result of this deficiency, in some instances, the developing countries are compelled to hire the experts to do most of the technical jobs for them.
  5. Differences in natural endowments: Countries world over are differently endowed with abundant natural resources. For instance, Nigeria is rich in crude oil, South Africa can boast of gold while copper in abundant in Sierra Leone to see these differences in endowment brings about international trade.
  6. Stock in capital: Capital is one of the factors of production. Most countries especially the developed countries can boast of adequate capital produce both consumer and capital goods and sell them to other countries that are disadvantaged through the process of international trade.
  7. Technological differences: Some countries are more technologically developed than others. The translation of this is that as a result of better technology they can embark on large-scale production of a lot of goods and sell them to the developing countries. This form the basis for international trade.
  8. Level of industrial development: This varies from country to country, For example, countries such as America, Britain, Germany and Japan have gone very far technologically with high level of industrialisation which makes it possible for them to enjoy economies of scale while the developing countries tend to benefit from them through international trade.
  9. Expansion of world market: International trade arises because of the need to provide market for surplus manufactured goods. Most developed countries cannot consume all the goods produced. Therefore, they ship them to Africa where they are readily available market.
  10. Differences in cost of production: The cost of production varies from one country to another. This is the basis of comparative advantage, which states that the country should produce goods in which it has the lowest opportunity cost of production compared with the rest of the world.

WHAT ARE THE PROBLEMS OR BARRIERS OF INTERNATIONAL TRADE?

  • Ideological differences: Foreign trade will be affected when there is difference in opinions and political ideologies among Nations of the world. This will restrict free flow of goods amongst them.
  • Currency differences: difference in currency is a barrier to international trade. Since it involves two or more currencies, fluctuations in exchange rates and non-availability of foreign currency will impede the flow of goods.
  • Artificial barrier: the imposition of duties like tariff on goods creates barrier. Strict regulation and tariff limits the extent of foreign trade. Goods that are dispatched to other countries usually pass through some barrier. This will hinder trading activities.
  • Distance: international trade involves great distance to stop because of the distance between one country and another the cost of freight will increase. Moreover it takes several days or months before goods can be dispatched from one country to another.
  • Difference in Language: Having different languages create communication barriers. This is a major setback because there will be no effective communication between businessman from one country and another.
  • Difference in Legal System: the legal system operating in the country differs from what is operating in another country. This may hinder international trade as different countries enact various forms of law.
  • Cultural Problem: the multiplicity of customs and traditions of various countries can keep away businessman. The cultural beliefs and norms differ from one country to another and this have a negative impact on foriegn trade.
  • Poor Communication facilities: communication facilities which ensured the dissemination of information about trade is not well developed in some countries. This has greatly slowed down foreign trade
WHAT ARE THE PROBLEMS OR BARRIERS OF INTERNATIONAL TRADE
  • Ideological differences: Foreign trade will be affected when there is difference in opinions and political ideologies among Nations of the world. This will restrict free flow of goods amongst them.
  • Currency differences: difference in currency is a barrier to international trade. Since it involves two or more currencies, fluctuations in exchange rates and non-availability of foreign currency will impede the flow of goods.
  • Artificial barrier: the imposition of duties like tariff on goods creates barrier. Strict regulation and tariff limits the extent of foreign trade. Goods that are dispatched to other countries usually pass through some barrier. This will hinder trading activities.
  • Distance: international trade involves great distance to stop because of the distance between one country and another the cost of freight will increase. Moreover it takes several days or months before goods can be dispatched from one country to another.
  • Difference in Language: Having different languages create communication barriers. This is a major setback because there will be no effective communication between businessman from one country and another.
  • Difference in Legal System: the legal system operating in the country differs from what is operating in another country. This may hinder international trade as different countries enact various forms of law.
  • Cultural Problem: the multiplicity of customs and traditions of various countries can keep away businessman. The cultural beliefs and norms differ from one country to another and this have a negative impact on foriegn trade.
  • Poor Communication facilities: communication facilities which ensured the dissemination of information about trade is not well developed in some countries. This has greatly slowed down foreign trade. 

ABSOLUTE ADVANTAGE THEORY

In 1776, Adam Smith propounded the theory of Absolute Advantage. He said the country should specialise in the production of those goods which she can produce better and leave other countries to produce those good that she cannot produce very well. The principle states that a country should produce the goods in which it has absolute advantage is over its trading partners and import those groups in which it is actually disadvantages. For example, if a country like Malawi can produce coffee easily because it is endowed and Niger can produce palm oil better than coffee therefore, Malawi should specialise in the production of coffee while Niger should produce palm oil.

PRINCIPLE OF COMPARATIVE COST OR COMPARATIVE ADAVANTAGE THEORY

The comparative advantage theory was propounded by David Ricardo in the 19th century. He said that international specialisation is good for a nation. The law state that a country derives benefits from trade when they specialise in the production of goods in which they have the greatest comparative advantage over others and import does in which they have comparative disadvantages. A country has comparative advantage in the production of a good when it is the lowest opportunity cost of production when compared with other countries. This theory is based entirely on international specialisation in production. Some countries can produce the goods at lower cost and even efficiently than others due to certain factors like labour efficiency and quality of natural resources.

