6 International Trade

6.1 The importance of international trade

International Trade : the change of ownership of goods and services across
international borders or territories.

Benefits of International Trade

 Income Generation:
o Provides income for businesses through exporting goods and services.

o Allows businesses to import goods from other countries for resale

domestically.
 Improved Living Standards:
o Enables countries to earn money from overseas sales to purchase what
they need.
o Contributes to better living standards for all countries involved in
trade.
 Resource and Skill Distribution:
o Addresses the uneven global distribution of resources and skills.

o Encourages trade to obtain materials, goods, and services unavailable

locally.
 Global Interdependence:
o Creates economic interdependence (globalisation), as countries rely on
one another for trade.
o Facilitates the exchange of resources and goods essential for
development.
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 Geographical Peace:
o Reduces conflicts by fostering cooperative access to resources.

o Promotes peaceful relations among trading nations.

 Specialisation and Efficiency:

o Allows countries to focus on their areas of expertise or comparative
advantage.
o Prevents resource waste by importing goods that can be produced
more economically elsewhere.
Comparative Advantage

Types of
Advantag
e

Comparati
Absolute ve
The ability of a
country to produce a The ability of a
certain product more country to produce a
efficiently than others good at a lower
opportunity cost than
other countries.
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6.2 Balance of trade and balance of payments

Balance of Trade (BOT) :
o Focuses on goods (visibles), as they are tangible and measurable.

Measures the
difference between
the value of a
country's imports and
exports

BO
T
Surplus Deficit
Exports > Exports <
Imports Imports

Balance of Payments (BOP):

 Definition:
o Includes both the trade of goods (visibles) and services (invisibles) in a
country's transactions with other nations.
o Invisibles include activities like tourism and financial services, which
cannot be physically seen.
 Purpose:
o Reflects the overall economic transactions of a country, including both
visible and invisible trade.
o Indicates whether the country is making a profit (surplus) or a loss
(deficit) in its international dealings.
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6.3 Customs authorities

Primary Function:
 Customs authorities assess, collect, and account for import duties (customs
duties).
 Customs duties/Import duties are tariffs or taxes levied on goods entering
a country (rarely on exported items).

Additional Responsibilities:
 Control the flow of goods, including hazardous items, animals, and personal
effects.
 Enforce laws and regulations related to the import and export of goods.
 Restrict the movement of specific goods as per national laws (e.g., through
tariffs, quotas, embargoes, and import licenses).

Customs Areas/Bonded Store:

 Commercial goods not cleared through customs are stored in customs areas
(bonded stores).
 This is referred to as entrepôt trade.

Impact on Trade:
 Customs authorities can facilitate trade by quickly processing paperwork and
the movement of goods.
 Conversely, they can hinder trade through restrictions, such as tariffs and
quotas, that repress free trade.
6.4 Trading blocs, protectionism, and free trade
Definition:
A trading bloc is a group of geographically linked countries that protect themselves
from imports from non-members, representing a form of economic integration.
Types of Trading Blocs:
 Preferential Trade Area (PTA):
o Reduces or eliminates tariff barriers on selected goods imported from
member countries.
 Free Trade Area (FTA):
o Reduces or eliminates barriers to trade on all goods from member
countries.
 Customs Union:
o Removes tariff barriers between members.
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oApplies a common external tariff on imports from non-member

countries.
 Common Market:
o Enables free trade in all economic resources, including goods, services,
capital, and labor.
o Removes all barriers and reduces/eliminates non-tariff barriers.

Advantag Free Trade exists within the bloc

es

Market access and trade creation are

easier

EOS lead to lower prices for consumers

Employment opportunities are increased

Firms are protected from cheapter

imports from countries outside the bloc

Disadvantag
es
The benefits of free trade with countries of
other blocs are lost.

Trading blocs can distort world trade and

possibly lead to reduced specialisation.

Inefficient producers can be protected and

not encouraged to become more effective
against competitors outside the bloc.

The development of a bloc encourages

other blocs to form, possibly resulting in
disputes between blocs.
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Protectionism
Protectionism takes place when a trading bloc, or indeed just a country, takes
action to protect against outside competition.

Import
Tariffs Quotas Embargoes
Licences
taxes imposed limits on the straightforwar documents
on imported quantity of a d government issued by the
goods product that ban on trading government
can be between one authorising
imported into country and import of
a country another certain goods
into a country.

