So far in the
previous units, we have examined domestic economic problems and noted that the
Government
has monetary and
fiscal policies at its disposal for dealing with them. The technicalities of
these policies have
been considered in
the previous units, but the extent to which they are effective is frequently
limited by the
repercussions they
may have on the external trading position of the country.
Historically,
International trade has been in existence since ancient times. Even in the
Bible, references
were made to trading
activities between different countries. Mention was made in the book of Genesis
of
sons of Jacob who
went to Egypt to buy grains. With increase in civilisation and travelling added
to the known
benefits of
specialisation and division of labor, International trade among countries of
the world has even
increased
tremendously.
Although early
writers recognize d the existence of International Trade they felt that it was
not much
different from
domestic trade to warrant the existence of a separate theory. The fist
economist to propound
the classical theory
of International Trade was Adam Smith in his much celebrated work published in
1776
and titled “An
Inquiry into the Nature and causes of the wealth of Nation” other classical economists
that
helped publicise the
theory included David Ricado, John Stunt Mill, Alfred Marshall and others.
While trying to
demolish the classical proposition for a separate theory, Ohlin (1933) argued
that
“International Trade”
should be regarded as a special case within the general concept of
International Economies.
He further argued
that nations engage in trading for the same reasons for which individuals or
groups
within the country
trade with each other instead of each one producing his own requirement. That
reason is
that they are enabled
to exploit the substantial advantages of division of labor to their mutual
advantage.
Trade between
different countries developed first where one country could produce something
desirable
which others could
not. International Trade, therefore, owes its origin to the varying resources
of different
regions.
Concepts, Reasons and Importance of International Trade
International Trade
refers to the buying and selling of goods and services between countries e.g.
between
Nigeria and the Noted
States of America, Ghana or Britain, etc.
In other words the
term “International Trade” refers to the exchange of goods and services that
take place
across International
Boundaries.
International Trade
also is simply defined as the trade across the borders of a country. This may
be
between two
countries, which is called bilateral trade or trade among many countries called
multilateral
trade.
International Trade
is also referred to as International specialization or International division
of labor.
The essence of
International Trade is to enable countries obtain the greatest possible
advantage from the
exchange of one kind
of commodity or another.
International Trade
is across the borders involving different nationalities with different
languages and
currency. e.g.
Nigeria and England.
Vaish (1980:589-592)
observed some distinguishing special features of International Trade. One of
those
salient features
according to Vaish (1980) is the immobility of factors of production. The fact
remains that in
recent times,
international movement of factors of production is subjected to much
restriction while domestic
factor mobility has
been on the increase with increase in means of transportation and
communication. Thus,
this is a difference
enough to indicate or distinguish between domestic and International Trade.
Another
distinguishing feature is the presence of single currency in domestic trade and
multiplicity of
currency in
international trade.
The third feature of
International Trade that makes it distinct is the controls and regulations
inherent in the
existence of
boundaries. Such controls take the form of import restrictions, protectionism,
custom duties and
other controls, which
do not exist, in domestic trade. Critics cannot disprove the fact that both the
payment
and every aspect of
international trade are highly controlled.
The next difference
is the presence of linguistic, cultural and political differences between the
people of
one country and those
of another international trade. Although critics argue that language and
cultural barriers
can still be present
in domestic trade in a country with more than one official language and
cultures, the
fact still holds that
people from the same country tend to have a way of understanding themselves
more even
when their cultures
and languages differ. This makes the domestic trade to have less barriers than
international
trade.
The fifth point to
consider is the difference in geographical and transportation, more complex and
costlier
whether by land, sea
or air in international trade. The packaging, insurance, banking and other
processes
involved in
international trade do not apply in the national or domestic trade.
Other differences
include differences in the legal systems of various countries, difference in
customer
demands and also the
issue of balance of payment.
From the foregoing,
it becomes clear that even when there are some similarities in home and foreign
trade
they are not exactly
the same. It needs be stated, however, that both types of trade are not
independent of
each other. Both
domestic and foreign trade helps to satisfy the needs of the citizens of a
country.
