Theories of International Trade | UGC NET Economics – Notes

Introduction

• International trade acts as a major contributing factor in global economic activity and a catalyst of economic growth in developing as well as developed countries. Differences in various conditions, like resource availability, natural climatic conditions, cost of production, etc., act as the motive behind trade between the countries. International trade has made it all possible and has provided a large number of employment opportunities as well as several goods and services for the consumer. Not just this, it has been a major reason for the rising living standards of people all over the globe.

• International trade has been a part of human civilization for a very long time; however, the past few decades have seen rapid development in cross-border trading. Imports and exports have largely contributed to the growth of GDP, and the credit for the same goes to imports and exports.

International Trade: An Overview

• In layman’s language, international trade is the exchange of goods and services between different countries. The term “exchange” includes the import as well as export of goods and services. As quoted by Wasserman and Haltman, international trade can be connoted as transactions among the inhabitants of different countries. Edgeworth, an Irish-based statistician, defined the term as the phenomenon of trade between countries. The term ‘international trade’ is an example of economic linkage and can be referred to as an economic transaction between countries.

• International trade stands as a crucial determinant of openness among countries and has been a remarkable factor in economic growth. In recent years, overseas trade has become a strategy of paramount importance for the growth of the national economy. However, the significance of international trade is not just limited to this, it also helps in encouraging social and international relations among countries. Increased foreign trade has augmented the process of globalisation.

• In the early years, Adam Smith and Ricardo were among the few political economists who acknowledged the significance of international trade, which has been practically affirmed by visible global growth and economic development. Global trade gives consumers the opportunity to experience and enjoy a variety of goods and services that, for whatever reason, are not available in their country or which might be a bit costly in their country compared to others. Foreign trade also, to a great extent, curbs the issue of irregular availability and distribution of resources all over the world by facilitating a smooth flow of raw materials as well as finished products. The optimum use of abundant raw materials is one more benefit expedited by trading globally.

Classification of International Trade Activities

The activity of international trade has been broadly classified under 3 subheads, namely, international trade operations, strategic alliances, and direct foreign investments. They are discussed as follows:

• International trade operations: This category specifically includes the operations constituting international business via import and export, import-export combined operations, and transit. Although the parties, in several instances, might have dissimilar interests, to gain a mutual advantage, they harmonise their differences and arrive at a mutual consensus by prioritising benefits. These international trade operations are legally considered under the category of bilateral contracts, which consist of international sales contracts as the legal instrument. In most cases, these transactions are short-term, however, the relationships between the parties can be long-term or short-term depending on their choice.

• Strategic alliances: This category mainly includes activities like franchising, sub-contracting, joint ventures (private or government), etc. It connotes the operation involving cooperation among the various partners from different countries, pertaining to the transfer of technologies globally.

• Foreign direct investment: The strategy closely resembles the categories of involvement, risk, and profit, each one of them at its maximum potential. It is an alternative to stepping foot into the global market. It comes under the category of cross-border investment, wherein, the interested residents of one economy invest or influence significantly in enterprises based in another country.