IMPORTANCE OF FOREIGN TRADE – 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.
WHY FOREIGN TRADE IS NECESSARY
- Mutual Advantage – Foreign trade creates mutual advantage between two countries when trade is made.
- Monopoly – When a country is the only supplier of a particular product or service, it gives the country an advantage over other countries who such goods or services.
- Comparative advantage – Foreign trade arises comparative advantage according to the need of other nations by producing essential commodities.
- Climate Conditions – There are some items that can’t be produced locally by some countries based on the climate condition.
- Advance Technology – Countries who don’t have the latest technology has to look to import to get products that are produced with advanced technologies.
IMPORTANCE OF FOREIGN TRADE – Below are the major importance of foreign trade
- Maximum Use of Natural Resources – Foreign trade helps each country to specialize in the production of those goods, which best suits it environments. It, thus leads to maximum use of its natural resources.
2. Availability of Goods – It enables a country to obtain goods by importing which it cannot produce
3. Specialisation – Foreign trade leads to specialization in the production of goods. Specialization leads to lowering of costs and improving the quality of goods. The countries therefore, benefit from international trade.
4. Economics of Large Scale – The expansion of foreign trade leads to production of goods on large scale.
5. Stability in Prices – Foreign trade equalises prices of goods throughout the world.
6. Advance Equipment – The developing countries can import latest machinery and knowhow from the developed world. They can thus speedily break the vicious circle of poverty.
7. Benefits to Consumers – The consumers are able to get those goods which are not produced in their own countries.
8. Development of the means of Communication and Transport – Trading activities between countries lead to development in the means of communications and transportation.
9. Discouragement to Monopolies – International trade discourages the formation of monopolies in a country. If there is a combination of certain business units and they raise the prices of goods higher than the market, the government imports those goods to reduce the prices in the country.
10. International Co-operation – Foreign trade brings the people of different countries close to one another.
11. Better Employment Opportunities – As the Foreign trade expands, it creates jobs and provides better employment opportunities for the people both in and outside the country.
DISADVANTAGES OF FOREIGN TRADE
- Threat to infant industries – Due to import of goods from abroad, the infant industries of a country are not able to grow and survive. This is a major problem in developing countries where cost of production is relatively higher than cost of importation.
2. Economic exploitation – The under developed countries depend upon the developed countries for the importation of machinery, technology etc. the developed nations exploit the weaker nations and charge very high prices.
3. Foreign trade encourages slavery. It impairs economic independence of the poor nations.
4. Misuse of natural resources – If there is an excessive export of natural resources like iron, cool etc. of a country; it will be exhausted in a shorter span of time. The country then suffers economically in the long run.
5. Importation of substandard and harmful products – The import of harmful goods adversely effects health, well-being and economy of the country.
6. Unwholesome competition and rivalry between countries – Foreign trade creates rivalry among the competing nations of the world. It leads to ill-will, hatred and may eventually lead to wars among them.
7. Exploitation of developing countries by the developed ones – The developed countries motivate the developing nations to give tariff concessions and reduce restrictions on imports and adopt free trade. If the developing countries are lured and agree to join such agreements, they economically suffer in the long run.
Importance of Foreign Trade