International Trade: Importance and Limitations

International trade or foreign trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries.

All countries need goods and services to satisfy wants of their people. Production of goods and services requires resources. Every country has only limited resources. No country can produce all the goods and services that it requires. It has to buy from other countries what it cannot produce or can produce less than its requirements. Similarly, it sells to other countries the goods which it has in surplus quantities. India too, buys from and sells to other countries various types of goods and services.

international trade

Meaning & Definition of International Trade

According to Wasserman and Haltman___ “International trade consists of transaction between residents of different countries”.

According to Anatol Marad___ “International trade is a trade between nations”.

International trade is in principle not different from domestic trade as the motivation and the behaviour 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 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 culture. International trade consists of ‘export trade’ and ‘import trade’. Export involves sale of goods and services to other countries. Import consists of purchases from other countries.

International or Foreign trade is recognized as the most significant determinants of economic development of a country, all over the world. The foreign trade of a country consists of inward (import) and outward (export) movement of goods and services, which results into. outflow and inflow of foreign exchange. Thus it is also called EXIM Trade.

For providing, regulating and creating necessary environment for its orderly growth, several Acts have been put in place. The foreign trade of India is governed by the Foreign Trade Development & Regulation Act, 1992 and the rules and orders issued there under. Payments for import and export transactions are governed by Foreign Exchange Management Act, 1999. Customs Act, 1962 governs the physical movement of goods and services through various modes of transportation.

Importance of International Trade in Global Context

  1. Greater Variety of Goods Available for Consumption: Foreign trade brings in different varieties of a particular product from different destinations. This gives consumers a wider array of choices which will not only improve their quality of life but as a whole it will help the country grow.
  2. Efficient Allocation and Better Utilization of Resources: Efficient allocation and better utilization of resources since countries tend to produce goods in which they have a comparative advantage. When countries produce through comparative advantage, wasteful duplication of resources is prevented. It helps save the environment from harmful gases being leaked into the atmosphere and also provides countries with a better marketing power.
  3. Promotes Efficiency in Production: International trade promotes efficiency in production as countries will try to adopt better methods of production to keep costs down in order to remain competitive. Countries that can produce a product at me lowest possible cost will be able to gain larger share in the market. Therefore an incentive to produce efficiently arises. This will help to increase the standards of the product and consumers will have a good quality product to consume.
  4. More Employment: More employment could be generated as the market for the countries’ goods widens through trade. International trade helps generate more employment through the establishment of newer industries to cater to the demands of various countries. This will help countries to bring-down their unemployment rates.
  5. Consumption at Cheaper Cost: International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Therefore it becomes cost cheaper to import from other countries through foreign trade.
  6. Reduces Trade Fluctuations: By making the size of the market large with large supplies and extensive demand international trade reduces trade fluctuations. The prices of goods tend to remain more stable.
  7. Utilization of Surplus Produce: International trade enables different countries to sell their surplus products to other countries and earn foreign exchange.
  8. Fosters Peace and Goodwill: International trade fosters peace, goodwill, and mutual understanding among nations. Economic interdependence of countries often leads to close cultural relationship and thus avoid war between them.

Limitations of International Trade

  1. Rapid Depletion of Exhaustible Natural Resources.
  2. Import of Harmful Goods.
  3. It may Exhaust Resources.
  4. Over Specialisation.
  5. Danger of Starvation.
  6. One country Gains at the Expense of Other.
  7. May Lead to War.
  8. Language Diversity.