Module in BAC C 6: International Trade and Agreements

Module 1
Introduction to International Trade

Overview
In this module, you have to learn the meaning of International trade, the brief
historical development of International trade, the reasons why countries are
engaged in International trade. The unit has also introduced you to the role of
International trade in a countries economy, the prevailing problems affecting
International trade and how it is differentiated from International business.

Outcomes
Upon successful completion of this module, you should be able to:
• Define and explain international trade
• Examine the nature and scope of international trade.
• Briefly trace the historical development of international trade
• Discuss the basic concepts and reasons for international
trade.
• Examine the comparison between international trade and
international business.
• Identify the prevailing problems of international trade
• Explain the various forms of international trade

Lesson Subject Matter or Concepts to be learned

- Definition and Meaning of International Trade
- The Nature and Scope of International Trade
- Brief Historical Development of International Trade
- Basic Concepts and Reasons for International Trade
- Reasons for International Trade
- International Trade and International Business Compared
- Forms of International Trade

International trade and production are a way of life for business managers today.
All over the world large numbers of business people find that foreign trade is an
importance part of their total activities countries rely on foreign countries for much
of their raw materials or sell a significant portion of their output abroad.
International trade makes available a range of materials and process that could not
conceivably exist in one restricted.

Webster’s New encyclopedic dictionary defined trade as exchange, interchange or

barter.

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International trade therefore means the commercial transaction or exchange that

occurs between two or more countries.
Countries trade because they are different from each other. Countries can benefit
from their differences by reaching arrangement in what each does or naturally
endowed.

International is different from domestic trade which takes place within a country
and uses local currency.

DEFINITION AND MEANING OF INTERNATIONAL TRADE

- International trade is the exchange of capital, goods and services across

international borders or territories. International trade is the trade that takes
place between one country and other countries. i.e. it is a trade transaction
that takes place between one or more countries. It is different from domestic
trade which takes place within a country and uses local currency.
- International trade involves the use of international currency(ies) and to
obtain this, one has to go through some procedures.
- Czinkota et.al. defined international trade to consists of transaction that are
devised and carried out across national borders to satisfy the objectives of
individuals and operations.
- International trade uses a variety of currencies, the most important of which
are held as foreign resent by governments and central banks.

THE NATURE AND SCOPE OF INTERNATIONAL TRADE

- In most countries, international trade represents a significant share of Net
National product and Gross Domestic Product.
- International trade as the meaning implicate has been presented throughout
much of history, its economic social and political importance has been on the
rise in recent centuries.
- Industrialization, advanced transportation, globalization, multinational
corporations and outsourcing are all having a major impact on the
international trade continuance of globalization. Without international trade,
nations would be limited to the goods and survives produced within their own
borders.
- International trade is, in principle, not different from domestic trade as the
motivation and the behavior of parties involved in a trade do not change
fundamentally regardless of whether trade is across a border or not. The
main difference is that international trade is typically costlier than domestic
trade. The reasons are that a border typically imposes additional costs such
as tariffs, time costs due to border delays and cost associated with country
differences such as language the legal system or culture. Another between
domestic and international trade is that factors of production such as capital
and labor are typically more mobile within a country than across

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countries. Thus international trade is mostly restricted to trade in goods and

services, and only to a lesser extent to trade in capital, labor or others.

BRIEF HISTORICAL DEVELOPMENT OF INTERNATIONAL TRADE

- The barter of goods or services among different peoples is an age-old practice,
probably as old as human history.
- International trade, however refers specifically on an exchange between
members of different nations and accounts and explanations of such trade
begin only with the rise of the modern nation-state at the close of the
European middle ages. As political thinkers and philosophers began to
examine the nature and function of the nation trade, trade with other
countries became a particular topic of their inquiry. It is, accordingly, no
surprise to find one of the earliest form of trade.
- International trade has been in existence since ancient times. Even in the
Bible references were made to trading activities between different countries.
Illusion was made in the book of Genesis of sons of Jacob who went to Egypt
to buy grains. With increase in civilization and traveling added to the known
benefits of specialization and division of labor. International trade among
countries of the world has even increased tremendously.
- Although early writers recognized the existence of international trade, they
felt that it was not much different from domestic trade to warrant the
existence of a separate theory.
- Adam Smith in his much celebrated work published in 1776 and titled “An
Inquiry into the Nature and causes of the wealth of Nation” was the first
economists to propound the classical theory.
- Ohlin (1933) argued that international trade” should be regarded as a
special case within the general concept of international economics. He
further argued that nations engaged 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. The 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 and climate of different
regions.

BASIC CONCEPTS AND REASONS FOR INTERNATIONAL TRADE

- International trade refers to buying and selling of goods and services
between countries e.g. between Nigeria and the United States of America,
Ghana or Australia etc.
- In other words, the term “international trade” refers to exchange of goods and
services that take place across international boundaries.

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- International trade 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 multinational trade. International trade
is to enable countries obtain the greatest possible advantage from the
exchange of one kind of commodity or another.