WHAT ARE THE ADVANTAGES OF INTERNATIONAL TRADE?

Increase in revenue: It provides revenue for the countries concerned. More revenue can be obtained from tariffs levied on import and export.
Efficient allocation of resources: when a country specialises in the production of a commodity in which she has comparative advantage it will lead to efficient and effective allocation of resources.
Equitable redistribution of resources: resources from one country may be of great importance to another country. International trade will ensure equitable redistribution of resources from one country to another.
Foster friendly relations and world peace: when countries trade with other countries is Foster's friendly relations among them which may bring about world peace.
Increase in specialisation: foreign trade afford a nation the opportunity of specialising in the production of goods in which she has comparative advantage. This gives rise to greater output and standard goods.
Increase in variety of goods: foreign trade brings about acquisition of variety of goods from other countries at the minimum possible prices.
Provision of employment : it creates employment opportunities as it attracts foreign investors who establish firms which employ citizens of that country.
Economic development: it leads to the importation of capital goods like machinery and automobiles which can result in economic development.

WHAT ARE THE DISADVANTAGES OF INTERNATIONAL TRADE?

  • Exploitation of poorer Nations: in foreign trade foreign Nations may be exploited by Richard countries in the area of price determination and quality of goods.
  • Discourages self-reliance: if importation is encourage people may be accustomed to foreign goods. This will lead to dependence and ultimately discovered self-reliance.
  • Leads to unemployment: infant industry may not be able to restart the competition from foreign companies. This may lead to the collapse and mass treatment of workers.
  • Leads to dependence: Foreign trade can bring about over dependence on foreign goods at the detriment of home made goods. For instance, Nigeria now prefer imported goods to locally-made goods.
  • Importation of dangerous goods: through international trade dangerous goods live hard and expired drugs may be imported into the country this good may create health hazard to the people.
  • Unfavorable balance of payments: a country may import more than what she exports. This will create a favorable balance of payments. Balance of payment deficit is a situation whereby a country's payment are more than her receipts.
  • Encourages dumping of goods: international trade and colleges dumping of goods full-stop some countries especially developed countries are capable of producing goods in large quantity. Surpluses as sold to less-developed countries at low prices compared to local prices.
  • Excessive production: in foreign trade which country specialises in what she has comparative advantage. This will increase with output while cost per unit will reduce. Countries we want to produce more and subsequent increase in production might lead to excessive production.
ECONOMIC INTERATION

ECONOMIC INTEGRATION IS A CONDITION OF INTERNATIONAL TRADE IN WHICH VARIOUS NATIONS WITH THE SAME ECONOMIC POLICIES AND IDEOLOGIES COME TOGETHER AND FORM AN ORGANISATION WITH A COMMON INTEREST WHERE ALL THE TRADE BARRIERS AND RESTRICTION AND REMOVED. THE MEMBER COUNTRIES STAND TO BENEFIT GREATLY FROM THIS UNION IN TERMS OF SPECIALISATION, WIDE SPECTRUM OF INVESTMENT AND EXCHANGE OF IDEAS. ECONOMIC INTEGRATION BRINGS ABOUT FASTER ECONOMIC DEVELOPMENT AND GROWTH AMONG THE MEMBER NATION'S

FORMS OF ECONOMIC INTEGRATION

  • Free trade area: this is a trade integration whereby a group of countries are green not to impose any kind of duties on imports from other members of the group. However each country may retain its own tariff rates against non-member countries. Examples of this form of economic integration is the European Economic Community (EEC) which was formed by Belgium, the Netherlands and Luxembourg immediately after the second World war.
  • Custom unions: this is another form of free trade or economic integration whereby a group of countries with a common external tariff work together. In 1833, Prussia and some of the smaller German states came together to form Customs Union. The year 1922 also saw and other formation by Belgium and Luxembourg. After the second world war, this Union was enlarged to accommodate more members such as the Netherlands. The Union was named Benelux.
Many other custom unions were formed after Benelux. For instance, Organisation of European Economic Co-operation (OEEC) saw the inclusion of West Germany, Italy and France. Others include; the European Free Trade Association (EFTA), the Latin American Free Trade Area (LAFTA).

The difference between a free-trade area and custom Union lies in the method of imposition of tariff rates. In a free-trade area, members are free to impose different tariff rate on non-member countries while in customs Union, all the members apply the same or a common tariff on non member countries.

The principle of comparative cost is the economic basis of these associations which is resting on the fact that if obstacles to international trade such as tariffs and removed or reduced, there will be increased in total output.

  • Common market: common market is a form of economic integration which operates like custom Union Berlin aiting all kind of trade barriers and restrictions while adopting a common external tariff and allowing free movement of labour and capital among the member Nations. The European economic Community (EEC) is an example of a common market.
  •  Economic Union: this is another form of economic integration with the sole objective of total economic integration of all the member Nations by removing completely any form of tariff within their boundaries while adopting a commentary for countries outside the organisation. The cardinal objective of economic Union is a total unification of currencies, monetary and fiscal policies as well as tax policies. Organisations such as EEC, ECOWAS, e.t.c have been striving hard for this form of economic relationship within their sub-regions, but so far, none has been able to attain this level of economic integration.

