Chapter 8 — International Trade

International trade is the exchange of goods and services among countries across national boundaries. Countries trade to obtain commodities they cannot produce themselves or can purchase elsewhere at a lower price.

International trade is the result of specialisation in production. It is based on the principle of comparative advantage, complementarity and transferability of goods and services, and should be mutually beneficial to trading partners.

The five bases are: (i) difference in national resources (geology, minerals, climate), (ii) population factors (cultural traditions, population size and standard of living), (iii) stage of economic development, (iv) extent of foreign investment, and (v) transport facilities.

Balance of trade records the volume of goods and services imported and exported by a country. If exports exceed imports, the country has a positive or favourable balance of trade. If imports exceed exports, the country has a negative or unfavourable balance of trade, which can ultimately lead to exhaustion of its financial reserves.

International trade is categorised into (a) bilateral trade, where two countries enter into an agreement to trade specified commodities with each other, and (b) multilateral trade, where a country trades with a number of other countries and may grant Most Favoured Nation (MFN) status to some trading partners.

Dumping is the practice of selling a commodity in two countries at a price that differs for reasons not related to costs. Dumped goods of cheaper prices can harm domestic producers in the importing country.

Free trade, also called trade liberalisation, is the act of opening up economies for trading by bringing down trade barriers like tariffs. It allows goods and services from everywhere to compete with domestic products and services.

GATT was formed in 1948 to reduce high customs tariffs. It was transformed into the World Trade Organisation on 1 January 1995. The WTO is the only international organisation dealing with global rules of trade between nations; it sets rules for the global trading system, resolves disputes, and also covers trade in services such as telecommunication and banking, and issues such as intellectual rights. Its headquarters are in Geneva, Switzerland, and it had 166 member countries as of December 2024. India is a founder member.

Regional trade blocs are groupings of countries with geographical proximity and complementary trade items that encourage trade among members by removing tariffs. Today 120 regional trade blocs generate 52 per cent of world trade. They developed as a response to the failure of global organisations to speed up intra-regional trade.

The Silk Route is an early example of long-distance international trade connecting Rome to China along a 6,000 km route. Traders transported Chinese silk, Roman wool, precious metals and high-value commodities from intermediate points in India, Persia and Central Asia.

International trade can prove detrimental if it leads to dependence on other countries, uneven levels of development, exploitation and commercial rivalry leading to wars. It also raises environmental concerns, as competition to trade more accelerates use of natural resources, depletes marine life and forests, and multinational corporations in oil, gas, mining, pharmaceuticals and agri-business create more pollution without following norms of sustainable development.

Ports are classified into three types based on cargo: (i) Industrial ports, which specialise in bulk cargo like grain, sugar, ore, oil and chemicals; (ii) Commercial ports, which handle general cargo — packaged products and manufactured goods — and also passenger traffic; and (iii) Comprehensive ports, which handle both bulk and general cargo in large volumes. Most of the world's great ports are classified as comprehensive ports.

Inland ports are located away from the sea coast and linked to the sea through a river or canal — for example, Manchester (linked by canal), Memphis (on river Mississippi) and Kolkata (on river Hoogli, a branch of the Ganga). Out ports are deep-water ports built away from the actual port to receive large ships that cannot approach the parent port; Athens and its out port Piraeus in Greece is a classic example.

Entrepot ports are collection centres where goods are brought from different countries for export. Singapore is an entrepot for Asia, Rotterdam for Europe, and Copenhagen for the Baltic region.

Packet stations, also known as ferry ports, are concerned exclusively with transporting passengers and mail across water bodies over short distances. They occur in pairs facing each other, for example Dover in England and Calais in France across the English Channel. Naval ports have only strategic importance, serving warships with repair workshops; Kochi and Karwar are examples of naval ports in India.

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