International Trade

International trade is exchange of capital, goods, and services across international borders or
territories. In most countries, it represents a significant share of gross domestic product (GDP).
While international trade has been present throughout much of history (see Silk Road, Amber
Road), its economic, social, and political importance has been on the rise in recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system. Increasing
international trade is crucial to the continuance of globalization. Without international trade,
nations would be limited to the goods and services produced within their own borders. The main
difference is that international trade is typically more costly than domestic trade. The reason is
that a border typically imposes additional costs such as tariffs, time costs due to border delays
and costs associated with country differences such as language, the legal system or culture.

Benefits of International Trade

International trade has flourished over the years due to the many benefits it has offered to
different countries across the globe. International trade is the exchange of services, goods, and
capital among various countries and regions. The international trade accounts for a good part of a
country’s gross domestic product. It is also one of important sources of revenue for a developing
country. With the help of modern production techniques, highly advanced transportation
systems, transnational corporations, outsourcing of manufacturing and services, and rapid
industrialization, the international trade system is growing and spreading very fast.

The economic, political, and social significance of international trade has been theorized in the
Industrial Age. The rise in the international trade is essential for the growth of globalization. The
restrictions to international trade would limit the nations to the services and goods produced
within its territories, and they would lose out on the valuable revenue from the global trade.

According to the principle of comparative advantage, benefits of trade are dependent on the
opportunity cost of production. The opportunity cost of production of goods is the amount of
production of one good reduced, to increase production of another good by one unit. A country
with no absolute advantage in any product, i.e. the country is not the most competent producer
for any goods, can still be benefited from focusing on export of goods for which it has the least
opportunity cost of production.

Some important benefits of International Trade are :

 Enhances the domestic competitiveness

 Takes advantage of international trade technology
 Increase sales and profits
 Extend sales potential of the existing products
 Maintain cost competitiveness in your domestic market
 Enhance potential for expansion of your business
 Gains a global market share
 Reduce dependence on existing markets
 Stabilize seasonal market fluctuations

 Basis of International Trade

The basis for international trade is that a nation can import a particular good or service at a lower
cost than if it were produced domestically

– In other words, if you can buy it cheaper than you can make it, you buy it
– This maxim is true for individuals and nations
– This is called specialization and exchange

International Trade Agreements

This section provides information on the main international agreements that affect Irish
business. This also includes a description of Ireland's membership of the EU and of the World
Trade organization.

The WTO Agreements :

This section deals briefly with some of the underlying agreements that make up the rulebook of
the WTO including agreements on: · Goods and Services · Intellectual Property Law · Dispute
settlement

The WTO's rules the agreements are the result of negotiations between the members. The current
set were the outcome of the 1986/94 Uruguay Round negotiations which included a major
revision of the original General Agreement on Tariffs and Trade (GATT).

GATT is now the WTO's principal rulebook for trade in goods. The Uruguay Round also created
new rules for dealing with trade in services, relevant aspects of intellectual property, dispute
settlement, and trade policy reviews. The complete set runs to some 30,000 pages consisting of
about 60 agreements and separate commitments (called schedules), made by individual members
in specific areas such as lower customs duty rates and services market-opening.

Through these agreements, WTO members operate a non-discriminatory trading system that
spells out their rights and their obligations. Each country receives guarantees that its exports will
be treated fairly and consistently in other countries? markets. Each promises to do the same for
imports into its own market. The system also gives developing countries some flexibility in
implementing their commitments.
Goods and Services: It all began with trade in goods. From 1947 to 1994, GATT was the
forum for negotiating lower customs duty rates and other trade barriers; the text of General
Agreement spelt out important rules, particularly non-discrimination.

Since 1995, the updated GATT has become the WTO's umbrella agreement for trade in goods. It
has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues
such as state trading, product standards, subsidies and actions taken against dumping.

Banks, insurance firms, telecommunications companies, tour operators, hotel chains and
transport companies looking to do business abroad can now enjoy the same principles of freer
and fairer trade that originally only applied to trade in goods.

