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Term Paper on International Trade


Term Paper # 1. Need for a Separate Theory of International Trade:

Since quite earlier times, there has been a controversy among the economists on the issue whether or not there is the need for a separate theory of international trade. There are two opposite viewpoints on this issue. One of them is called as the classical viewpoint, while the other is associated with Bertil Ohlin and Haberler.

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Classical Viewpoint:

The classical writers including Adam Smith, Ricardo and J.S. Mill recognize that the inter-regional trade is fundamentally different from the international trade. Among the different regions of the same country, there is a free mobility of labour and capital but serious constraints exist upon the international mobility of these factors. The immobility of labour and capital permits the different countries to specialise in the production and export of specified goods.

In addition, there are differences in national policies, political organizations, monetary systems and tariff and non- tariff restrictions among the different countries. It signifies that the conditions governing the exchange of goods within different regions of the same country are not applicable in the case of exchange of goods among the different countries. Hence there is full justification in having a separate theory of international trade.

Ohlin’s Viewpoint:

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The writers like Bertil Ohlin and Haberler have refuted the classical viewpoint. In their opinion, the difference between international and inter-regional trade is only of degree and not of kind. In the words of Ohlin, “International trade should be regarded as a special case within the general concept of inter-regional or perhaps rather inter-local trade.” Within the same country, the different regions specialise in the production of different commodities due to differences in resource endowments, skill and efficiency of the people. The mobility of the factors is not perfect even within different parts of the same country.

Consequently, the cost advantages or disadvantages reflected by price differentials appear even in the case of internal trade. The different regions are engaged in the exchange of different commodities essentially because of the motive of profit or gain from trade. It is possible to extend Marshallian analysis of value in the single market to the phenomenon of international trade that involves more or less closely related several markets.

Despite Ohlin’s rejection of the necessity of separate treatment of the theory of international trade on account of methodological reasons, it must be conceded that there are certain distinct differences and complicating factors involved in international trade. These justify, in an ample measure, the rationale of a separate treatment of international trade.

Term Paper # 2. Distinguishing Features of International Trade:

The theories and models dealing with micro and macro aspects of international trade have been built up by the modern writers like Samuelson, Leontief, Johnson and Jagdish Bhagwati. These are quite distinct from the theory related to inter­regional or internal trade. When it has been fully recognized that the international trade is distinct from the internal trade, the most relevant question concerns the distinguishing features of international trade.

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These distinguishing features are as follows:

(i) Immobility of Factors:

The most prominent distinguishing feature of international trade, according to classical economists, was the perfect geographical immobility of the factors of production like labour and capital among the nations. In contrast, there is perfect mobility of productive factors among the different regions of the same country.

If the factors of production are perfectly mobile within the same country, they will tend to move to these regions where their prices are relatively higher. The inter-regional mobility of factors can completely wipe out the differences in prices of factors in different regions. Each factor of production tends to have the same price throughout the country.

The international mobility of factors, on the other hand, is neither free not perfect. There are severe constraints upon the mobility of labour and capital such as immigration laws, restrictions on the international capital flows and legal restrictions. The additional barriers on factor mobility are in the form of differences in language, climate, customs, and religions, political and educational systems. It is, therefore, clear that there is a relatively greater degree of factor mobility within the different regions of the same country than among the different countries.

The classical assumption of perfect mobility of factors within the country and their perfect immobility among the different countries is, however, too drastic and not acceptable. The movements of labour have continued to take place from one country to another despite restrictions. The immigration has played a highly significant role in the development of several countries like the U.S.A, Britain, Canada, Australia, New Zealand and the countries of South America.

Similarly the international capital flows continued to take place from Europe to the U.S.A., Canada, Australia and several other regions of the world during the last three centuries. The massive flows of capital still take place among the different countries. As regards the restrictions on the mobility of labour and capital, these may exist even within the different regions of the same country.

Consequently, it should be recognised that there is neither perfect factor mobility within the same country nor prefect immobility of factors among the different countries. The difference between internal and international mobility of factors is only that of degree. It may, however, be accepted that the degree of factor mobility within the same country is more than that on an international plane. Even that necessitates a separate treatment of international trade from the domestic trade.

