International trade theory is simply an extension of general economic theory on international setting.
Thus, international trade theory is a branch of exchange theory where exchange relationship develops between nations, rather than between regions.
A region is a geographical sub-division of a country. Trading relationship that develops between regions of the same country is called internal trade.
When exchange and trading relationship grows between nations or countries we have international trade. Anyway, such exchange between regions takes place because of specialisation of a region. In other words, regional specialisation is the basis of domestic trade.
ADVERTISEMENTS:
Similarly, the basis of international trade is the specialization or division of labour or cooperation. If the basis of any trade is specialisation then why should there be a separate international trade theory? If international trade is just simply a logical extension of internal trade, then why should there be a distinction between interregional trade and international trade?
There are several reasons to study international trade theory rather than a general trade theory:
(i) Monetary System:
First is the independent monetary system. Each country has its own currency and own banking system. Within a region same currency unit prevails. But for making international transactions domestic currency is of no use. Further, a foreign exchange rate (i.e., the rate at which one currency, say rupee, is exchanged for another currency, say dollar) has an important bearing on exports and imports.
As a result, one country may gain while other may lose. However, different regions while carrying their economic activities remain insulated from such change. Or a change in the value of domestic currency will affect the entire nation uniformly.
(ii) Trade Policy:
ADVERTISEMENTS:
Trade policies differ from country to country. Trading or exchange relationship is strongly governed by trade policy of a country that it pursues. Trade policy is concerned with either relaxation or control of trade with the objective of garnering large volume of benefits of trade, since trade involves costs as well.
But, domestically, a uniform regional trade policy is pursued. There may be control or restrictions of the movement of goods within a country, but these are different from international controls.
(iii) Degree of Mobility of Resources:
A vast difference exists in the degree of mobility of resources between countries, ft is said that resources are mobile domestically but immobile internationally. Inputs like labour and capital are free to move or to choose their own areas of activity within a country.
But such is not an easy thing in the international arena where immigration laws, citizenship requirements, etc. come into play to prevent the movement of labour. Similarly, capital flows are also restricted between nations. No such restrictions or controls are placed on their movement within countries.
(iv) Socio-Political Conditions:
ADVERTISEMENTS:
Finally, socio-political environment varies from country to country, although such environment is uniform within a country. Market for commodity transactions between different nations is largely governed by its own geographical boundaries, social institutions and customs, habits, choice, etc. Within a country, one observes same social institutions and business customs. Throughout the world, a uniform set of socio-political environment can never exist.
For all these reasons, economists have also specialised in this branch of economics and a vast body of international trade theory has been developed by these specialist economists. Thus, there is no logic to have a uniform trade theory for both international and interregional trade.