No country in the
world produces all that her people need. Thus, International Trade is as
important as
domestic trade if not
more.
Nations trade with
each other due to the following reasons:
(a) Necessity: - No country is
self-sufficient which means that they have to buy from other countries
those things they
cannot produce.
(b) Because of the
uneven distribution of National resources: National resources are not distributed
evenly in all
countries e.g. in Nigeria we have oil, tin, coal, etc., but Ghana has Gold,
etc. Different
countries have
different mineral resource endowment. Such mineral deposits include coal, tin
ore, oil,
gold, lead, etc. A
country largely supplies of one but with less of others, hence such a country
will trade
with countries that
have such so as to obtain the one she does not have.
(c) Differences in
climate: Some crops can only do well under certain climatic conditions e.g.
tropical
crops such as cotton,
cocoa, etc., will not do well in Temperate zones and vice versa. Many
commodities,
particularly
agricultural products are produced under different climatic conditions.
Tropical countries
produced Cocoa, palmoil
products, rubber, etc., while variation of diary products are produced in
the temperate
regions, hence the need to exchange.
(d) The existence of
special skills in some countries: Some countries have acquired worldwide reputation
at making certain products
e.g. Switzerland is known for making watches. Japan is known for
making electronics,
etc.
The inhabitants of a
region may develop a special skill for the production of a commodity, which in
time
may acquire a special
reputation for quality. Wines such as champagne sherry, port, chianti owe their
distinctive qualities
partly to the special flavour of locally grown grapes and partly to the local
method
of manufacture,
Scotch and Irish Whisky have similarly acquired distinction.
By exchanging some of
its own products for those of other regions, a country can enjoy a much wider
range of commodities
than otherwise would be open to it.
(e) Differences in
tastes: Countries have to import different or some commodities required by
citizens
which they cannot produce
in great quantities e.g. manufactured goods, shoes, plastics.
(f) Differences in
Industrial development and the level of Technology: The more advanced
countries
are developed both
industrially and technologically hence the developing nations have to import
most manufactured
goods from them.
The advanced
technology in most of the developed countries enable them to produce a good
number of
machines and
equipment, which the less developed countries could not produce. By trading
they can
exchange.
(g) Access to
Capital: International Trade enables countries with limited capital to
either borrow from
capital rich
countries or attract direct investment into the countries and thus enjoy the
benefits of
imported capital and
technology.
Classical Theories of International Trade
The classical
economists led by Adam Smith and David Ricardo presented two important
explanation to
justify International
Trade. One is the absolute cost difference in production of various commodities
at different
countries. The other
argument, which in fact incorporates the first, is the theory of comparative
advantage.
Absolute Costs
Differential Argument: This argument holds that where one country can produce a given
commodity at a lower
absolute cost than another both countries will benefit more from international
trade by
allowing the country
that can produce it at a lower absolute cost to specialise in this production
while the other
country buys from
them.
According to Smith
(1776), trade between two countries will take place if each of the two
countries can
provide one commodity
at an absolute lower cost of production than the other country because of the
difference
in absolute cost and
the absolute advantage that one has over the other.
Samuelson (1982:627)
used the term “diversity in conditions of production” to present the argument
for
absolute cost
differential. In line with this, Vaish (1980) sees the superiority of one
country in the production
of a commodity, as
being also her comparative advantage in the production of that commodity.
The Theory of
Comparative Advantage: Based on the absolute cost difference explanation, international
trade will only be
beneficial when one country can produce a commodity at a lower absolute cost or
more efficiently than
another. There may be a situation where one of two countries can produce all
commodities
at a cheaper rate
than the other. The theory of comparative cost also known as the theory of
comparative
advantage, holds that
as long as there is a variation in the degree of efficiency at which one
country produces
various commodities
as compared to another, both countries will benefit from engaging in
international trade.
