International Trade | Meaning, Features | Inter-Regional Trade vs International Trade

What is International Trade?

The term “trade” generally means exchange of goods among different individuals. If such exchange of goods takes place between two individuals or firms of the same country, it is defined as “internal trade”.

International Trade - Meaning, features

International Trade – Meaning, features

International trade is that branch of economics which is concerned with the exchange of goods between one country and another. It is the movement of goods and services from one Geographical Boundary to another. It is trading with foreign countries. But it is only an extension of internal or domestic trade.

Neighboring Nations trade with each other as they benefit from it. The main motive behind international trade is Profit. Profit from international trade like the Profits from all trade arises because of the fact that specialization increases productivity. International trade means trade between nations with different elements of productive power.

Factor endowments are unevenly distributed among the countries of world. This is due to geographical, climatic, physical factors and technical development. When these differences are existing trade between nations takes place and it is beneficial to all.

Features of International Trade

1. Immobility of Factors of Production

Basically this reason was given by the classical economists on the assumption that labour was the only factor of production. Ricardo emphasized a separate theory of international trade on the ground that factors of production are immobile between nations and mobile within nations.

Immigration laws and citizenship requirement often restrict the international mobility of labour. International capital flows are also prohibited by different governments. It is factor immobility which leads to comparative differences in the cost of production.

2. Heterogeneous Market

There is lack of homogeneity in the world market due to differences in language, preference, customs, weights and measures. The behavior of the buyers too differs accordingly. For example: cars in India have right hand driving while in foreign countries they have left hand driving.

3. Different National Policies

Laws and rules relating to taxation, labour standards, trade unions, education and factory legislation are more or less uniform in different regions of a country. On the contrary, there is vast difference in such laws in different countries.

4. State Intervention

Government interferes with the normal trade through its tariff policy, import quota, subsidies and similar controls. Such state intervention will cause different problems in international trade.

5. Differences in Socio-economic Environment

There is more or less uniformity in the socio-economic government within countries but it differs between countries. Fredrick states that “domestic trade is among us, international trade is between us and them” .

6. Different Political Units

While domestic trade takes place within the same political unit, international trade occurs between politically different units. Each government is interested in its own welfare and tries to see its own
interest at the cost of the other country.

7. Different Currencies

Different monetary units prevail in different countries. This results in the problem of exchange rates and foreign exchange. Hence each country has to follow its own policy regarding exchange rates and foreign exchange.

8. Degree of Competition

Within the country, prices in both the products as well as in the factor markets are determined under competitive conditions. Every firm works at its optimum scale. But in international trade rather than optimum allocation of resources, the theory of dumping and protection are considered to be of great importance.

9. Specific Problems

International liquidity, international monetary co-operation, evolution of international organizations like the European common markets are issues which never arise in internal trade. In some aspects there are similarities and in some other aspects, there are dissimilarities between these two trades.

Similarities between Inter-Regional Trade & International Trade

1. Participants in both trade have the same desire i.e. to achieve maximum gain at minimum of sacrifice.

2. The difference between the two trades is one of the degree and not of kind.

3. No area and no region of any country can produce all that is necessary for itself.

4. Immobility of factors of production give rise to both internal and international trade. Eg: Assam and Kerala — greater distance, Bihar and Nepal — lesser distance.

5. The fundamental principle in both is the same.

6. Both trades are due to division of labour.

7. In both trades, people specialize in producing goods in which they have greater comparative advantage.

Differences between Inter-Regional Trade & International Trade

1. Immobility of factors of production

According to classical writers, labour and capital were perfectly mobile within the country and immobile between countries, The immobility is due to differences in language, social and political life, religion and traditions, etc.

2. Differences in production conditions

Production conditions differs due to several causes. An advanced country in science and technology uses better methods of production than that of an under developed country. Due to this the costs and prices also vary. Because of these differences in production costs and prices, that international trade takes place.

3. Natural Resources

The countries differ in natural resources and geographical conditions. This leads to territorial division of labour and localization in industries. Countries rich in iron and coal resources specialize in the production of steel. And countries having plenty of land and favorable climate produce agricultural commodities. These advantages can not be transferred at all to other countries. It is only possible to transfer, thereby the cost becomes extremely prohibitive.

4. Currency system differs

Different countries have different currency systems, and conversion of one country currency into another currency is difficult. Sometimes scarcity of foreign exchange restricts the imports. Besides, due to changes in the monetary policies, the price levels also vary, and this makes international trade much more difficult.

5. Trade and Exchange controls

There are lot of restrictions like exchange controls, customs duties, tariff barriers and quotas followed by countries which restrict the free flow of international trade.

6. Market knowledge

People possess a very good knowledge of the conditions of trade in their own country. But they cannot be so conversant with the conditions obtained in other countries. This lack of knowledge may hinder international trade.

7. Barter systems

In international trade exchange of goods and services is done mostly on barter terms. In external trade the exchange is often made for money of that country.

8. Difference in law

Internal trade is governed by the law of the land. But international trade is conditioned by the law of the exporting countries and importing countries and the countries through which the goods and services pass.

9. Objective differs

In internal trade profit motive in terms of monetary unit of the that country is the primary objective. But in international trade, the main objective is one of balancing the payments position between different countries.

10. Cultural distinctions

The various cultural practices between countries make international trade difficult. Eg. Britain produces right hand driven cars while the France uses left hand driven cars. The trade in cars between these two countries will not take place. Markets are also separated by language, customs, trading, usage, habits, tastes and other factors which make trade between countries difficult.

All these differences have given way for a separate theory of international trade.