Thursday, January 14, 2021

What is Foreign Trade | What are the Reasons for International Trade?

Foreign trade helps expand the business, increase competition, and dissolve monopolistic entities. It also provides a wider availability of goods and services and encourages product innovation.

What is Foreign Trade and What are the Reasons for International Trade?

Foreign Trade: Types, History and the Reasons for International Trade

What is Foreign Trade?

Foreign Trade (International Trade) is the exchange (Exports and Imports) of capital, goods, and services across international borders or territories.

Foreign trade is a group of activities that depend on the circulation of products between a certain country and other countries.


Foreign trade is defined as the exchange of services, capital, and goods through international or regional borders.

Foreign trade constitutes an important part of the economy of most countries of the world, as it directly affects their GDP.


Types of Foreign Trade

 Foreign Trade can be divided into the following three groups:-


Export Trade: Export trade is based on the principle of selling one or more types of commodities to a merchant from one country to a trader in another country; outflow of goods from home country to a foreign country.


Import Trade: Import trade is the opposite of export trade, as its principle is based on buying goods from a foreign country and bringing them to the home country.


Entrepot Trade: Entrepot trade is based on the principle of importing some different commodities from a specific country and making some adjustments to them, then re-exporting them to another country.


History of International Trade

International trade has a rich history with the barter system being replaced by mercantilism in the 16th and 17th centuries. The 18th century saw a shift towards liberalism. The beginning of the 19th century marked the move towards professionalism, which diminished by the end of the century.


The interest in foreign trade goes back to the emergence of the commercial school in the seventeenth century AD in Continental Europe.


It was interested in studying trade as one of the most important sources of private wealth in nations, and the interest increased at this stage to boost the quantity of exports compared to the amount of imports in order to contribute to increasing the flow of money to countries,

Also coinciding with this stage was the interest in reducing imports, providing market protection, and reducing wage costs in order to support external competition.


A commercial school appeared in France in the eighteenth century AD, indicating that the main source of wealth is associated with agricultural production, and this school was called the school of naturalists that focuses on agricultural efforts and differs from the commercial school in its ideas.

In Britain, the Industrial Revolution contributed to considering production the main source of wealth.

This is what the economist and thinker Adam Smith pointed out in the book The Wealth of Nations.

As for the first intellectual and academic treatment of the idea of ​​foreign trade, it is mainly due to the economist David Ricardo through his interest in developing the theory of comparative advantage, and it indicates that the costs involved in labor are the main source of internal exchange, which extends later to external exchange.

 

The Importance of Foreign Trade

 Foreign trade is one of the important economic activities in the world. As all countries depend on it for their economic systems; which contributes to providing all consumer needs

Foreign trade is one of the important economic activities in the world, as all countries depend on it for their economic systems, which contributes to the provision of all consumer needs.

The importance of foreign trade can be summarized according to the following points:


Foreign trade is a measure of a country's capacity to produce and compete in global markets due to its dependence on available production rates and the countries' capabilities to obtain foreign currencies. 

Foreign trade is considered one of the vital areas in societies, whether they have a developing or developed economic environment, as foreign trade contributes to linking countries together, and helps to enhance the ability to market through the creation of new markets. 

Countries depend on foreign trade in order to increase the balance of hard currencies in their accounts due to the reliance of export and import operations on the use of various currencies.


What are the Reasons for Foreign Trade?

The countries of the world share among each other a set of diversified economic relations, which have been crystallized based on foreign trade, due to the imposition of their influence on the local and global commercial markets. Changes in prices related to international trade also contributed to reinforcing the idea of trade between countries to achieve financial profits.


The reasons for the emergence of foreign trade can be summarized as follows:


External economic relations:

The need for external economic relations is the need that has arisen as a result of the unequal distribution of resources that constitute the productive elements among the countries of the world.

Examples include: climate conditions, such as the nature of the soil, temperatures, quality of rain, capital, human and mineral resources, the quality of technology, administrative efficiency, and other economic factors affecting the productive conditions of countries.

These differences between countries lead to a difference in their capabilities to provide services and goods.

The need here affects the desires of countries to obtain products by importing them depending on the exports of other countries' surplus production; Therefore, foreign trade helps every country to utilize its resources efficiently.


International economic cooperation among nations:

Enhancing international economic cooperation is the effect of international cooperation in promoting the existence of trade exchanges between countries., especially in exceptional economic circumstances. This leads to a decrease in the volume of economic dealings, which results in a lack of relations and ties between countries.

As for in normal economic conditions and within the environment of normal transactions, international cooperation of all kinds and in all fields contributes to providing an important role. International economic cooperation is a powerful source for strengthening modern economic relations, developing existing ones, or restoring previous relations while being keen to contribute to their continuation.


International specialization:

International specialization is the specialization associated with several aspects, such as: geographical factors, such as climate changes, and the difference in the quality of natural resources between countries and their distribution.


Therefore, states cannot fully rely on themselves to provide for the needs of their inhabitants as a result of the unjust distribution of wealth among them, which leads to the necessity for each state to specialize in the production of specific types of goods, compatible with their capabilities, nature and economic conditions.


Countries generally export low-cost products domestically compared to their high cost abroad, and they also import high-cost products locally compared to their low cost abroad. This economic base is called the comparative advantage, whose emergence depends on the difference between costs.


The globalization of technological innovation:

Recently, technologies have improved the reliability and efficiency of international trade.

The globalization of technological innovation allows countries to have easy access to foreign knowledge and technology and to foster international competition - as a result of the rise of emerging market firms -  and this strengthens firms' incentives to innovate and adopt foreign technologies.

The variation in the levels of production technology used between countries is the difference and variation in the use of the economy's resources.

Production conditions are described as being highly efficient in light of the development of technology levels, and vice versa in the event of a decrease or decline in these levels/.

Factors of production affect the manufacturing process, which leads to a decline in its efficiency, and failure to take advantage of economic resources in the best available way.


Consumer taste heterogeneity:

Consumers are heterogeneous with their marginal willingness to pay for quality. Different people can do the same thing for different reasons. They may also work differently for similar reasons.

The variation of tastes about commodity specifications is the impact of consumers on foreign trade, as they seek in every country in which they live to obtain products of high quality in order to achieve the best possible benefits from them, and the impact of this factor on foreign trade increases with the rise in the average private income of individuals.


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