Foreign or International Trade: Reasons, Advantages/Disadvantages and Classification

CONTENT

1. Reasons for foreign trade
2. Advantages and disadvantages of foreign trade
3. Barriers to foreign trade
4. Classification of foreign trade

NOTES

Foreign trade or international trade or external trade is the exchange of goods and services between two or more countries e.g. Nigeria, Japan and USA

Reasons for International Trade

1. Uneven distribution of natural resources
2. Differences in climatic conditions
3. Differences in skills and technical know-how i.e.  technological difference
4. Differences in the cost of production
5. To augment domestic production of goods and services
6. The need to expand existing market for products
7. The differences in quantity and quality of labour force
8. The need to establish relationship with other countries

IMPORTANCE (ADVANTAGES) OF FOREIGN TRADE

1. It increase government revenue through taxes such as import duties, export duties etc.
2. It improves the standard of living of participating countries by making available

products that cannot be produced by a country

• It encourages international specialization and its resultant increase in total output
• It fosters friendly relationship among nations
• It is a source of foreign exchange earnings
• It promotes the transfer of technology
• It creates employment opportunities in participating countries
• It widens the world market
• It enhances the promotion of economic development

DISAVDANTAGES OF FOREIGN TRADE

1. It may lead to the destruction of cultural and moral values of a country
2. Excessive specialization may lead to over-production of goods in a country
3. It encourages dumping of goods
4. It may lead to structural unemployment
5. It leads to over-dependence of countries on each other
6. It creates balance of payments problems
7. It creates distortions in the economy e.g. neglect of the agricultural sector in Nigeria
8. It leads to the importation of harmful goods.2

EVALUATION

1. What five benefits does Nigeria derive from engaging in foreign trade
2. State seven differences and three similarities between foreign trade and internal trade

PROBLEMS OR DIFFICULTIES ENCOUNTERED IN FOREIGN TRADE (OR BARRIERS TO FOREIGN TRADE)

1. Problem of distance, transportation costs etc.
2. Currency differences and exchange rate risks
3. Differences in weights and measures
4. Language barrier and communication problems
5. Cultural and religious barriers
6. Political and diplomatic barriers
7. Artificial barriers/regulations e.g. tariffs, quota, embargo, licenses and other economic barriers
8. Documentation and administrative procedures are too many and more complicated
9. Differences in technical specifications

CLASSIFICATIONS OF FOREIGN TRADE

1. Import, Export and Entrepot
   1. Import refers to goods bought from other countries
   1. Export refers to goods sold to other countries
   1. Entrepot refer to buying from one country in order to resell to another
2. Bilateral and Multilateral Trade
   1. Bilateral Trade is a trade agreement in which two countries exchange goods and services as trading partners
   1. Multilateral Trade: This refers to a situation where a country has more than one trading partner at the same time.
3. Visible Trade and Invisible Trade
4. Visible trade refers to the trade in items of tangible goods – goods that can be seen, touched and felt.
5. Invisible trade refer to the trade in items that cannot be seen, felt or touched. They are usually services e.g. banking transport, insurance, tourism, aviation/air services, shipping services, consultancy services etc.

EVALUATION

1.         State and explain five problems likely to be face by a businessman who wants to sell his goods overseas

2.         Distinguish between the following tems:

            A.        Bilateral Trade            and Multilateral Trade

            B.        Visible Trade and Invisible Trade     

READING ASSIGNMENT

Essential Commerce for SSS by O.A. Longe Page 44 – 53

Comprehensive Commerce for SSS by J.U. Anyaele Page 117 – 137

GENERAL EVALUATION QUESTIONS

1. What is a bonded warehouse
   1. State five importance of warehousing to Commerce
   1. What factors should be considered in siting a small retail shop
   1. What five benefits does Nigeria derive from engaging in international trade
   1. State and explain five problems likely to be faced by a businessman who wants to sell his goods overseas

WEEKEND ASSIGNMENT

1. Re-exporting imported goods to another country is known as ____ trade               

A. Barter         B. visible         C. invisible                  D. entrepot

• International trade transactions are conducted on the principle of     A. utmost good faith   B. equity C. collateral labour agreement D. comparative cost advantage
• Bilateral trade is the trade _____      A. Among various countries B. Between two countries C. Among commonwealth countries D. Among ECOWAS member states

4.         When producers in one country sell off their excess produce at a very low price the practice is described as A. Hedging B. entrepot trading C. Dumping D.counter trading

5.         One of the barriers to foreign trade is the presence of

A.        Difference in goods and services        B.        Dfferent means of transportation C.   Many security personnel                   D.        Tariffs on goods and services

THEORY

1. What is foreign trade?
2. State four disadvantages of foreign trade.