REASONS FOR INTERNATIONAL TRADE

1. OPPORTUNITY COST
- This is simply the value of using a resource; measured in terms of the value
of the best alternative for using that resource.
- International trade occurs because no single country has the resources to
produce everything well. The products a country decides to produce depend
on what must be scarified to produce them; that is, whatever resources a
country uses to produce one product are no longer available for producing
some other product. Those things we have to give up in order to get more of
what we want are called opportunity cost, and they determine what countries
produce for trade.
- For example, Saudi Arabia exports crude oil. The Saudis could have chosen
to export wheat, but they lack the resources (the arable land, the water, and
climate) to grow wheat efficiently.

2. COMPARATIVE ADVANTAGE/FACTOR ENDOWMENT

- The United States also produces both crude oil and wheat, but its opportunity
cost is lower than Saudi Arabians. Having smaller reserves of oil and more
than ten times the arable land, the United States has to give up only a few
barrel of oil (compared with Saudi Arabians innumerable barrels of oil) to
produce a bushel of wheat.
- Thus, in the production of wheat, the United States have a comparative
advantage; that is, it has the ability to produce a given product at a lower
opportunity cost than its trading partners.
- Factor endowment consists of differences in capital, labor and land. For
example, a rich nation like the united states has a large amount of expensive
capital equipment hence can specialize in goods such as chemicals,
automobiles. Other nations with an abundant labor supply like Japan finds
it efficient to concentrate on making television sets, which require the
assemblies of components by hand.

3. ABSOLUTE ADVANTAGE
- If a nation is the sole producer of an item, it has an absolute advantage over
all other nations in terms of that item.
- Another absolute advantage exists when one nation can make something
more cheaply than its competitors.

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- An absolute advantage is a nation’s ability to produce a particular product

with fewer resources (per unit of output) than any other nation. This absolute
advantage might exist because for instance the Saudis have been growing
wheat far longer than people in the United States or because the Saudis are
simply more talented.

4. COMPETITION
- International trade gives room to competitors.
- Foreign goods compete with the local goods in the market.
- Foreign markets may grant local manufacturers greater potentials for
growth.

5. ACCESS TO CAPITAL/GREATER RETURNS ON CAPITAL

- International trade enables countries with limited capital to either borrows
from capital rich countries or attract direct investment into the countries
and thus enjoy the benefits imported capital and technology investment
abroad may yield higher returns than additional domestic investment,
particularly where the foreign market is growing.

6. ECONOMIC AND SOCIAL DEVELOPMENT

- International trade increases the economic and social development of the
under developing countries.
- Other reasons for international trade are: differences in tastes, differences in
industrial development and the level of technology, existence of special skills
in some countries and differences in climate.

INTERNATIONAL TRADE AND INTERNATIONAL BUSINESS COMPARED

- International trade is a business transaction between the nationals of two
different countries.
- For example, a Nigerian businessman can import a consignment of a product
from a British producer. He needs not to know anything about the business
environment of Britain. But opening an international business is more
involving. The operator must study and understand the international
business environment such as culture, a legal, economic factor which prevails
in the environment he would want to locate his business.

PREVAILING PROBLEMS OF INTERNATIONAL TRADE

- Engaging in International trade is a sophisticated activity. It requires great
corporate, personal and business skill, experience and knowledge.
International trade is being influenced by the following problems:
a. Cultural differences: Deep cultural differences like social
expectations, manners and methods of doing business can be
persistent problems to a country who is about to enter into a
bilateral or multilateral agreement.

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b. Currency problem: Trading between sovereign nation creates

financial complications because currencies are not of equal value
and the rate of exchange between currencies are not fixed.

c. Legal protection: countries often limit International trade by

legal means. Example tariff, quota and embargo. This protective
tariffs and quotas is to encourage the growth of domestic industries
and to protect them from price competition from foreign companies.

d. Foreign political climates: these are often unpredictable. For

example, terrorism and foreign tax structures may be favored to
business. Foreign business climates and methods may create ethical
problems. Example bribery is more widely accepted in Nigeria than
in the United States.

FORMS OF INTERNATIONAL TRADE

There are a number of ways in which Nations can participate in International trade.
1. DIRECT EXPORTING
- This form of international trade involves soliciting orders from foreign
countries for goods and services that are made in a country and then shipped
abroad.
- For example, without International trade, the market for the Nigerian crude
oil, columbine, cocoa, rubber, etc would have been limited to domestic
economy.
- Export of goods and services act as foreign exchange earners to the domestic
economy. Foreign exchange availability is essential requirement for the
survival of any national income.
2. FOREIGN LICENSING
- This is another important form of trade that exists between two or more
countries.
- It involves a country soliciting another country to produce and sell her
product to them in a fee and after due procedural arrangement have been
made which binds the elements of such countries contract.
- This is generally used for goods with established brand names.

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REFERENCES:
Adegbola, Eunice Abimbola, Principles and Practices of International Trade:
Course Guide

Feenstan, Robert C. and Taylor, Alan M., International Tade, Worth Publishers,
4th Edition, 2017

Grath, A., The Handbook of International Trade and Finance, 2016

www.lumenlearning.com

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