These principles appear in the new General Agreement on Trade in Services (GATS). WTO
members have also made individual commitments under GATS stating which of their services
sectors they are willing to open to foreign competition, and how open those markets are.

Intellectual Property Law : The WTO's intellectual property agreement amounts to rules
for trade and investment in ideas and creativity. The rules state how copyrights, trademarks,
geographical names used to identify products, industrial designs, integrated circuit layout-
designs and undisclosed information such as trade secrets "intellectual property" should be
protected when trade is involved.

Dispute settlement

The WTO's procedure for resolving trade quarrels under the Dispute Settlement Understanding is
vital for enforcing the rules and therefore for ensuring that trade flows smoothly.

Countries bring disputes to the WTO if they think their rights under the agreements are being
infringed. Judgements by specially appointed independent experts are based on interpretations of
the agreements and individual countries' commitments.

The system encourages countries to settle their differences through consultation. Failing that,
they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of
a ruling by a panel of experts, and the chance to appeal the ruling on legal grounds.
 Foreign Trade and Economic Growth

Foreign trade enlarges the market for a country’s output. Exports may lead to increase in national
output and may become an engine of growth. Expansion of a country’s foreign trade may
energize an otherwise stagnant economy and may lead it on to the path of economic growth and
prosperity. Increased foreign demand may lead to large production and economies of scale with
lower unit costs. Increased exports may also lead to greater utilization of existing capacities and
thus reduce costs which may lead to a further increase in exports. Expanding exports may
provide greater employment opportunities. The possibilities of increasing exports may also
reveal the underlying investment in a particular country and thus assist in its economic growth.

Rising exports and the consequent increase in domestic output may lead to an increase in
domestic income and employment. This will lead to the creation of new effective demand for a
number of commodities in the domestic market. As a result, all the industries producing for the
domestic market will also get a big boost. Some of the infrastructure specially erected for the
development of export industries like new transport facilities; training facilities etc may also
assist the development of domestic industries. In recent years, newly industrializing economies
(NIC) of Asia namely Hong Kong, Singapore, Taiwan, Malaysia, Thailand and South Korea
have achieved remarkable growth by exports of manufacturers. Thus foreign trade has a
multiplier effect on economic growth.

India also has had its share of prosperity due to the development of foreign trade. From times
immemorial, India was considered as the workshop of the world. Articles produced by India’s
skilled artisans were considered worth their weight in gold. That explains why, even in the
absence of plentiful gold mines, India was a repository of gold.

The opening of Suez Canal in 1869 led to a reduction of distance between India and Europe
which led to an increase in the demand for India’s commercial crops. As a result, production and
exports of commercial crops increased. The process was encouraged by the import of foreign
capital for the provision of irrigation facilities and railway lines to connect the interior with the
port towns. The rise in the output of such agricultural crops as oilseeds, cotton, jute and tea, was
largely due to a flourishing export trade. This initiated the process of economic growth in India,
albeit on not very desirable lines.

Even now foreign trade continues to engender growth in India. For example, many export
processing zones and special economic zones have been established to facilitate manufacture or
reprocessing for export. All such efforts create a lot of employment opportunities and lead to an
increase in incomes which lead to the demand for many new products which are very often
manufactured in the country itself.

Foreign trade induces economic growth in other ways too. The appearance of imported
commodities in a country invariably creates new demands. This provides an inducement to the
people in general to work hard and earn enough money to be able to purchase some of the
imported articles. This necessarily leads to economic growth. Again, there is an urge in
enterprising industrialists to produce the things imported in the country itself. Japan provides an
excellent example of this type. It is said Japan never imports a manufactured article twice. This
has happened in almost all countries including India. In fact, this natural urge for import
substitution provides a strong stimulus to economic growth. The strategy behind India’s earlier
development plans was mainly one of import substitution. The existence of a large domestic
market also provides a strong incentive for import substitution as, for example, consumer
industries in India. In the case of basic and strategic industries, economic independence and self
reliance have been the motive force behind import substitution, and in these cases cost becomes a
secondary consideration. In many a case, successful import substitution adds to the export
potential. Many of the new industrial products manufactured in India are exported.

