MCom I Semester Business Environment International Trading Environment Study Material Notes

MCom I Semester Business Environment International Trading Environment Study Material Notes: Meaning of International Trade Need of International Trade Prospects of International Trade Advantages of International trade Importance of International Trade and National Interest Disadvantages of International trade Long Answer Questions Short Answer Questions Objectives Questions Answer :

CTET Paper Level 2 Language I English Question Model Paper

International Trading Environment

The size, nature and total environment of trade have been with the development of human culture. The nature of ancient international trade was limited to the natural resources of the country or their specific expertise in handicrafts. The fundamental basis of international trade lies in the fact that countries are endowed by nature with different elements of productive power. In other words, factor endowments are unevenly distributed among the countries of world. This is due to geographic facts, physical features and climatic differences. Thus, international trade is inevitable where there are marked differences in the countries regarding materials, natural vegetation, climate, soils and other physical and geographical conditions. Now the scientific measures have changed the nature of international trade. Developments in the sectors of communication and transport have made the international trade convenient. Various international organisations and institutions control the functioning of international trade. Now World Trade Organisation (WTO), a new globally recognised trade organisation has strong enforcement power to promote international trade.

MEANING OF INTERNATIONAL TRADE

Amongst the various forms of trade, the international trade is most wide. Inter-regional trade is trade between different regions within the same country whereas international trade is between different countries. It should be noted that the difference between inter-regional trade and international trade is only of degree not of kind. According to Ohlin, “International trade is but a special case of inter-local or inter trade.” The exports and imports of goods and services are international trade. For example, India exports rice, sugar, readymade garments to other countries and imports capital goods from America, it is international trade. International trade is the performance of business activities designed to plan, price, promote, and direct the flow of a company’s goods and services to consumers and users in more than one nation for a profit.

NEED OF INTERNATIONAL TRADE

International trade has increased at a great pace. A large number of enterprises of all sizes are involved in international operations, besides their domestic operations. In view of persistently growing liberalisation of economic systems across the world and economic interdependences, globalisation of market, free flow of capital and knowledge and rapidly changing customers’ tastes have rendered global business scenario much more volatile and competitive. Need for the international trade is clear from the following points :

1 Necessary for competition : Economics recognises pure competition. But pure competition is practically non-existent in the real world. Pure or perfect competition is the ideal system of the market. The purely competitive firm is under compulsion to use the most economical and modern methods of production so that its cost may be brought down to competitive level. The pressure of competition forces the price to the point at which the firm can make normal profits. This point confirms to the level of full capacity and a level that can be achieved at the lowest per unit cost in the international trade, competition becomes global and consumers can obtain the goods at the lowest price. The new economic policy of India has promoted competition and reduced the cost of production.

2. Utilisation of natural resources : Differences in advantages of trade in different countries may arise because of natural causes like geographical and climatic conditions. This leads to territorial division of labour and localisation of industries. For instance, some countries may have particular mineral resources like coal, iron, are, copper etc. other may have land or climate particularly suitable for certain crops, e.g., jute in Bengal. Either these advantages cannot be transferred to other countries at all or the cost of moving them is prohibitive. Nature has blessed some countries with some rare materials, e.g., oil in Arab countries, gold in African countries. These scarce materials are equitably distributed among the countries of the world through international trade.

 3. Necessary for Development of Industries : Some industries can not flourish without international co-operation. The country needs machinery, equipments, technical knowledge, raw materials etc. All these things underdeveloped countries lack. They have to import these things from foreign countries. The government formulates those type of policies related to foreign trade which reduce international trade obstacles and promote local industries.

4. Source of wealth : Materialism is the main incentive and ideology of the modern world. International trade increases wealth. It increases the level of demand which gives space to the business and trade. It increases the job opportunities. Thus, international trade increases prosperity level in a country.