(ii) Mobility of Products:

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There is a relatively more free mobility of products within the different regions of a country. The only barriers to movement of goods are in the form of geographical distances and cost of transportation. In the case of international trade, on the contrary, there are several more man-made barriers to the free movement of products apart from distance and transport costs.

These include import and export duties, quotas, exchange restrictions and other non-tariff restraints. There have been growing tendencies towards protectionism among the advanced countries. The United States has been pressurising the other countries to do away with the trade barriers but at the same time she is ever willing to protect her home industries.

The slapping of 200 percent import duties on certain items imported from the European Community as a punitive measure to force the latter to reduce agricultural subsidies, had almost jeopardized the negotiations under the Uruguay Round. In several other countries, the spirit of nationalism and urge for self-sufficiency has resulted in the adoption of import substitution policies which also tend to reduce the international trade. There are no such complex restrictions on the flow of goods within the same country.

(iii) Non-Homogeneity of Markets:

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The international markets lack homogeneity on account of differences in languages, tastes, fashions, customs and systems of weights and measures. Such differences may not exist in the case of markets within the same country. For instance, the right- hand driven motor cars, electrical goods, readymade garments and indigenous medicines produced in India can be easily marketed in India but it may be difficult to sell them in the foreign markets like those of the U.S.A and Canada.

(iv) Difference in Resource Endowments:

The different countries have been endowed by nature with different types of natural resources. Each country specialises in the production and export of those commodities in which they are well- endowed. They import such products, in the production of which they face a resource deficiency. For instance, India has been exporting iron ore, manganese and mica and the Middle East countries export petroleum products just because they are well-endowed with these materials.

The countries like Australia and Canada produce and export farm products. Countries like the U.S.A., England, Germany and Japan are abundant in capital. It is, therefore, natural for them to specialise in the production and export of those goods, which involve relatively larger use of capital. Thus the differences in resource endowments are one of the reasons for the international economic inter-dependence of the countries.

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(v) Differences in Geographical and Climatic Conditions:

It is not possible for a given country to produce domestically every type of product. The geographical and climatic conditions, which differ from country to country, influence their specialisation in production and exports. It is because of the geographical or climatic reasons that Australia exports wheat; India exports tea; Malaysia exports rubber; Thailand exports rice; Cuba exports meat and sugar; Brazil exports coffee; and Bangladesh exports jute.

(vi) Differences in Currencies:

The distinction between the international and inter­regional trade becomes more explicit because of the existence of different currencies in different countries. For instance, all domestic transactions in India take place in terms of rupees, which is the legal tender in this country. But in its trade with countries like the U.S.A., Germany, Japan, France and Britain, the payments have to be made in terms of dollars, marks, yens, francs and pound sterling respectively.

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The availability or non-availability of exchange reserves in terms of foreign currency condition the direction of trade of any country. When there is the existence of different currencies, the countries have to contend with the problem of conversion of one currency into another. In case of certain currencies, known as soft currencies, the convertibility is easy but in case of hard currencies, the convertibility can be difficult.

No such problem exists in the domestic trade. The complications in international trade are therefore, caused by the availability or shortage of foreign currency reserves, exchange rates, ease or difficulty in conversion, controls and restrictions on foreign exchange etc. Domestic exchange does not involve the complexities and complications that are present in the international exchange of goods and services due to differences in currency units.

(vii) Differences in Economic Environment:

The economic environment of a country consists of legal and international framework governing consumption, production, exchange and distribution, the monetary, fiscal and commercial policies, techniques of production, factor proportions, factor prices, production function, infra-structural facilities, taste patterns and preferences and degree of competition.

All of them together create a specific economic environment or investment climate in a particular country. But economic environment does differ from one country to another. Such differences have a very significant impact upon the character of trade among the different countries.

(viii) Differences in Transport Costs:

One of the distinguishing factors between the domestic and foreign trade is the cost of transportation. The costs of transporting goods to the foreign countries are generally higher than those in the inter-regional trade because of vast geographical distances between the different countries.