 Balance of Trade (BOT)

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the
monetary value of exports and imports of output in an economy over a certain period. It is the
relationship between a nation's imports and exports. A positive balance is known as a trade surplus if it
consists of exporting more than is imported; a negative balance is referred to as a trade deficit or,
informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.

Definition

The balance of trade forms part of the current account, which includes other transactions such as
income from the international investment position as well as international aid. If the current
account is in surplus, the country's net international asset position increases correspondingly.
Equally, a deficit decreases the net international asset position.

The trade balance is identical to the difference between a country's output and its domestic
demand (the difference between what goods a country produces and how many goods it buys
from abroad; this does not include money re-spent on foreign stock, nor does it factor in the
concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with recording and
collecting data. As an illustration of this problem, when official data for all the world's countries
are added up, exports exceed imports by almost 1%; it appears the world is running a positive
balance of trade with itself. This cannot be true, because all transactions involve an equal credit
or debit in the account of each nation. The discrepancy is widely believed to be explained by
transactions intended to launder money or evade taxes, smuggling and other visibility problems.
However, especially for developed countries, accuracy is likely.

Factors that can affect the balance of trade include:

 The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting
economy vis-à-vis those in the importing economy;
 The cost and availability of raw materials, intermediate goods and other inputs;
 Exchange rate movements;
 Multilateral, bilateral and unilateral taxes or restrictions on trade;
  Non-tariff barriers such as environmental, health or safety standards;
 The availability of adequate foreign exchange with which to pay for imports; and
 Prices of goods manufactured at home (influenced by the responsiveness of supply)

Trade Balance = Total Exports - Total Imports

 Balance of Payment (BOP)

A balance of payments (BOP) sheet is an accounting record of all monetary transactions

between a country and the rest of the world. These transactions include payments for the
country's exports and imports of goods, services, and financial capital, as well as financial
transfers. The BOP summarizes international transactions for a specific period, usually a year,
and is prepared in a single currency, typically the domestic currency for the country concerned.
Sources of funds for a nation, such as exports or the receipts of loans and investments, are
recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign
countries, are recorded as negative or deficit items. When all components of the BOP sheet are
included it must sum to zero with no overall surplus or deficit. For example, if a country is
importing more than it exports, its trade balance will be in deficit, but the shortfall will have to
be counter balanced in other ways – such as by funds earned from its foreign investments, by
running down reserves or by receiving loans from other countries.

Expressed with the standard meaning for the capital account, the BOP identity is:

 Current Trends in India

 Barriers to International Trade

What is a Trade Barrier

Types:

-Import duties -Import quotas

-Import licenses -Tariffs

-Export licenses -Subsidies

-Non-tariff barriers to trade -Voluntary Export Restraints

Barriers to international trade

1. Tariff Barriers

This is the barrier put on imports in the form of duties, tax and quotas etc. Due to which the
imports are less and the price level of imported products rises and the demand for them
decreases.

2. Non - Tariff Barriers

This is the barrier put by the country on imports by restricting quantity of importing. A fix
quantity is defined for the importing products that make the price level of the imported goods
high and the supply of foreign goods become limited.

3. Voluntary Constraints

This is the last kind of trade barrier in which the country itself voluntarily stops the incoming
products. Due to this barrier the country has power to stop the imports coming frequently into the
country and limiting the competition with the foreign goods with the local industries.

These three types of trade barriers should be taken into consideration when deciding to trade
internationally. Mostly lower developed countries and the developing countries uses these kinds
of trade barriers for their international trade and international business. The advantage of these
barriers is as follows: -

 Country earns foreign exchange by putting Tariff and non-Tariff barriers.

 The local industry of the country is protected by the foreign competitive industries.
 Less imported goods are brought into the country due to which consumer also buys local
products.
 The currency remains in the country due to which government gains benefit in the form of
revenue.