Samuelson (1982)
explained this theory with the simple example. He likened that example to
countries and
concluded that the
key word “comparative” implies that each and every country has both definite
“advantage”
in some goods and
definite “disadvantage” in other goods. According to him, international trade
is
mutually profitable
even when one of the countries can produce every commodity more cheaply in
terms of
labor or all
resources than the other country.
The theory of
comparative advantage centers on international specialisation and international
division of
labor, it was
originally popularised by David Richardo.
Lepsey (1986) also
agreed that specialisation will help people learn by doing which in turn leads
to greater
efficiency in
production.
The theory of
comparative advantage supports the principle of free trade among nations. It is
only on that
condition that Specialisation
would be beneficial to a country. It only emphasises that those industries
should
shift to the area
where the country has a comparative advantage.
Advantage of International Trade
Basically, trade
between nations become necessary for the same reason that an individual engages
in trade
with another. No
nation is so independent that it produces within its borders all that her
citizens need. Butressing this point, Vaish (1981) observed that “since the
creation of earth its inhabitants, natural resources and man’s innate abilities
were not uniformly apportioned by the Almighty God to all parts of the globe
and to all persons and since techniques of production do not advance at equal
rates among all nations, regional specialisation in production offers ample
scope for international trade.
International trade
is, therefore, of much benefit to both consumers in term of improved
satisfaction and
living standards, the
country and the word in general in terms of better utilisation of the world
resources and
increased
international understanding, which helps to promote world peace.
One of the
outstanding benefits of international trade is that it encourages international
division of labor
and specialisation,
which in turn increases the wealth of the nation.
By encouraging
specialisation, more goods and services are produced, and at reduced prices.
This reduces
the monopolistic
tendencies of local suppliers. International Trade also make it possible for
each
county to have access
to world’s raw materials and other resources, which the Almighty God had
distributed
unevenly to various
countries.
Ahukannah et al (1992:45)
pointed out that foreign trade makes possible the importation of machinery and
spare parts needed
for local production and for the operation of local industries.
Oyebola (1977:154)
also added that “under international trade, there is a free movement of skilled
labor
between different
countries of the world”. As we know, in developing countries like Nigeria,
local industries
still depend on technological
transfer from the developed countries, without international trade, this will
not be
possible. It,
therefore, accelerates economic development, especially the developing world
where modern
equipment can be used
for industrial and agricultural purposes. The developing world gains in
technical
knowledge from the
more advanced world. International Trade attracts foreign investment to
Nigeria.
International trade
provides revenue for the countries concerned. In Nigeria for example, import
and
export duties form a
great percentage of the total revenue from taxes.
Another advantage of
international trade is that it provides employment for many inhabitants of the
countries
concerned. For
example, many people in West Africa are engaged in importation and exportation
of
goods.
Disadvantage of International Trade
Despite all the
advantages of trade between countries, it is criticised on the basis of some
observed disadvantages.
1. Any nation that is
solely dependent on the sale of a single major product is liable to adversities
of a
decline in world
demand for the product e.g. the monoeconomies of Nigeria and Ghana which
depends
solely on crude oil
and cocoa respectively.
2. Economically,
weaker nations are likely to be dominated by the more advanced countries of the
world.
West African nations
are subjected to economic subservience by their former colonial masters.
3. International
trade leads some nations not to make serious efforts to be self-reliant.
4. International
trade can also lead to over-production of goods and services, which can rise to
depression.
5. It breeds
mistrust, suspicions, jealousies and unhealthy competition among countries and
these have
often accounted for
wars and other forms of unrests in the world.
6. Over-dependence of
some countries on others for the supply of some products may result in lack of
development of
knowledge and skill along the lines of the dependant nations. In times of war,
dependent
nations economically
can be at great disadvantage.
7. Some economies
concentrate on the production of certain commodities at the expense of many
essential
ones. It could be a
source of handicap in times of war. This is because the other country can place
an embargo on these
goods that the nation highly depended upon.