(ix) Differences in Political Systems:

All the residents of a country share a common political system. Even when there are differences among the various groups of people on account of language, caste, religion, customs and food habits, they still have the sense of belonging to the same nation. The spirit of nationalism makes them subserve their regional clashing interests. They become concerned with the welfare of all groups of people in that country.

They are prepared to make sacrifices and adjustments for the sake of their compatriots. In the inter-regional trade, the care is taken that the terms of trade are not very detrimental to one or the other region. In case of international trade, there is no such cohesion as the peoples of different countries belong to different political entities. Each country is guided by enlightened self-interest and there is little concern about terms of trade becoming detrimental to some foreign country. In this context, Frederic List observed, “Domestic trade is among us, international trade is between us and them.”

(x) Differences in Trade Policies:

The international trade also differs from the internal trade because of trade policies. Within a given country a single uniform national policy governs the domestic or inter-regional transactions. In the case of international trade, the trading countries follow different national policies concerning imports, exports, capital inflows and outflows, tariffs, quotas, exchange controls and other barriers to the international movement of goods and services.

Very often such policies are in conflict with the economic, political and strategic interests of one country or the other. In view of such complexities related to international trade policies, it seems appropriate to treat international trade as distinct from the domestic trade.

(xi) International Payments Problem:

In case of inter-regional trade, the transactions generally take place at the micro level (among individuals and business firms). There is no problem of adjusting any deficit or surplus because of a high degree of inter-regional mobility of capital. In the case of international trade, the values of exports and imports between two trading countries over a short or long period may not get fully matched, giving rise to surplus or deficit in international payments.

The countries are obliged to adopt appropriate measures like import restrictions through tariffs or non-tariff barriers, subsidisation of exports, capital movements, depreciation or devaluation, monetary policies, expenditure policies and physical or financial controls. Some of these adjustments may be to the disadvantage of one or more trading partners. Their reactions to such policies may vary from resentment to retaliation. Thus the problems and complications associated with balance of international payments distinguish the international trade from the internal or inter-regional trade.

On the basis of the peculiarities and distinguishing features, it is proper to recognise that the classical writers are on a strong wicket when they stress upon a separate treatment of international trade theory from that of domestic trade. It is, in fact, this recognition that has accorded to international economics the status of an independent branch of economic theory.

Term Paper # 3. Importance of International Trade:

Since the times of Mercantilists, who had advocated the accumulation of gold or wealth through creation of trade surpluses by the promotion of exports and restrictive import policies and classical economists, led by Adam Smith, who supported the free international trade, the trade among nations has been given a place of pride in the economic progress of nation.

Alfred Marshall said, “The causes of which determine the economic progress of nations belong to the study of international trade.” D.H. Robertson expressed it in a more forthright manner. According to him, international trade is an engine of growth. In the words of Haberler, “International trade has made a tremendous contribution to the development of less developed countries in the 19th and 20th centuries and can be expected to make an equally big contribution in the future.”

The Nobel Laureate J.R. Hicks stressed, “If there is any branch of economic theory which is especially relevant to development economics, it is the study of international trade.” The relevant question, in this regard is why the prominent economists of all times have given so great an importance to the international trade.

The answer lies in the immense advantages of foreign trade that are discussed below:

(i) International Division of Labour and Specialization:

The division of labour and specialization of products by individual firms accelerate the rate of production, lower costs and maximize profits. International trade ensures the application of the principles of division of labour and specialisation to the fields of production and international exchange of commodities by the various countries.

Adam Smith enunciated the international specialisation through these words- “The tailor does not attempt to make his own shoes, but buys them from a shoe maker. The shoe maker does not attempt to make his own clothes, but employs a tailor. The farmer attempts neither the one nor the other, but employs those artificers….If a foreign country can supply us with a commodity cheaper than we ourselves can make it better buy it from them with some part of the produce of our own industry employed in a way in which we have some advantage.”

Given the specific natural endowments every country should specialise in the production and export of only that commodity or commodities in the production of which it has greater comparative cost advantage than the others. When each country specialises in the production and exports of those goods which it is most suited to produce and imports those goods which it can procure cheaper from the others, it derives gain from trade in the form of an increase in real income and improvement in the consumption standard of its people.