TRADE BARRIERS

Tariffs
Tariffs have been a means of protecting domestic industries and creating revenue for centuries. A
tariff is really nothing more than a tax placed on goods imported into a country. In the early
years of the U.S., tariffs were the main source of revenue for the Federal government and
continued to be an important source of revenue up until the 1930’s. Today, the average tariff
rates across goods and across countries are between 10 and 15 percent and are not a
significant source of revenue for most countries (Rajapatirana, 1994b). However, tariffs still
present a significant barrier to trade among nations.
By placing a tax on imported goods, a tariff raises the price of goods and allows certain domestic
producers to produce at higher levels. In doing so, resources may be diverted away from
industries for which a country has a competitive advantage to industries for which the country
does not have a competitive advantage. Diversion of resources creates higher prices and lower
quality for goods that are produced domestically. Therefore, a tradeoff exists between
saving jobs in specific industries versus the welfare of consumers.

Quotas
A quota, also referred to as a quantitative restriction, is a policy tool to restrict trade by placing a
ceiling on the amount of a product that can be imported during a given period. As a result, the
restriction will create artificially high prices on goods and reduce the amount of competition
within that industry. A variation of the quota system is a voluntary export restrictions (VER).
Under VER, an exporting country is asked to restrict their exports under the threat of explicit
restrictions and trade barriers.

Duties
A duty is a tax imposed on imported goods by the customs authority. It is often applied as an ad
valorem tax and is either based upon the value of the good or the weight or quantity of the good.
A duty has a similar effect as a tariff in that it raises the price of imports and distorts the relative
price of goods and consumption patterns. Therefore, duties create a consumer welfare loss.

Exchange Rate Controls

Many third world countries try to be protective of their unstable and struggling economies.
Therefore, they want to be self-reliant as much as possible to encourage their domestic
industries. In an attempt to protect their domestic industries, third world countries will often
create exchange rate barriers to reduce the influx of foreign currency, which reduces the ability
of a country to purchase imports. Consequently, residents will be forced to purchase goods
from domestic producers which creates an artificially diversified domestic economy that
produces a number of goods for which the country does not have a competitive advantage. As a
result, consumers will have to pay a higher price on goods and services and resources will be
diverted away from industries for which they have a competitive advantage (Gwartney and
Stroup, 1995).

Dumping Policy
Dumping occurs when a producer sells a product in a foreign market at prices below that of their
own domestic market. Dumping could be just a strategy of a producer (predatory dumping
practices), or it could be the result of foreign government subsidies. This will not only enable a
domestic producer to crack the foreign market, it may, eventually, drive out competition in that
foreign market.

 WTO

WORLD TRADE ORGANISATION AND ITS IMPLICATIONS

The World Trade Organization (WTO), which was established in 1995 as a successor to the
General Agreement on Tariffs and Trade 1947 (GATT 1947), is the principal international
organization governing multilateral trade among Members. The WTO enshrines the principle of
non-discrimination, based on the twin concepts of Most Favoured Nation (MFN) and national
treatment between Members. This implies that a benefit related to trade in goods and services
given to a Most Favoured Nation has to be extended to all other Members; and that exports from
a Member can not be discriminated against vis-à-vis domestic products of the importing
Member.

The WTO administers the implementation of a set of agreements, which include the General
Agreement on Tariffs and Trade, other agreements in the goods sector (e.g., agriculture, textiles,
sanitary and phytosanitary measures, trade related investment measures, anti-dumping, etc.), and
in addition, agreements in two other areas, viz., trade in services, and trade related intellectual
property rights. The WTO agreements were negotiated on the basis of a ‘single undertaking’,
which implies that membership to the organization obligates the acceptance of the results of the
Uruguay Round of multilateral trade negotiations without exception. Plurilateral agreements,
such as the Government Procurement Agreement, were not a part of this single undertaking, and
Members of the WTO have the option to accede or not to them.

