Foreign trade, also referred to as International Trade, is the exchange of capital, goods, and services between two or more countries.
Foreign trade arises from the fact that no country is self-sufficient in term of producing all the goods and services that it requires. Countries have to buy from other countries what they cannot produce or can produce less than the requirements. Similarly, a country sells to other countries the goods and services which it has in surplus.
International trade consists of ‘export trade’ and ‘import trade’. Export trade involves sale of goods and services to other countries. Import trade involves purchasing of goods and services from other countries.
Types of Foreign Trade – The two types of Foreign Trade are:
- Bilateral trade: This is a trade agreement in which two countries exchange goods and services.
- Multilateral trade: This is the type of international trade where a country trade with two or more countries.
Division of Foreign Trade
- Import Trade: Import trade refers to purchase of goods by one country from another country or inflow of goods and services from foreign country to home country.
- Export Trade: Export trade refers to the sale of goods by one country to another country or outflow of goods from home country to foreign country.
- Entrepot Trade: Entrepot trade is also known as Re-export. It refers to purchase of goods from one country and then selling them to another country after some processing operations.
Reasons for International Trade/Foreign Trade
- Uneven distribution of natural resources:
- Expansion of market for products: Foreign trade is necessary as it helps to widen the market for goods produced.
- Difference in taste
- Difference in technology
- Difference in skills
- Difference in climatic condition
- Desire to improve the standard of living
- Difference in efficient use of natural resources
Barriers to International Trade/Foreign Trade
- Difference in currency
- Difference in culture and beliefs
- Difference in language
- Political instability
- Problem of documentation
- Transportation and communication
- Government policy
- Difference in legal system/ emigration laws
- difference in weights and measurement