5. Increases in availability of things: Now the international trade has facilitated the consumption of those commodities also which cannot be produced by the country from the existing resources. International division of labour and international trade which enable every country to specialise and to export those things which it can produce cheaper in exchange for what others can provide at a lower cost. International trade has facilitated the consumption of specific commodities like life saving medicines, equipments of warfare etc. The policies of liberalisation and globalisation adopted by India have increased the imports of specific commodities.

ADVANTAGES OF INTERNATIONAL TRADE

The international trade is advantageous from the economic, social and political points of view. The main advantages of international trade are as follows:

1 Advantages of Competition: Competition eliminates monopoly profits from the trade and helps in providing the commodities to the consumers at fair and reasonable prices. Although perfect competition is the outcome of the competition at inter Though perfect competition is a rare phenomenon, of the competition at international level. Competition improves the efficiency of the producers.

2. Helps in crises period. During the period developed during the international trade, the country crises period : During the period of crises the good relations from the various countries of the world. the international trade, the country obtains the huge help

3. Expansion of market. The international trade widens the size of the brings about optimum production with costs getting reducedes promotes greater specialisation and efficiency in production. This this benefiting the world as a whole. Multilateral convertibility of currencies venience in making payments to different countries also facilitates the expansion of market.

4. Cultural Development International trade brings the people of various countries together with the exchange of goods and services they exchange their culture. The present form of developed world civilisation and culture is the outcome of the international trade. It is also felt by some eminent economists that the scope of international trade is not restricted to exchange of goods alone rather it extends to cultural spheres as well amongst the trading countries. Sports competition, film festivals, dance and music concerts are also organised at international level. The concerned countries also hold seminars on different social and cultural subjects.

5. Development of Social Services : International trade facilitates the expansion of social programmes like education, health, sanitation, development of roads etc. There is expansion of facilities in power sector, building of highways, bridges, flyovers, pollution control programmes.

6. Industrial development: International trade also brings to the participating countries industrial development. International trade increases national income and facilitates saving and opens up new channels of investment in various industries. Exports help to earn foreign exchange which can be utilised in buying capital and equipment for industries. Besides, raw materials, machinery and capital equipment international trade enables a country to import technical knowhow, managerial talents and enterpreneurship through foreign collaborations. It increases industrial development.

7. Instrument of price control: One direct effect of international exchange of goods is to equalise the prices of similar goods in the trading countries. Commodities prices in the ultimate analysis depend on the factor prices. Equalisation of commodity prices must tend to equalise factor prices. The prices of relatively scarce factors will fall since the goods for which they are imported. and demand for such factors will diminish, on the other hand there will be greater demand for the relatively cheap and abundant factors, for the goods in which they enter will be exported. Their price will, therefore, tend to rise.

PROSPECTS OF INTERNATIONAL TRADE

International trade has increased at a great pace. A large number of enterprises of all sizes are involved in international operations, besides their domestic operations. More particularly, the processes of economic reforms and globalisation have gained momentum as well has acquired a certain urgency and irreversibility. The change the political system in Eastern Europe towards a greater participation in global economy, emphasis on privatisation by the World Bank and IMF and the willingness on the part of developing countries to open up for competition are some major factors that have increased international economic activity, with a tremendous potential for expansion in future. Business that were immune to global competition only a few year ago, now find themselves locked in fierce and ferocious competition battles all around the world. In view of persistently growing liberalisation of economic systems across the world and economic interdependence, globalisation of markets, free flow of capital and knowledge, and rapidly changing cutomer’s tastes have rendered global business scenario much more volatile and competitive. Earlier in India too, most of the companies did not have much to do with the international trading environment except the transactions related to exports and imports. Most of the trade was channelised through specific agencies, leaving a little scope for autonomous decisions-making for managers regarding international operations. After the coming into effect of the convertibility of the national currency on current account and opening up the economy for greater competition, an opportunity has opened up for managers to manage their exposure as well as to use different instruments in their dealings. Therefore, it is imperative for today’s managers to grasp the international business environment.