Reasons for protectionism (5)

protects foundling
protects home businesses enabling
them to protects home-based
businesses from
jobs
external competition develop before they
face competition

prevents other
prevents the import
countries from
of harmful or
‘dumping’ cheap
undesirable
imports into the
goods.
country

Free Trade
 Trade without protectionism, no barriers between countries or trading bloc
Benefits of free trade:
 It encourages firms to become more efficient because they face competition.
 It forces producers to produce high-quality goods in the face of competition.
 Retaliation is avoided – if a country puts up trade barriers, other countries will
do the same.
 Free trade encourages businesses to export and import. This results in
increased choice for consumers.
 Trade barriers increase the cost of trading, for example, a tariff results in
higher costs for consumers.
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Free port
(free zone) provides a place through which a group of countries that have agreed to
reduce or eliminate trade barriers can pass goods without customs intervention.

6.5 Difficulties faced by exporters and importers

Language: the trader needs to be conversant with the language of the countries it
wishes to trade with.
Customs of other countries may be different from those of the home market; they
must be taken into account within the marketing strategy.
Measurements differences such as weights, measures and sizes have to be
considered, for example, metric and non-metric.
Suitability of products must be considered owing to differing regulations related to
safety standards.
Competition will be more difficult to research and assess in an overseas market.
Import regulations must be observed, together with knowledge of those of other
countries.
Customs duties must be paid and have to be taken into account when costing
prices.
Transport is obviously more complex to arrange and manage in foreign trade than
in home trade.
Distance to delivery point must be taken into account, for example, in relation, to
perishable products.
Damage during transit must be taken into account; this may be more likely in
overseas trade.
Packaging may need to be stronger (and more costly) than in home trade.
Documentation will be greater and more complex than in home trading.
Payment arrangements can be complicated and involve delay and greater
potential for defaults in payment.
Use of agents: in the overseas country, agents may be necessary to act on behalf
of the trader to make contracts for the sale or purchase of goods.
Exchange rate fluctuations can adversely affect the market price of goods:
A rise in the value of currency in one country can result in a fall in the cost of
imports and a rise in the price of exports.
A fall in the value of currency in a country can result in a fall in the cost of
exports and a rise in the price of imports.
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International trade documentation

Bill of Exchange
 It is particularly used in the settlement of international debts.
 The bill of exchange is made out by the seller/exporter of goods (the
creditor). It requires that the buyer/importer (the debtor) pay a sum of
money on demand, or on an agreed future date (usually after three months).
Documentary Credit
 This is a bill of exchange with all documents of title attached, including the
invoice and insurance policy. With it, a bank has the right to take possession
of the goods if the bill of exchange is not honoured when it matures (when
payment is due).

Letter of credit
 A letter of credit is an assurance given by an importer’s bank of the financial
standing of the customer, undertaking to make the payment required in due
course

Bill of lading
 Purpose: Acknowledging that specified goods have been received on board
as cargo for conveyance to a named place for delivery to the consignee who
is usually identified

Air waybill
 an airway bill serves as a receipt for goods carried by an airline.

Manifest
 A manifest is a summary of all the bills of lading and cargo a ship is carrying.

Freight note
 The bill or charge for shipping goods, the freight note is sent to the exporter
by the shipping company.

Certificate of origin
 This document certifies the country of origin of goods
Import licence
Issued by the importing
 government, the import licence gives permission to bring certain
commodities into the country.
Export licence
 An export licence is needed before certain goods are allowed to leave a
country
Indent
 An indent is a document that is used to order goods from another country
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1 Look at this data related to the balance of payments of the country of

Noland.

a What is the visible balance? [2]

b What is the invisible balance? [2]
c What is the current balance? [3]
d How does international trade benefit consumers? [3]
e What problems are faced by businesses that trade internationally, which
are not faced by those engaged only in home trade? [4]
f Considering the importance of international trade, why do countries
implement protectionism? [6]

2 a What are visible exports? Give an example. [2]

b Give two examples of invisible imports. [2]
c Describe the likely effect of the following on your country’s balance of
payments:
i Increased expenditure by your country’s citizens on holidays abroad. [3]
ii An increase in the production of food by your home producers. [3]
d Explain the significance of each of the following to foreign trade:
i tariffs
ii quotas
iii embargoes
iv subsidies
v wars. [10]

3. Define the term "balance of trade" and explain how it differs from the "balance of
payments."
4. Explain the role of customs authorities in international trade.
5. What is a trading bloc, and how does it benefit member countries?
6. Differentiate between a "free trade area" and a "customs union."
7. Why might a country impose tariffs on imported goods?
8. Explain the advantages of international trade for a country.
9. Why do countries sometimes impose quotas on imports?
10. What is entrepôt trade, and how does it benefit countries involved?
11.What are the disadvantages of trading blocs for non-member countries?
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