The emergence of the WTO with its sweeping mandate and enforcement mechanisms has far
reaching implications for developing countries. For India – a founding member of the GATT-
1947 and the WTO – this new rule-based system provides both opportunities and challenges. The
importance of WTO in trade creation and increasing market access for Members is widely
acknowledged. However, there are also areas of serious concern for developing countries like
India emanating from rights and obligations under certain agreements in the WTO. These include
the following:

Agreement on Agriculture (AoA): The WTO Agreement on Agriculture (AOA) was one of the
many agreements negotiated during the Uruguay Round of multilateral trade negotiations.
International trade in agricultural commodities has witnessed serious distortions over the years
because of massive production and export subsidies given by the developed countries. While this
has contributed to excess production, the industrialized world also imposed import restrictions to
prevent imported agricultural products from reaching domestic markets. With the purpose of
correcting these trade distortions, the AoA provides for (a) reduction in domestic subsidies, (b)
reduction in export subsidies, and (c) tariff binding and progressive reduction of tariffs in
agricultural commodities, i.e., market access.

Quantitative Restrictions (QRs)- The WTO provides that trade restrictions, i.e., prohibitions or
restrictions (other than duties) made through quotas, import or export licenses or other measures
shall not be maintained by any Member, except those maintained for BOP purposes or consistent
with the provisions of Articles XVII, XX and XXI of GATT 1994. India phased out quantitative
restrictions on imports maintained for
BOP reasons by 1 April 2001.

However, removal of QRs does not imply duty-free imports, nor does it mean removal of all
import controls. To deal with the adverse fall-out of QR phase-out, several measures are
possible: tariff adjustments within bound levels, levy of anti-dumping duties, countervailing
duties on subsidized imported goods, safeguard action such as duties and temporary imposition
of QRs. Non-tariff Measures (NTMs) such as Sanitary and hytosanitary (SPS) measures are also
available for ensuring quality and hygiene of imports, especially agricultural and food items.

Trade Related Intellectual Property Rights (TRIPs)- Intellectual Property Rights (IPRs) refer to
the legal ownership of by a person or business of an invention/ discovery attached to a particular
product/ process which protects the owner against unauthorized copying or limitation. The IPRs
are of seven types, viz., copyrights, trademarks, geographical indications, industrial designs,
patents, integrated circuits and trade secrets. A patent is a statutory privilege granted to the
inventors and other persons deriving their rights from the inventor, for a fixed period of years, to
exclude other persons from manufacturing, using or selling a patented product or from utilizing a
patented process or method.

The TRIPs Agreement purports to bring in uniformity in the standards of intellectual property
rights among the WTO irrespective of their development status. While this is expected to result
in technology transfer and flow of investment among the Members, the extent of benefits
accruing will depend on domestic industries and the status of development of the countries.

Geographical Indications- The TRIPs Agreement provides for mutual recognition of

geographical indications. The Agreement contains a provision that a member shall provide the
legal means for interested parties to prevent the use of any means in the designation or
presentation of a good that indicates or suggests that the good in question originates in a
geographical area other than the true place of origin in a manner which misleads the public as to
the geographical origin of the good. There is, however, no obligation under the Agreement to
protect geographical indications which are not protected in their country of origin or which have
fallen into disuse in that country. In India, a law has been enacted and would be applicable from
the day to rules are notified

Trade and Investment – The introduction of the investment issue to the Uruguay Round was a
departure from the multilateral trade regime. Despite resistance from the developing countries,
the Agreement on Trade Related Investment Measures (TRIMs) was incorporated in the final
Act of the UR. The TRIMs Agreement requires Members to phase out performance requirements
such as local content requirements and foreign exchange neutrality.
There are many implications for the developmental objectives for the host country in
terms of inviting foreign investment under this Agreement. A multilateral framework cannot
guarantee an increase in FDI inflows although it threatens to adversely affect the quality of the
inflows. The link between trade and investment is also somewhat ambiguous. The bulk of FDI
flows continue to be market-seeking (or tariff jumping) type, and these inflows actually
substitute trade.

Principles of the trading system

The WTO establishes a framework for trade policies; it does not define or specify outcomes.
That is, it is concerned with setting the rules of the trade policy games. Five principles are of
particular importance in understanding both the pre-1994 GATT and the WTO:
 1. Non-Discrimination. It has two major components: the most favoured nation (MFN)
rule, and the national treatment policy. Both are embedded in the main WTO rules on
goods, services, and intellectual property, but their precise scope and nature differ across
these areas. The MFN rule requires that a WTO member must apply the same conditions
on all trade with other WTO members, i.e. a WTO member has to grant the most
favorable conditions under which it allows trade in a certain product type to all other
WTO members.Grant someone a special favour and you have to do the same for all other
WTO members."National treatment means that imported goods should be treated no less
favorably than domestically produced goods (at least after the foreign goods have entered
the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical
standards, security standards et al. discriminating against imported goods).

