Foreign Trade: Definition, Types of Foreign Trade

Foreign Trade DefinitionForeign trade is the exchange of capital, goods, and services across international borders or territories.

In most countries, it represents a significant share of gross domestic product (GDP). Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system.

Increasing international trade is crucial to the continuance of globalization. International trade is a major source of economic revenue for any nation that is considered a world power.

Without international trade, nations would be limited to the goods and services produced within their borders.

What is Foreign Trade?

Foreign trade is the exchange of goods across national boundaries. Prof. J.L. Hanson said, “An exchange of various specialized commodities and services rendered among the corresponding countries is known as foreign trade.”

Foreign trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade does not change fundamentally depending on whether a trade is across a border or not.

The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays, and costs associated with country differences such as language, the legal system, or a different culture.

Foreign trade is all about imports and exports. The backbone of any foreign trade between nations is those products and services which are being traded to some other location outside a particular country’s borders.

Some nations are adept at producing certain products at a cost-effective price.

Perhaps it is because they have the labor supply or abundant natural resources which make up the raw materials needed. No matter what the reason, the ability of some nations to produce what other nations want is what makes foreign trade work.

Types of Foreign Trade

Types of Foreign Trade

  1. Import

Importing is the purchasing of goods or services made in another country. For example, importing edible oil from Chinese producers to sell in Africa.

  1. Export

Exporting is selling domestic-made goods in another country. For example, Hameem Garments exports Readymade Garments (RMG) products to Western Countries.

  1. Re-export

When goods are imported from a foreign country and are re-exported to buyers in some other foreign countries, it is called re-export.

For example, Firm/ Readymade Garments located at EPZs imports raw materials (cotton) from Korea and produces Readymade Garments products by Thai cotton and then those products to Canada.

Reasons / Need / Importance / Advantages of Foreign Trade

The following points explain the need and importance of foreign trade to a nation.

  1. Division of Labor and Specialization

Foreign trade leads to the division of labor and specialization at the world level. Some countries have abundant natural resources.

They should export raw materials and import finished goods from countries which are advanced in skilled manpower. This gives benefits to all the countries and thereby leading to the division of labor and specialization.

  1. Optimum Allocation and Utilization of Resources

Due to specialization, unproductive lines can be eliminated, and wastage of resources avoided. In other words, resources are canalized for the production of only those goods, which would give the highest returns.

Thus there is rational allocation and utilization of resources at the international level due to foreign trade.

  1. Equality of Prices

Prices can be stabilized by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilizes the prices, making allowances for transport and other marketing expenses.

  1. Availability of Multiple Choices

Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world.

  1. Ensures Quality and Standard Goods

Foreign trade is highly competitive. To maintain and increase the demand for goods, the exporting countries have to keep up the quality of goods.

Thus quality and standardized goods are produced.

  1. Raises Standard of Living of the People

Imports can facilitate the standard of living of the people. This is because people can have a choice of new and better varieties of goods and services.

By consuming new and better varieties of goods, people can improve their standard of living.

  1. Generate Employment Opportunities

Foreign trade helps in generating employment opportunities by increasing the mobility of labor and resources. It generates direct employment in the import sector and indirect employment in other sectors of the economy.

Such as Industry, Service Sector (insurance, banking, transport, communication), etc.

  1. Facilitate Economic Development

Imports facilitate the economic development of a nation. This is because, with the import of capital goods and technology, a country can generate growth in all sectors of the economy, agriculture, industry, and service sector.

  1. Assistance During Natural Calamities

During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the problem of shortage of essential goods.

Foreign trade enables a country to import food grains and medicines from other countries to help the affected people.

  1. Maintains Balance of Payment Position

Every country has to maintain its balance of payment position.

Since every country has to import, which results in an outflow of foreign exchange, it also deals in export for the inflow of foreign exchange.

  1. Brings Reputation and Helps Earning Goodwill

A country which is involved in exports earns goodwill in the international market.

For example, Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic goods.

  1. Promotes World Peace

Foreign trade brings countries closer. It facilitates the transfer of technology and other assistance from developed countries to developing countries. It brings different countries closer due to economic relations arising out of trade agreements.

Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themselves.

Features of Foreign Trade (Export/ Import)

  1. Import dependency (our country foreign trade depend on import because of high demand and low supply),
  2. Import capital goods and industrial goods,
  3. Export of readymade garments (RMG), RMG and Knitwear 74% export,
  4. Export of agricultural raw materials and products,
  5. Unfavorable balance of payment ( More import but less export),
  6. Operate most business by sea/ocean,
  7. More import from Asia (China, Singapore, India ) and export in Western countries (USA, England),
  8. Government initiation and control (By TCB and EPB govt control foreign trade and operate helpful initiative),
  9. Export of jute and jute goods,
  10. Export of manpower,
  11. Private initiative,
  12. Diversity of import goods (necessary goods and unnecessary luxurious goods ).
  13. Effect of free trade economy (for open market economy unnecessary luxurious goods are imported in our country, and our country’s money went to another country)
  14. Business with all countries.

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