8. The next argument
is that international trade can stifle local industries and cause unemployment
to
result from such
industries. It is also said to cause economic instability because the economic
problems
of a supplier country
may affect the buyer country. Moreover, goods that are currently imported at
lower prices can rise
in prices in the future.
Restrictions to International Trade and Specialisation
Barriers to
international trade could be both natural and artificial. These barriers
include:
(a) Linguistic or
Language Barrier: All over the countries of the world, different languages are
spoken.
For instance, in
France, they speak French, in Britain they speak English, in Spain they speak
Spanish
while in Nigeria the
official language is English in addition to numerous other local languages. The
problem of
communication arises when different languages engage in trade. However with
Western
education and the
increased use of English Language all over the world, this natural barriers is
being
broken.
(b) Distance Barrier:
Nations
are thousands and millions of kilometers apart. This delays messages or
goods involved in
foreign trade. However, the development of modern communication system like the
telephone and modern
transport systems has helped to minimise this natural barrier.
(c) Religious
Barrier: Religion also poses a barrier in foreign trade. For instance, in
West Africa, cow
meat is a good source
of protein but in some parts of India and other Asian Countries, cow meat is
forbidden. This can
go a long way in hindering the development of foreign trade, especially when
people
are dogmatic and
fanatical about their beliefs and religious practices.
(d) Communication
Barrier: In many developing countries, telephone and the telex system are
not
International Trade
79
developed while the
existing ones are poor, inefficient and inadequate.
(e) Transport
Barrier: Many developing nations have very poor and inadequate transport
systems and
network such as
inaccessible roads, under developed maritime system and poor airport services
constituting
delays in
international transactions.
(f) Currency
differences Barrier: Each country uses its domestic currency in domestic trade. For
instance,
in Nigeria, naira is
used, in Ghana, cedi is used, in Britain the British sterling or pound is used
while in America, the
American dollar is used. Most of these local currencies are not convertible
currencies and cannot
be used in the settlement of international transactions. This poses the problem
of
being involved in
securing foreign exchange involving convertible currencies such as the US
dollar,
the pound sterling.
(g) Measures and
Weights Barriers: Technical problems arise since different countries use different
units of measures and
weights. For instance, Nigeria has gone metric and hence uses metres, etc., as
well as grammes,
kilogrammes, etc. However, some other nations she trades with still use yards,
feet,
and inches as well as
ounces and pounds.
(h) Traditional
differences Barriers: The traditions and customs of different countries differ and these
may pose a problem to
foreign trade.
(i) Ideological
differences Barrier: The countries in the Western bloc practice capitalism while those
in
Eastern bloc used to
practice socialism, capitalism or mixed economies. Many a time, these
ideological
differences pose a
great obstacle to foreign trade since nations under different idealogical
learnings
may refuse to trade
with each other. Where they do trade at all, a lot of caution and restrictions
are
adopted.
(j) Economic
Independence/Self-reliance barrier: Many countries today want to be economically
independent and
self-reliant so that they reduce their participation in foreign trade even when
they do
not have comparative
cost advantage in the goods they produce in as much as this is a good policy.
It
can limit or hinder
foreign trade.
(k) Protectionist
Policy Barrier: Many countries take measures to protect their economies from
dumping
from overseas or to
protect strategic sectors of their economy such as agriculture. This limits the
extent of foreign
trade.
(l) Trade Inbalance
Barrier: When many developing nations experience continuous trade inbalance
with some advanced
nations, there is the tendency to limit their imports from those nations so as
to
improve their balance
of trade and hence balance of payments.
(m) Foreign Exchange
barrier: Many developing nations such as Nigeria lack enough foreign
exchange
to purchase foreign
goods. Such nations will thus reduce imports and hence their participation in
foreign
trade.
(n) Credit Shortage
barrier: In many countries, credit facilities are inadequate or lacking
such that there
is not enough money
to engage in external trade.
(o) Artificial
Barriers: Government also takes measures to restrict foreign trade. Such
measures include
the imposition of
custom duties, import and export duties placing bans on some goods, placing
quantitative
controls or quotes
exchange controls, and non-tariff barriers, etc.