2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise
because of the MFN rule, and a desire to obtain better access to foreign markets. A
related point is that for a nation to negotiate, it is necessary that the gain from doing so be
greater than the gain available from unilateral liberalization; reciprocal concessions
intend to ensure that such gains will materialise.
3. Binding and enforceable commitments. The tariff commitments made by WTO
members in a multilateral trade negotiation and on accession are enumerated in a
schedule (list) of concessions. These schedules establish "ceiling bindings": a country can
change its bindings, but only after negotiating with its trading partners, which could mean
compensating them for loss of trade. If satisfaction is not obtained, the complaining
country may invoke the WTO dispute settlement procedures.
4. Transparency. The WTO members are required to publish their trade regulations, to
maintain institutions allowing for the review of administrative decisions affecting trade,
to respond to requests for information by other members, and to notify changes in trade
policies to the WTO. These internal transparency requirements are supplemented and
facilitated by periodic country-specific reports (trade policy reviews) through the Trade
Policy Review Mechanism (TPRM).The WTO system tries also to improve predictability
and stability, discouraging the use of quotas and other measures used to set limits on
quantities of imports.
5. Safety valves. In specific circumstances, governments are able to restrict trade. There
are three types of provisions in this direction: articles allowing for the use of trade
measures to attain noneconomic objectives; articles aimed at ensuring "fair competition";
and provisions permitting intervention in trade for economic reasons.Exceptions to the
MFN principle also allow for preferential treatment of developed countries, regional free
trade areas and customs unions.

 Indian EXIM Policy

Indian Exim Policy

In every five years, the Ministry of Commerce and Industry, Government of India, announces the
Export-Import (EXIM) policy. This is an effort towards the encouragement of foreign trade and
creation of a complimentary Balance of Payments. The EXIM policy, updated yearly on 31st of
March, is followed from 1st April.

Some of the chief highlights of the current policy are:

1. Extension of the DEPB scheme till May, the next year.

2. Service tax will be refunded on maximum services
3. Extending Income tax benefit for EOUs.
4. Extension of FMS coverage and inclusion of ten more countries including Mongolia,
Croatia, Ghana, Colombia, Albania, etc.
5. Introduction of split-up facility
6. Payment of excise duty by export oriented units on monthly basis rather than
consignment basis.

However, the central government reserves the right to amend any of the sections of this policy in
public interest.
Some of the focus initiatives of the policy are:
To have a greater share in the global trade and generate more employment opportunities, a
number of focus initiatives that have been identified for various sectors are:

Agriculture:
Some of the policies that have been introduced are-Vishesh Krishi and Gram Udyog Yojana.
Moreover, diverse export promotion schemes have allowed the use of export of certain restricted
items. Import of certain pesticides has been approved under the advance authorization schemes
for export of agricultural products.

Handloom:
MAI/MDA schemes have granted specific plans for the promotion of export of handloom items.
Duty free import on certain items has been conferred which has proved to be beneficiary. These
include hand knotted carpets.

Handicraft:
Establishment of new handicraft SEZs would enable the procurement of products from the
cottage sector and also help in the finishing for exports. It is also suggested that the import
entitlement of machineries, tools, trimmings and equipments will be 5% of the value of FOB for
export that was recorded the previous year. Import trimmings, consumables and embellishments
are under the authorization of handicraft EPC.

Gems and Jewellery:

The replenishment scheme holds the authority to allow the import of 8K or above gold backed up
by an Assay certificate for the specification of weight, alloy content and purity. Several import
duties have been revised for jewellery, cut and polished diamonds, marine sector, electronics,
leather and footwear, etc.

Export and Import Finance

 Special need for Finance in International Trade

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