The article is written by Tushar Singh Samota, a law student from the University Five Year Law College, Rajasthan University. It gives a detailed description of international trade by covering its growth and contemporary trade law theories, along with the benefits and criticisms of the same.
It has been published by Rachit Garg.
Table of Contents
Introduction
“The biggest losers from international trade are always those whose skills have a cheaper competitor in a different market.” –Gita Gopinath
The numerous national economies in the modern world are interdependent on one another. Today, examples of closed economies are hard to come by. The world’s economies are now all open. But the level of openness differs from nation to nation. As a result, no nation in the modern world is self-sufficient. In this context, the term “self-sufficiency” refers to the ratio of domestically produced products and services to the overall production. But the level of independence differs from nation to nation. The functions of regional and international specialisation are equally significant.
Regional specialisation is the practice of distinct regions or locations within a nation specialising in the creation of particular goods. International specialisation is the production of various items by various nations around the world. The same or almost identical factors that cause international specialisation also determine regional specialisation. International trade is the method by which a country that produces goods in excess, that is, more than it needs, exports them to other nations in exchange for those nations’ surplus agricultural products. In this article, the author has tried to discuss the importance of international trade by discussing its growth along with various trade theories. The article will also touch upon the benefits and criticisms of international trade.
Growth of international trade
We are all aware that international trade has been popular for ages and that all civilizations have engaged in trade with various regions of the world. Trading is necessary owing to differences in resource availability and comparative advantages. No country can afford to stay isolated and self-sufficient in the current situation when technology and innovation in all disciplines have flung open borders to globalisation.
International trade has a long history, beginning with the barter system and progressing through mercantilism in the 16th and 17th centuries. The 18th century witnessed the rise of liberalism.
The founder of economics, Adam Smith, wrote the classical book “The Wealth of Nations” and during this period he outlined the value of specialisation in production and included international trade within its purview. The Comparative Advantage Principle was created by David Ricardo and is still valid today. Each nation’s foreign trade policy has been impacted by all of these economic ideas and precepts. Although nations have signed several agreements throughout the last few centuries to promote free trade, nations do not apply import charges or other tariffs and permit unrestricted trade of products and services.
The development of professionalism began in the early 19th century and slowed down toward its conclusion. The western nations began a significant movement toward economic liberty about 1913, at which time quantitative constraints were eliminated and customs charges were cut globally. All currencies were easily convertible into gold, which served as the worldwide monetary exchange currency. It was simple to start a business and find work anywhere, and trade between countries was relatively unrestricted throughout this period. The First World War altered the path of global trade as governments created barriers around themselves with wartime regulations. After the war, it took up to five years to dismantle the wartime restrictions and restore trade to normalcy. However, the economic recession of 1920 altered the balance of world trade once more, and many countries saw their fortunes change due to currency fluctuations and depreciation, putting economic pressure on various governments to adopt protective mechanisms such as raising customs duties and tariffs.
The World Economic Conference, held in May 1927 and sponsored by the League of Nations and attended by the major industrial nations, was prompted by the need to ease international trade between nations and lessen the pressures of the economy. This conference also resulted in the creation of the Multilateral Trade Agreement. The General Agreement on Tariffs and Trade, which was implemented in 1947, came after this. To maintain a favourable balance of payments, import quotas or quantity restrictions, including import prohibitions and licensing, were implemented, along with higher import duties. However, the global economy was once again disrupted by the 1930s depression, which led to another worldwide economic downturn.
All nations eventually agreed to be governed by international organisations and trade agreements in terms of international trade as they gradually came to understand that the old school of thought was no longer going to be practical and that they needed to continually review their international trade policies. Today, we have a far better grasp of international trade and the forces that influence global trade. The context of global markets has been guided by economists’ understanding and theories based on the natural resources available to various countries that give them a comparative advantage, economies of scale of large-scale production, technology in terms of e-commerce, product life cycle changes in tune with technological advancement, and financial market structures.
International Trade Law
Today’s global economy provides more products and services than ever before. We can import and export goods and services of all types to every part of the world thanks to current technology and innovative shipping procedures. The ramifications of international trade, of course, require the implementation of complex international trade agreements. This is especially true given the complicated, multi-party character of the majority of current international trade agreements. The North American Free Trade Agreement (NAFTA) and the South Asia Free Trade Agreement (SAFTA) are two notable examples of multilateral trade agreements. Nations in these regions sign these treaties to sell their domestic goods in global markets and to benefit from competitive pricing on imported goods and services.