OBJECTIVES OF ECONOMIC INTEGRATION

  • To ensure economic growth and development.
  • To remove trade barriers.
  • To Foster cooperation.
  • To bring about industrialisation.
  • To exchange ideas.
  • To create common tariffs.
  • To bring about trade expansion.
  • To create employment.TTo ensure competition.
PROBLEMS OF ECONOMIC INTEGRATION

  • Political Instability: most African countries have been under severe political problems which tend to create political instability and this situation does not allow free flow of trade.
  • Lack of Adequate Infrastructure: This makes it very difficult for smooth economic integration.
  • Unequal Development: inequality in development among the participating member country has made it greatly difficult to attain a proper economic integration in the African sub-region.
  • Difference in Economic and Political Ideologies: differences in Economic and political ideologies most of the time create conflict between member countries.
  • Physical and monetary differences: this is another problem confronting economic integration.
  • Divided loyalty: member countries are members of order parallel organisations and distance to create division in their loyalty to economic integration.
ECONOMIC INTEGRATION IN AFRICA

The African continent was able to form some economic cooperation even during the colonial era. The economic relationships were established in order to foster peace and unity within the African continent. Although such organisation were tied to the influence of colonial manipulations, they were still able to protect their economic interests. After the Independence of most African countries, the need for Economic integration became paramount in order to continue to foster peace and unity, Economic growth and Economic development within the African continent. The economic organisation that came into being include; the French West African Customs Union, West African Union Economic Community of west African states (ECOWAS) and the East Africa Common Market which has since been dissolved.

TERMS IN INTERNATIONAL TRADE

  1. Imports: Imports are goods and services bought from other countries. Imports are therefore of two types: Visible Import and Invisible imports.
  2. Exports: Exports refers to goods and services sold to other countries. Exports could therefore be Visible and Invisible.
  3. Terms of trade: The terms of trade refers to the rate at which a country's exports are exchange for its imports. It is expressed as a relationship between the prices a nation receives for its export and the prices it pays for imports. It is the price ratio between export and imports.

It is measured by using the formula:

Index of terms of trade = Index of a erage export prices/ Index of average import prices × 100

4. Balance of trade: The balance of trade shows the relationship between the total value of visible imports and visible exports of a country during a given. Usually one year. It shows the relationship between the total value of goods sold to and brought from other country by a country during the given period. This is also called the visible trade balance.

5. Free trade: Free Trade refers to international trade conducted without artificial restrictions. There no custom duties, quotas, embargoes, e.t.c. Thereby enabling the forces of demand and supply to walk freely. There is perfect mobility of commodities are factors of production between countries.

6. Infant industry: infant industries are Young or newly established countries. what industries are at the development stage and sold their products are not in a position to compete effectively with the product of the long-established industries of the economically advanced countries.

7. Balance of payments: the balance of payments is a summary statement of account of all a country's economic transactions with the rest of the world during a given, usually one year.

8. Current Account: the current account deals with payments and receipts for currently produced goods and services.

9. Capital Account: the capital account deals with the capital inflows and outflows with respect to a country during a given accounting period, usually one year. It shows the actual transfer of money or capital for investment during the period.

10. Balance of payments deficit: there is a balance of payment deficit if the total payment of a country to other countries on the combined current and capital account exceed her receipts from other countries, within a trading period, usually one year. In this situation, the reporting country has a weak financial standing in the international trade transactions especially the deficit persists for a long time.

11. Balance of payment surplus: there is a balance of payments surplus when the total receipts from all other countries on the combined current and capital account exceed the total payment to other countries during the given training period. In this situation, the reporting country is financially strong in its international trade transactions.

12. Balance of payment equilibrium: there is equilibrium if the total receipts from other countries equals total payments to other countries.

13. Devaluation : devaluation is a deliberate and legally prescribed reduction in the value of a country's currency in relation to the currencies of other countries and two gold. It increases import prices and reduced export prices. Therefore; export become relatively cheaper than exports. Devaluation can therefore be described as a deliberate worsening of the terms of trade in order to correct a fundamental balance of payment deficit. The use of devaluation is a last resort measure.

Example of currency devaluation

Let us assume that the initial exchange rate of the Nigerian naira and the American dollar is #1.00 = $2.00. this means that a Nigerian importer would spend $800.00 to buy 40 radios that cost $20.00 each from the United States. Total US dollars (foriegn currency) required = $200 × 40 = $800.00. Since the exchange rate is one naira equals $2.00, the total amount of naira can be calculated as follows: $2.00 = #1.00

Therefore; $800.00

= 800/2 = #400.00

This means that a Nigerian importer will spend $400.00 to import the 40 radios.

If Nigeria devalues her currency by 100%, the new exchange rate would be #2.00 = $2.00. That means that it is now going to cost in Nigerian importer twice what it was before to buy the same number of radios i.e. #800.00.

14. Foriegn exchange rate: foreign exchange rate is the rate at which one currency in exchange for another. It is the price of one currency in terms of another.

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