Factor Mobility: Factors of production, especially labor, are not mobile. Raw
materials are subjected
to controls which
include sanctions. If factors of production are not mobile, specialisation is
limited to
the extent of
international restrictions.
Imperfect competition between countries: Sometimes there is
opposition from groups with vested
interest. This prevents
free trade among nations and makes difficult the operation of the comparative
advantage principle.
Multi-lateralism: The theory of comparative costs assumes trade to be bilateral,
that is between two
countries that
specialise. The real world, however, is a system of multi-literalism in which
many countries
trade with one
another at the same time. Among countries that produce cheaply, some may have
greater advantage
over others, while some countries may prefer to buy from one country rather
than
from one another.
This factor sometimes leads to an unfavorable balance of trade for countries that
import more than they
export to other countries.
Instruments of Foreign Trade Protection and Promotion
In an ideal world in
which the principle of comparative costs specialisation is practiced, there is
free trade and
no duty is placed on
traded goods. Almost all countries around the world impose some form of
restrictions on
the flow of
international trade. Despite the advantages of foreign trade, different governments
place restrictions
on it. These
restrictions take different forms as described below:
(a) Import Duties of
Tariffs: These are charges or taxes levied by the government on goods
imported
into the country. The
major objective of imposing such duties is to raise revenue or to restrict the
importation of the
concerned goods.
(b) Export Duties or
Tariffs: These are charges of taxes levied by the government on goods
exported out
of the country. It
may be to raise revenue or to discourage the exportation of certain commodities
that
are in short supply
locally.
(c) Import Quotas or
Quantitative Restrictions: These are direct restriction on the quantity of goods
that can be bought
into the country. This limits importation. Embargo is also a form of quantitative
control.
(d) Exchange Control:
This
includes the rationing of foreign exchange available for purchases e.g. through
import licencing or
through the foreign exchange market (FEM). Exchange control measures specify
the value of foreign
exchange.
(e) Non-Tariff
Barrier: This may take the form of administrative practices, such as
deliberately channelling
government contracts
to home companies even where their tenders are not competitive or insisting
on different
technical standards.
(f) Total Ban: This involves placing
total ban on the importation of certain commodities, especially harmful
and non-essential
goods. It may also be to encourage the local production of such goods and save
foreign exchange e.g.
Nigeria has placed total ban on the importation of wheat (before December,
1992) barley,
vegetable oil, etc. Occasions may also arise when the government places total
ban on the
exportation of
certain commodities to meet local demand. For instance, in January, 1988. The
Federal
Government of Nigeria
banned the exportation of certain grains such as maize.
(g) Export Promotion
Incentives/Subsidies: Nations such as Nigeria (since 1986) give export promotion
incentives in order
to stimulate non-oil exports to earn longer foreign exchange. This reduces
hitherto imported
items. Standards and complex customs regulations such as import deposit schemes
and pre-shipment
inspections are trade protection measures.
The Case for Free
Trade
Free trade on its own
refers to an open door trade policy which encourages free flow of foreign goods
and
services without any
barrier. It is, therefore, the absence of protectionism. According to Adam
Smith, free
trade policy is “ a
system of commercial policy which draws no distinction between domestic and
foreign
commodities and thus
neither impose additional burden on the latter nor grants any special favor to
the
former” Vaish
(1980:644).
The major argument
presented for free trade is that it will make the maximisation of world output
possible
by encouraging each
country of the world to specialise in the production of those commodities in
which they
have a comparative
advantage.
Furthermore, such
specialisation will lead to a more efficient utilisation of the world
resources. This in turn
will lead to cheaper
imports. It does this by encouraging perfect competition, which safeguards
consumers
from monopolistic
tendencies of local producers.
According to Haberler
(19509:4-10) free trade encourages the economic development of under-developed
countries. It does
this by enabling them to import capital goods machinery and essential raw
materials,
and also to import
the technical know-how managerial talents, and entrepreneurship from developed
countries.