(ii) Optimum Use of World Resources:

The international trade promotes the product and factor specialisation in various countries. Each country sells its products in those markets where it can get most remunerative prices and buys the essential raw materials and intermediate products from those markets where these are the cheapest. This leads to an optimum allocation and utilisation of all the productive resources of the world.

(iii) Stabilisation of Prices:

In the absence of international trade, the domestic surpluses or shortages in production invariably lead to serious deflationary and inflationary trends and consequent destabilization of the entire system. Through the international trade, the domestic surpluses in production can be offset through exports and shortages can be removed through imports. In this way, the foreign trade can efficiently deal with the problems of internal inflation or deflation and ensure a greater degree of stability in prices.

(iv) Technological Progress:

When a country has decided to specialise in the production of particular commodities, it will always attempt to maintain its comparative cost advantage in that sphere through appropriate technical changes. The international trade permits a country to import new machines, equipment, designs and technical services from other countries and can bring about a steady expansion in its productive capacity.

(v) Easy Flow of Capital:

Both developed and poor countries have to depend upon foreign capital for financing international payments deficit and economic development. The international trade cultivates mutual co-operation among the countries and facilitates the international short term and long term flows of capital.

(vi) Promotion of Competition:

The international trade promotes competition among the different countries. The international competition increases the efficiency of production. It becomes possible to import superior varieties of products at reasonable prices. Similarly large surpluses of domestic production can be disposed of in the foreign markets to realise larger export earnings. In addition, the free competition can provide protection from the monopolistic exploitation at the hands of domestic producers.

(vii) Greater Bilateral Co-Operation:

The international trade emphasises upon the mutuality of interests among the trading countries. It creates consciousness about the problems faced by the different countries related to balance of trade and payments, international debt payments, exchange rate fluctuations, tariff and non-tariff barriers and shortage of invisible funds for development. They co-operate among themselves to resolve these problems in the spirit of co-operation and understanding and devise bilateral arrangements that serve their common interests.

(viii) Growth of International Economic Institutions:

The necessity of promoting restriction- free international trade, for ensuring efficient system of exchange and payments adjustments and removing the shortage of international liquidity, led to the growth of several multilateral institutions like IBRD, IMF, IDA, UNCTAD and WTO. All these institutions are making efforts to create a new international economic order.

(ix) Export-Led Growth:

There are alternative strategies of growth. The recent political and economic developments over the world have brought into limelight the strategy of growth through the maximum expansion of exports. This strategy assists in domestic specialisation in production and consequent expansion of export industries and other complementary industries. The industrial expansion ensures greater generation of employment and the resultant increase in incomes and living standards.

The export-led growth provides sufficient export earnings that can be ploughed back for the development not only of export sectors but various other sectors of the economy. The development imports like raw materials, machinery, equipment and advanced technical know-how can also be financed through exports. Thus both the poor and advanced countries reach higher production frontiers through trade.

(x) Basis of Economic Survival:

The economies of several advanced and poor countries are almost completely dependent upon the external trade. For the countries like England, Japan and Germany, having large productive surpluses but smaller domestic market, the external trade is a matter of life and death.

Even the countries like the U.S.A., Canada and Australia are not likely to maintain their existing standards of consumption and production in the absence of international trade. The economies of the OPEC (Organization of Petroleum Exporting Counties) nations will collapse instantly, if they cannot export crude oil and petroleum products to the other countries.

From the above discussion, it becomes clear that the countries can derive immense gains from international trade. No doubt the countries can achieve continuous expansion of their productive capacity and standards of consumption on the solid foundation of external trade.

Term Paper # 4. Arguments against International Trade:

It is true that international specialisation in production and exports has some merits but it is also important to recognise some of the problems created by it.

The major arguments against the international trade from the point of view of less developed countries like India are as follows:

(i) Exploitation of Resources and Markets:

The less developed countries are well-endowed with natural resources including minerals, farm and forest products. On the basis of logic of free international trade, the advanced countries have continued to exploit the natural resources of the poor countries for the expansion of their industries and their markets for dumping their exports. The free flow of products of industrialised countries does not permit the indigenous production of manufactural goods.

