“Foreign trade implies the buying and selling of goods and services among different countries across the world”. It may consist of export of goods and imports of goods from abroad. Foreign trade is also known as International Trade.
Advantages 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.
- Availability of Goods
It enables a country to obtain goods by importing which it cannot produce due to higher costs at home.
Foreign trade leads to specialize in the production of goods. Specialization leads to lowering of costs and improving the quality of goods. The countries therefore, benefit from international trade.
- Economics of Large Scale
The expansion of foreign trade leads to production of goods on large scale. The economics of large scale production (both external and internal) are thus availed of by the trading countries of the world.
- Stability in Prices
Foreign trade equalizes prices of goods throughout the world.
- Advance Equipment’s
The developing countries can import latest machinery and know how from the developed world. They can thus speedily break the vicious circle of poverty.
- Benefits to Consumers
The consumers are able to get those goods which are not produced in their own countries.
- Development of the means of Communication and Transport
Different Countries may dispose of those goods which they have in surplus and obtain goods which they are short in supply. The trades between the countries lead to development in the means of communications and transport.
- Ability to Face Natural Calamities
International trade helps a country to face naturals incidents such as Earthquake, floods etc. The effected countries are able to import goods which they are short in supply.
- 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.
- International Co-operation
Foreign trade brings the people of different countries close to each other. It can bring better understanding and harmony among the various nations.
- 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.
- Economic exploitation
The under developed countries depend upon the developed countries for the import of machinery, technology etc the developed nations exploit the weaker nations and charge very high prices from them.
- Endangers independence
Foreign trade encourages slavery. It impairs economic independence of the poor nations.
- 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.
- Import of harmful goods
The import of harmful goods adversely effects health, well being and economy of the country.
- World wars
Foreign trade creates rivalry among the competing nations of the world. It leads to ill-will, hatred and eventually to wars among them. This disturbs world peace.
- Trade and tariff agreements
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.
Why Foreign Trade in Necessary
There are various reasons for conduction’s business on an international scale. They are discussed as under:-
- Mutual Advantage
One of the reasons of foreign trade is that it arise mutual advantage between two countries when trade is made.
In monopoly, a country is enjoying production of various commodities. It helps them an absolute advantage over other countries which don’t have those commodities.
- Comparative advantage
One of the reasons of foreign trade is that it also arise comparative advantage according to the need of other nations by producing essential commodities.
- Climate Conditions
Many countries producing raw material from their climate conditions like tea, rubber etc there are no alternative for the other country but to import them.
- Advance Technology
One of the reasons of foreign trade is that nowadays goods are produced though various advance technology in many developed countries. Country which does not have any latest technology is import goods from these developed nations.