In general, international trade law comprises the laws and traditions that must be followed while conducting business with foreign nations. It has its roots in two distinct mediaeval theories known as lex mercatoria (the law for merchants on land) and lex marine (the law for merchants on the sea). After World War II, there was an expansion in international trade as a result of the General Agreement on Tariffs and Trade, a treaty that established a framework for trade-in products. Today, international trade law is a corpus of international laws that consists mostly of international treaties and actions of international intergovernmental bodies. Many regulations regulating international trade agreements now are based on conventional systems of law and GATT. The international trading of intellectual property is a novel field of international trade law that has just recently emerged.
The World Trade Organization (WTO) was founded to assist in the negotiation and implementation of multilateral trade agreements. The WTO is made up of member countries that have agreed to a multilateral accord. The World Trade Organization’s mission is to reduce bottlenecks and hurdles to free trade, such as tariffs. Tariffs are taxes levied on imports to encourage customers to buy domestically produced goods. To counterbalance the effect of tariffs, the World Trade Organization requires member countries to promise that they would treat imports from other countries in the same manner that they would treat locally produced products and services.
The WTO also establishes trade rules and regulations and serves as an international platform for debating and resolving trade-related issues. Almost every country is now a member of the WTO. The WTO’s trade dispute settlement mechanism is one of its most visible components. Since its inception in 1995, the WTO dispute settlement system has processed over 350 disputes, with about one-quarter of them being resolved amicably. WTO law is the corpus of legislation enacted by the WTO.
International trade law has significant tax ramifications. A cross-border transaction is any procedure that takes place across various countries. Nations that engage in cross-border transactions and international commercial development must be well-versed in tax legislation. Each nation has various tax requirements for overseas company activity, and the penalties for not complying with domestic tax rules can be severe.
Contemporary international trade theories
International trade theories offer many explanations for international trade. Economists have proposed ideas to explain the mechanics of global trade across time. The most prevalent historical ideas are referred to as classical, and by the middle of the 20th century, modern trade theories started to change to explain trade from a firm’s perspective rather than a country’s. Both of these subcategories, classical and modern, include several global theories.
Classical trade theories
Mercantilism
Mercantilism is an economic technique in which governments exploit their economies to increase their power at the cost of other countries. Governments attempted to guarantee that exports outpaced imports and that wealth in the form of bullion was accumulated.
Absolute advantage
Absolute advantage is an economic term that refers to a party’s greater manufacturing capabilities. It relates specifically to the ability to create a certain item or service at a cheaper cost than another party.
Comparative advantage
The capacity of an economy to produce a certain item or service at a lower opportunity cost than its trade counterparts is referred to as comparative advantage. The notion of comparative advantage presents opportunity cost as a consideration for deciding between several production possibilities.
Factor proportions theory
This theory shows quantitatively how a country should function and trade when global resources are unequal. It identifies the desired balance between two countries, each with its own set of resources.
Leontief paradox
In economics, Leontief’s paradox states that a country with more capital per worker has a lower capital/labour ratio in exports than in imports. Wassily W. Leontief’s attempt to experimentally test the Heckscher-Ohlin theory resulted in this econometric conclusion.
Modern trade theories
Country similarity theory
Linder proposed in this country the similarity theory that businesses first create for domestic consumption. When organisations consider exporting, they frequently discover that markets with client preferences close to their native market provide the greatest opportunity for success.
Product life cycle theory
Five main stages make up the product life cycle, namely:
- product creation,
- market launch,
- growth,
- maturity, and
- decline.
The length of time spent in each stage varies by product, and various firms use different techniques to move from one phase to the next.
Global strategic rivalry theory
Their idea centred on multinational corporations and their efforts to achieve a competitive advantage over other worldwide enterprises in their field. Firms in their industry will face global competition, and to thrive, they must build competitive advantages.
Porter’s national competitive advantage theory
According to the competitive advantage theory, states and corporations should seek policies that produce high-quality items that can be sold at high market prices. The priority of national strategy, according to Porter, should be that productivity increases.
Please note: For more information on the theories of international trade, readers can visit this page.
Importance of international trade
There is always a demand since various countries have varied talents and specialise in different areas. To make up for what they don’t produce, they must engage in commerce with other countries. For example, not all nations have oil resources, in such cases, the countries import oil from oil producers. On the other side, most oil producers buy completed commodities since they do not generate enough. As a result, no country in the modern world is self-sufficient. As a result, international trade is critical for all countries across the world.
Economics is the study of how to use limited resources effectively and fairly. Allocation of economic resources between nations is another problem of international trade. The best products are produced and sold in a competitive market, and as a result of efficient production, benefits like better quality and lower prices are available to all people in the world. Such allocation is carried out in the global markets utilising international trade under the concept of free trade. One essential idea of international trade is that one should acquire products and services from the country with the lowest price and sell them to the one with the highest price. This benefits both consumers and sellers, and it also allows industrialised countries to accelerate the speed of their economic development. They can adopt foreign technologies and import machinery.
