International Trade: Classification, Characteristics and Other Details (2024)

The aim of international trade is to increase production and to raise the standard of living of the people. International trade helps citizens of one nation to consume and enjoy the possession of goods produced in some other nation.

Trade between two or more countries is called foreign trade or international trade. This involves the exchange of goods and services between the citizens of two countries. When citizens of one country exchange goods and services with the citizens of another country, it is called foreign trade.

Classification of International Trade:

(a) Import Trade:

It refers to purchase of goods from a foreign country. Countries import goods which are not produced by them either because of cost disadvantage or because of physical difficulties or even those goods which are not produced in sufficient quantities so as to meet their requirements.

(b) Export Trade:

It means the sale of goods to a foreign country. In this trade the goods are sent outside the country.

(c) Entrepot Trade:

When goods are imported from one country and are exported to another country, it is called entrepot trade. Here, the goods are imported not for consumption or sale in the country but for re- exporting to a third country. So importing of foreign goods for export purposes is known as entrepot trade.

Characteristics of International Trade:

(i) Separation of Buyers and Producers:

In inland trade producers and buyers are from the same country but in foreign trade they belong to different countries.

(ii) Foreign Currency:

Foreign trade involves payments in foreign currency. Different foreign currencies are involved while trading with other countries.

(iii) Restrictions:

Imports and exports involve a number of restrictions but by different countries. Normally, imports face many import duties and restrictions imposed by importing country. Similarly, various rules and regulations are to be followed while sending goods outside the country.

(iv) Need for Middlemen:

The rules, regulations and procedures involved in foreign trade are so complicated that there is a need to take the help of middle men. They render their services for smooth conduct of trade.

(v) Risk Element:

The risk involved in foreign trade is much higher since the goods are taken to long distances and even cross the oceans.

(vi) Law of Comparative Cost:

A country will specialise in the production of those goods in which it has cost advantage. Such goods are exported to other countries. On the other hand, it will import those goods which have cost disadvantage or it has no specific advantage.

(vii) Governmental Control:

In every country, government controls the foreign trade. It gives permission for imports and exports may influence the decision about the countries with which trade is to take place.

Need for International Trade:

In today’s world, economic life has become more complex and diversified. No country can live in isolation and claim to be self-sufficient. Even countries with different ideologies, culture, and political, social and economic structure have trade relations with each other. Thus, trade relations of U.S.A. with U.S.S.R. and China with Japan are examples. The aim of international trade is to increase production and to raise the standard of living of the people. International trade helps citizens of one nation to consume and enjoy the possession of goods produced in some other nation.

There is a need of international trade due to the following reasons:

(i) Uneven Distribution of Natural Resources:

Natural resources of the world are not evenly divided among the nations of the world. Different countries of the world have different amount of natural resources and they differ with each other in regard to climate, minerals and other factors.

Some countries can produce more of sugar like Cuba, some can produce more of cotton like Egypt, while there are some others which can produce more of wheat like Argentina. But all these countries need sugar, cotton and wheat. So they have to depend upon one another for the exchange of their surpluses with the goods that are in short supply in their country and hence the need for international trade is natural.

(ii) Division of Labour and Specialisation:

Due to uneven distribution of natural resources, some countries are more suitably placed to produce some goods more economically than other countries. But they are geographically at a disadvantageous position to produce other goods. They specialise in the production of such goods in which they have some natural advantage in the form of availability of raw material, labour, technical know-how, climatic conditions, etc. and get other goods in exchange for these goods from other countries.

(iii) Differences in Economic Growth Rate:

There are many differences in the economic growth rate of different countries. Some countries are developed some are developing, while there are some other countries which are under-developed: these under-developed and developing countries have to depend upon developed ones for financial help, which ultimately encourages international trade.

(iv) Theory of Comparative Cost:

According to the theory of comparative cost, each country should concentrate on the production of those goods for which it is best suited, taking into account its natural resources, climate, labour supply, technical know-how and the level of development.

Each country specialises in the production of those goods which it can produce at the lowest cost as compared to other countries, which leads to international specialisation and division of labour. This reduces the cost of production all over the world and improves the standard of living of the people in various countries. Hence the theory of comparative cost encourages international trade.

Types of International Trade Transactions:

(i) Direct Business:

In direct business the importer places order with manufacturer of the exporting country. No help is taken from importing or exporting agency and middlemen too are avoided. Direct business is possible when the manufacturer is known to the importer. The purchase is made on a fixed price and no commission etc. is to be paid.