(ii) Balance of Payments Deficits:

The poor countries have a very limited capacity to produce and export. But they have to import essential consumer products, producer goods, technical services and defence materials, apart from the foreign capital. It has involved them into persistently mounting burden of balance of payments deficit. Faced with the excessive strain of payments deficit, the less developed countries are not likely to achieve a higher rate of growth.

(iii) International Debt Problem:

The international trade has created an acute problem of repayment of international debts. Some of the countries of the Third World have landed themselves in the serious debt trap where they have to resort to fresh borrowing just for the purpose of debt servicing. There is neither willing bilateral accommodation of borrowing countries by the advanced leading countries nor there is any satisfactory multilateral arrangement so far to tackle this critical situation.

(iv) Adverse Terms of Trade:

Most of the less developed countries are engaged in the production and export of primary products. The advanced countries, on the other hand, produce and export manufactural goods. It has been a historical experience that the international prices of primary products with the exception of petroleum products, have declined relative to those of the manufactured goods. As a consequence, the terms of international trade have invariably remained unfavourable for the poor countries.

(v) International Transmission of Fluctuations:

The increased economic inter-dependence of the countries through international trade and capital movements transmits cyclical fluctuations from one country to another causing a serious destabilisation of their economic systems.

(vi) Lack of Industrial Diversification:

The most essential requirement of self-generating growth in any country is the diversification of industries. The international trade tends to cause specialisation of production, which militates against the diversification of industries and creates a blockade in the process of growth.

(vii) Shortage of Development Finance:

It is believed that the international trade can encourage the flow of development finance from the advanced countries to the poor. This type of expectation has not been realized. The poor countries are generally starved of invisible funds. There are serious constraints upon direct foreign investments as well as bilateral and multilateral lending’s to the developing countries.

(viii) No Advanced Technical Know-How:

The poor countries also expect that their growing trade relations with advanced countries will enable them to secure advanced technical know-how for the transformation of their productive sectors. The transfer of technology to the less developed countries has so far taken place only to a very limited extent. Many often the latter are saddled with a technology not consistent with their resource endowments and potentialities.

The multinational corporations keep their techniques as guarded secrets. The turn-key projects cause an accumulation of obsolete plants. The advanced countries are presently insisting upon a stricter pursuance of copyrights or patent rights. The W.T.O. provisions have almost prohibitive effect on the development of indigenous technologies by the poor countries.

(ix) No Exchange Stability:

Although IMF has been engaged since its inception in the task of stabilisation of exchange rates and consequent stability in the international trade and payments, yet the different countries continue to adopt such trade, foreign exchange and other policies which have created obstacles in the international stability of exchange rates.

(x) Discriminatory Trade Policies:

The advanced countries have behaved in the most hypocritical way in the matters of trade policies. While on the one hand, they want developing countries to have a tariff-free trade regime, but on the other, they themselves follow discriminatory trade and tariff policies and do not permit greater access for the products of less developed countries to their markets.

The organisation of regional economic groupings and consequent raising of tariff against the countries outside the group is clearly violative of the goal of establishment of a new international economic order and is harmful to the interests of the weak and poor of the world.

(xi) No Economic Self-Sufficiency:

The developing countries can achieve economic self- sufficiency if they provide protection to their infant industries from the onslaught of destructive competition from the multi-national corporations. If the free access to the products of advanced countries is permitted in the markets of developing countries, there is little hope of their achieving economic self-sufficiency and a self-reliant growth.

(xii) Political Interference:

The less developed countries by their historical experiences know that international trade had resulted in their political slavery and exploitation. Even in recent times, the advanced countries have employed trade and economic assistance as the pretexts for their political interference in the poor countries.

(xiii) Cause of War:

The advanced countries have fought two World Wars in the last century just for scramble of colonies or the sources of raw materials and dumping places for their manufactured goods. The Iraqi occupation by the U.S. and British forces in 2003 was basically meant to enable the occupying countries to maintain their strangle hold on the source of supply of crude oil.

In conclusion, it may be stated that trade can be an engine of growth, provided there is a mutuality of interests and spirit of accommodation and co­operation among the trading countries and that trade and aid policies are not employed as the vicious instruments of exploitation and deprivation of the poor countries of the Third World.


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