To acquire new information and skills that are pertinent to the specific requirements of their emerging economies, they might send their academics and technocrats to more developed nations. In the end, no nation can achieve economic independence without experiencing a slowdown in its rate of economic growth. Even the wealthiest nations purchase raw materials from the poorest nations for their businesses. Production and consumption of products would be constrained if each nation just produced what it needed for its purposes. Such a condition undoubtedly impedes economic development. Additionally, there would be little potential for the global population’s quality of life to rise. People with money can purchase goods and services that are unavailable in their nations thanks to internal trade. Thus, consumer happiness may be increased to the fullest. International trade is the type of trade that fuels global economic growth.
Global events have an impact on this market’s supply, demand, and pricing. Countries and customers have the opportunity to experience services and items that aren’t offered in their nation because of global trade. There is an international market for many different things, including clothes, food, stocks, wines, and spare parts. The trading of services also takes place in industries like banking and travel. Imports are products and services that are purchased on the international market, whereas exports are products and services that are sold abroad. A country’s balance of payments keeps track of exports and imports. Developed nations can use their labour, capital, and technological resources more efficiently thanks to international trade. Many countries can manufacture a variety of goods more effectively because they are endowed with natural resources and various resources like labour, technology, land, and money and sell them for a lesser price in other nations.
If a nation cannot successfully produce a good or service inside its borders, it may import it. The expertise of global trade is this. Global trade encourages foreign direct investment by enabling participation in the global economy by many nations. These people make investments in overseas businesses and other assets. As a result, the nations may join in global competition. International trade has had a significant impact on a nation’s economic development. It has been noted that developing nations, particularly India and China, have expanded through time as a result of economic liberalisation and the opening up of trade barriers.
Benefits of international trade
Many international organisations, like the World Trade Organization, are attempting to streamline the process of international trade. The goal of bilateral and multilateral forums is to facilitate trade between countries, which will ultimately increase the number of products and services traded. It is significant to highlight that trading between countries is challenging because of the disparities in their economies, laws and regulations, customs, and several other aspects. However, as globalisation has advanced over the past few decades, international trade has grown rapidly. Therefore, we must comprehend the following key advantages of international trade:
Optimal utilisation of a nation’s natural resources
International trade between two or more countries enables all of them to utilise their natural resources to the fullest extent feasible. Using these resources, each nation may concentrate on producing goods and services that can then be sold to other countries to generate foreign exchange and strengthen their economies. It also helps to employ resources that might otherwise be wasted to raise the nation’s overall economic status.
Availability of various types of products and services
One of the key advantages of international trade is that it allows a country to receive goods and services that it would otherwise be unable to produce on its own due to a lack of resources or higher production costs. They may obtain these things at a reduced cost from outside the nation.
Specialisation in the production of certain products and services
Some countries have advantages such as natural resources, labour, technology, and capital. These resources enable them to produce specific types of goods and services at lower rates and sell them to other countries that require them. They can participate in large-scale manufacturing to meet the demands of local and international consumers as well as domestic and international marketplaces. They can also sell goods and services in huge numbers to other nations, therefore increasing their foreign exchange reserves.
Price stability
Price stability for goods and services is one of the key advantages of international commerce. It helps to smooth out the advantages and put a halt to the wild oscillations that might occur as a result of these items’ unavailability. Furthermore, international trade helps countries expand their markets and get access to commodities and services that would not otherwise be available locally.
Technical expertise exchange
International trade enables countries that lack knowledge in production, manufacturing, and technology to obtain it from other countries. Apart from enhancing their economic success, developing nations may help underdeveloped countries build and grow companies. Also, it plays a critical role in driving product development and worldwide market rivalry, as well as defining global value chains. It also creates new firms and influences the nature of international rivalry and commerce.
Increase efficiency in the production and distribution of products and services
Countries may use international trade to expand their production scale and make it more efficient to meet the demands of other countries. They can also concentrate on providing higher-quality products and services while lowering their total expenses. It entails commodity line growth, as a result of which a firm may improve its supply of product lines as well as the distribution of operational risks since, by increasing the supplier range, the company will be less reliant on a single supplier. In turn, customers gain from lower pricing, increased quantity, and variety of goods, resulting in a higher standard of living.
Transportation and communication development
International trade can only grow if transportation and communication systems are reliable and efficient. Otherwise, it will create bottlenecks that would jeopardise the transaction’s feasibility. International trade frequently serves as a motivator for nations to strengthen their transportation and communication with other countries to promote the ongoing interchange of goods and services.