It also serves as a
carrier for international capital movement and promotes free competition in
those
countries.
The Case for
Protection
Why Nations impose
Restrictions on Foreign – International Trade.
(a) Infant Industry
Argument: Nations impose restrictions in order to protect new or infant
local industries
from foreign
competition with respect to long-standing but similar large industries.
(b) Revenue Argument:
Nations
impose duties or restrictions in order to earn enough revenue to execute
other projects
locally. This is particularly so in the case of the imposition of import
duties.
(c) Balance of
Payments Arguments: Some countries impose restrictions to improve their balance of
payments via import
restrictions or to correct balance of payments deficits. Measures taken here
include those which
restrict imports and stimulate.
(d) Anti-dumping
Argument: Countries take measures to prevent the dumping of cheap
commodities in
their countries.
(e) Employment
Stimulation Argument: Restrictions are also used as a deliberate instrument of planning
to stimulate
employment. This is done by encouraging local production of hitherto foreign
imported
goods by businessmen.
(f) Changing Pattern
of Consumption Argument: The government also imposes restriction to discourage
the consumption of
some commodities which are either considered harmful or non-essential. Those
considered harmful
are meant to protect the health of the nationals while the non-essential but
expensive
ones are placed on
restrictions to change consumption pattern while generating revenue to the
government as well as
redistributing income.
(g) Bargaining Power
Argument: Some countries also impose restrictions on foreign trade in order
to
have bargaining power
during negotiation at trade conferences.
(h) Self-Sufficiency
Argument: Some countries impose restriction on certain goods to enable them
to be
self sufficient in
the production of those commodities. This helps to eliminate or reduce foreign
domination
and neo-colonialism.
(i) Self-Reliance
Argument: Some nations tend to rely on their abilities, initiatives and
resources in the
production of certain
commodities hence they impose restrictions on certain goods.
(j) Recovery from
Depression Argument: During periods of economic depression when there is low
economic activity and
rising unemployment, imports are usually restricted to stimulate the domestic
economy.
(k) Strategic Sectors
Argument: Strategic tariff could be imposed to protect some strategic
sectors of
the economy such as
industries whose products may be essential in times of war or international
crisis.
Also protection given
to agriculture in most developing nations even when comparative costs are high
compared to other
nations could be seen as a measure to protect a strategic sector of the
economy.
Conclusion
When trade takes
place within the borders of a country, it is said to be home trade, domestic
trade or internal
trade. But, when
trade takes place beyond the boundaries of a country, it is said to be foreign,
external or
international trade.
International Trade is the trade between one country and another.
The most obvious
reason for trading with other countries is to obtain goods which cannot be
produced in
our country or can
only be produced at great expense. Climatic and geological differences account
for a
proportion of
International Trade. Less obviously perhaps, differences in the skills of labor
and in accumulation
of capital account
for some of the exports of the wealthy countries. It was differences in factor
endowments that
underlay the traditional pattern of world trade.
The basic explanation
underlying International Trade is to be found in the “Law” of comparative
costs.
This shows that trade
will be beneficial to a country if it concentrates but not necessarily
specialise entirely on
the production of
those goods in which it has the greatest relative advantage over its trading
partners.
Economists have
frequently praised the virtues of free trade- trade unhampered by any
artificial barriers
such as tariffs and
they have seen it as a means of inducing the most economic allocation of
resources.
Despite this, all
Governments take steps to reduce the volume of imports entering their country,
or exports
leaving their
country. They do this for a variety of reasons and in the certain knowledge
that they invite
retaliation from
their trading partners. There are a number of ways of protecting the home
economy from
overseas competition.
Those most frequently used include the following: Tariffs, subsidies,
Quantitative restrictions,
non-tariff barriers,
exchange controls.
We may conclude that
there are frequently important economic and social strategic reasons for the
protection
of home industries.
Summary
In this unit, we have
tried to look at the concept and importance of International Trade, the
theories of
absolute and
comparative advantages, the issues of protectionism and free trade, briefly.
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