(ii) Consignment Business:

Under consignment business the exporter sends the goods to an agent in the importing country. The goods are received at the risk of the exporter and the consigner (importer) sells the goods at a price decided by the sender. The consigner cannot change the price unless otherwise permitted by the sender. The consigner is allowed a commission on sales and the expenses incurred on the goods.

The details of sales are regularly sent to the sender. The consigner remits the money received on sales to the sender after deducting his commission and expenses. In consignment business the ownership of goods remains with the principal (sender of goods) and the consigner acts on his behalf.

(iii) Indent Firms:

These are the firms of importing and exporting agents at important port towns. These agents purchase goods on behalf of international traders and make arrangements to send them. The purchases are made at lowest prevailing prices. Similarly, goods are purchased in foreign countries and are imported on behalf of traders in the country. The indent firms charge a commission for their services. The indent firms are also called commission agents.

(iv) Merchant Shippers:

This is a class of businessmen who buy goods on their own account and sell them in a foreign country at a profit. The goods are purchased at lowest possible price while sales are made at highest available prices to maximise their profits.

Middlemen in International Trade:

There are a number of middlemen in international trade. Because of complex and intricate procedures in foreign trade the role of middlemen is very important. Middlemen have become almost a necessity in international trade.

Middlemen in Importing Country:

(i) Clearing Agents:

A clearing agent is appointed by an importer. He completes various formalities when goods reach the port. He gets the goods cleared by observing customs formalities and then despatches them to the destination of the importer either by road or by rail as the case may be. A clearing agent charges a commission for his services.

(ii) Import Agent:

An import agent acts on behalf of the wholesaler. He completes the complicated procedures involved in importing goods on behalf of the wholesaler. He gets a fixed commission for his services and the risk involved in the business is to be borne by the wholesaler. An import agent has a specialised knowledge of the goods in which he deals.

Middlemen in Exporting Country:

(i) Export Agent:

He acts on behalf of the international buyer. He collects goods as per the instructions of the international buyers and despatches them these goods after completing various formalities. He charges commission as per the agreement for his services.

(ii) Forwarding Agents:

Forwarding agent is appointed by the exporter to act on his behalf. He performs various export formalities and arranges for the export of goods and charges commission as per agreement.

(iii) Shipping Company:

A shipping company may also act as an agent of the exporter. It despatches goods to the country of the importer by collecting them from the exporter.

Special Difficulties and Problems in International Trade:

International trade is more complicated as compared to home trade of a country. There are many difficulties which are faced by a trader engaged in international trade.

The following are the special problems or difficulties of foreign trade:

(i) Distance:

Usually, international trade involves long distances. Distance between various countries is a great difficulty in an International trade. Due to long distances, it becomes difficult to establish close relationship between the buyers and the sellers.

(ii) Diversity of Languages:

Different languages are spoken and written in different countries of the world. The difference of language creates another problem in the international trade. It becomes difficult to understand the language of traders in other countries. All correspondence has to be done in foreign language.

(iii) Transport and Communications:

Long distances in international trade create difficulties of proper and quick transport and communication. Both of these involve considerable delay as well as cost. The high cost of transport is a great hindrance in international-trade.

(iv) Risk and Uncertainty:

International trade is subject to greater risk and uncertainties as compared to home trade. As the goods have to be transported to long distances, they are exposed to many risks. Goods in transit overseas are susceptible to the perils of the sea. These risks may be covered through marine insurance, but this involves extra cost in foreign trade transactions.

(v) Lack of information about International Traders:

In international trade, since there is no direct and close relationship between the buyers and the sellers, the seller has to take special steps to verify the creditworthiness of the buyer. It is difficult to obtain information regarding creditworthiness, business standing and financial position of persons living in foreign countries.

(vi) Import and Export Restrictions:

Every country has its own laws, customs and import and export regulations. Exporters and importers have to fulfill all the custom formalities as well as follow rules controlling exports and imports.

(vii) Difficulties in Payments:

International trade involves the exchange of currencies because the currency of one country is not the legal tender in the other country. Exchange rates are determined for different currencies for this purpose. But exchange rates go on fluctuating.

Moreover there is a wide gap between the time when the goods are despatched and the time when the goods are received and paid for. Thus, there is a greater risk of bad debts also in foreign trade. Remittances of money for payments in foreign trade are time-consuming and expensive. Hence, payments in foreign trade create complications.

(viii) Various Documents to be used:

Foreign trade involves the preparation of a large number of documents both by the importer as well as the exporter. These documents may be required either under law or under customs of trade of the two countries.

(ix) Study of Foreign Markets:

Every foreign market has its own characteristics. It has own requirements, customs, traditions, weights and measures, marketing methods, etc. An extensive study of foreign markets is required to be successful in foreign trade, which may not be possessed by an ordinary trader.