Better ties
International trade between nations leads to more contact between the two countries. It also allows for the exchange of knowledge and ideas. This can create better collaboration and understanding, laying the groundwork for the two countries to build more amicable ties.
Exclusion of trade barriers in agricultural products
The exclusion of all types of trade barriers from the agricultural products of the developed countries will lead to a decline and rise in production and world prices, respectively. The developing countries profit by selling or exporting these products at escalating world prices.
Criticism of international trade
Every action has an unmistakable negative influence. Although international trade delivers numerous benefits to the countries involved, it may also have a detrimental influence. Some of these are:
- The drawbacks of global commerce range from detrimental societal consequences to bad environmental implications. Sometimes, the pursuit of profit causes the well-being of individuals to be neglected or compromised. Other issues with international trade in products and services include potential dangerous reliance on other countries and home employment losses.
- International trade has adverse societal effects. While being exposed to many cultures can be advantageous, it can also be detrimental. The sorts of goods and services that are sent to developing countries can have quick and significant adverse effects on those countries’ cultures. For instance, in certain other countries where culture or religion are stressed, some music or films from countries like the United States cannot be marketed in their original form, and sometimes not at all, due to the potential changes in attitude and conduct they may induce.
- The fact that the well-being of the populace in countries that produce commodities and services is occasionally disregarded in favour of profits is another drawback of international commerce. Only a small portion of those gains often go to the nation they are exploiting, and in certain cases, that little portion may not even be citizens. People are frequently forced to labour under unjust conditions in third-world nations, such as receiving poor pay or being subjected to unsafe workplace conditions.
- Even if bad treatment is not a problem, it is frequently discovered that goods and services may be produced more affordably in emerging nations. When these nations are given access to sizable markets, it may trigger job losses and the demise of whole industries in the developed nations since those industries are no longer able to compete.
- Some nations are so profit-driven or in need of money that they will let their natural resources be over-exploited, which can lead to significant issues in the future. International commerce can also lead to the destruction and exhaustion of natural resources. This is sometimes made worse by the fact that the organisations tasked with extracting those resources or making commodities from them could do so in a manner that causes serious environmental harm. Sometimes, there are insufficient or no resources available to deal with these problems afterwards.
- Small-economy countries frequently rely largely on their trading partners in richer countries. It is normal to discover that those sophisticated nations will try to take advantage of these connections. They accomplish this by exerting economic pressure on political outcomes unrelated to their trade-related operations. Furthermore, the dependence that nations have on one another contributes to the drawbacks of international commerce. One country may implement embargoes or other onerous trade restrictions if disagreements occur or just for financial advantage when it is known that it is the source of all or a large share of the commodities or services used by another country.
Conclusion
International trade is an extension of the three essential aspects of life i.e production, exchange, and consumption. Producers and consumers in international trade come from many nations. It offers numerous essential benefits for both governments and businesses, and it is a key pillar in ensuring and improving our global wealth levels, as it can drive the necessary macroeconomic goals and long-term growth of emerging economies. Developing nations should use a flexible exchange rate that promotes international trade to achieve the necessary shift and macroeconomic transformation. Expansionary monetary and fiscal policies should be undertaken by emerging countries as well, as this would support small and medium-sized businesses in their region. These nations must accept and make accessible single-digit interest, collateral-free loans to SMEs, particularly those in important industries such as agriculture, as one of the primary drivers of economic development.
Furthermore, grants, aid, and technical training should be easily accessible to these economic agents, as this has a positive influence on international trading activities, which would significantly contribute to reducing the high unemployment rate, the vicious poverty cycle, increasing living standards, increasing per capita income, and so on in these nations. Furthermore, nations should work together on a global scale to create a framework that allows everyone to profit from global commerce.
Frequently Asked Questions (FAQs)
What are the advantages of international trade for a company?
For a firm, the benefits of international trade include a wider potential client base, which means higher earnings and revenues, maybe less rivalry in a foreign market that has not yet been tapped, diversification, and potential benefits from foreign currency rates.
What makes international trade necessary?
International trade is affected by disparities in some areas of each country. Differences in technology, education, demand, government regulations, labour laws, natural resources, wages, and financing options typically stimulate international trade.
What are the most common international trade barriers?
International trade barriers are measures put in place by countries to hinder international trade and safeguard home markets. Subsidies, taxes, quotas, import and export permits, and standardisation are examples.
References
- https://www.researchgate.net/publication/330066648_Legal_Aspects_of_International_Trade
- https://biz.libretexts.org/Bookshelves/Business/Advanced_Business/Book%3A_International_Business/02%3A_International_Trade_and_Foreign_Direct_Investment/2.02%3A_What_Is_International_Trade_Theory
- https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html
- https://www.academia.edu/download/36633661/12.pdf
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