IMPORTANCE OF INTERNATIONAL TRADE

International trade plays an important role in the economy of a country. This greatly influences the incomes of the countries engaged in trade. Changes in terms of trade may affect the international distribution of income. Prosperity of the developed countries is the result of international trade. Every country whether developed or underdeveloped wants to increase its share in word trade. Some countries are enriched with some rare materials. These scarce materials are equitably distributed among the countries of the world through international trade. The underdeveloped countries are enabled by the foreign trade to obtain capital equipment machinery, raw materials, technical skills which are highly useful in accelerating the rate of economic growth.

1 Mutual interdependence of countries promotes world peace.

2. The participating countries are able to make optimum use of their resources or factors Environment so that the national output is greater than what it otherwise would be. This raises level of social welfare in the country.

3. International trade, by providing the necessary knowledge about developments in other countries encourages domestic producers to be uptodate and the domestic consumers to be alive to exercise their sovereignty in a better and fuller way.

4. International trade encourages cooperation and integration amongst the various cultures.

5. To regulate and promote international trade, a number of international institution like GATT, WTO etc. were set up.

6. International trade has economic, social and cultural importance.

INTERNATIONAL TRADE AND NATIONAL INTEREST

International trade is necessary for the prosperity of a country and it is a medium of improving cooperation and coordination in world community. But it is not necessary that international trade is always in the national interest National interest of a country may be adversely affected because of the following

1 Increase in consumption of foreign goods: International trade makes the imported goods easily available. Foreign trade exposes home industries to outsides competition and to even dumping of foreign goods. A country sells its products in other countries at a low price with the aim to capture the foreign market, pumping tactics resorted to by advanced countries may harm the development of domestic industries. The new liberal economic policy of India has adversely affected the progress of some industries in the country.

2. International Pressure: The underdeveloped countries not only import manufactured goods from advanced countries through their international trade but also avail other facilities. Gradually these countries interfere in the policy and administration of the debtor countries. Developed countries demand many concessions and reductions of tariffs from developing countries, but they are also encouraging free flow of trade, capital and technology across states. Thus, they are using globalisation to their advantage. U.S.A and west Europe have been raising environmental issues like child labour and exploitation of labour in developing countries just to continue trade restrictions.

3. Effect on Employment: It is argued that international trade increases employment in a country. If protection is not given to old established industries, foreign competition may ruin them and create unemployment in the country. In a developing country like India where imports are more than export, foreign trade would not increase employment but it will contract it. Favourable terms of trade enable a country to create more job opportunities in the country.

DISADVANTAGES OF INTERNATIONAL TRADE

The underdeveloped and developing countries face the problems concerning international trade. Disadvantages of international trade are as follows:

1 Dumping effect: A foreign country may resort to dumping with a view to capturing markets in other countries by selling at a much lower price than what is charged in their own country. Dumping is injurious to domestic industries and creates unemployment in the country.

2. Adverse effects on culture : Every nation and society have their own traditions and culture, whereas, on the one hand in the international trade goods and services are imported and exported on the other hand it also exchanges the culture and standard of living when people come into contact with their superior goods or superior patterns of consumption, with new articles or new way of meeting old wants, they are apt to feel after a while amount of restlessness and dissatisfaction. Their knowledge is extended, their imagination is stimulated. new desires are aroused, new problems are created in the society.

3. Foreign dependence: Mostly the countries import those commodities whose cost of production is high in the domestic market. In this way their dependence on foreign countries increases. Foreign trade leads to international dependence which proves harmful in times of political crisis. Stilitz exposes the hypocrisy of western countries, “The western countries have pushed poor countries to eliminate trade barriers, but kept their own barriers, preventing developing countries from exporting their agricultural products and so depriving them of deseparately needed export income. The U.S. was, of course, one of the prime culprits……it was not just that the more advanced industrial countries declined to open up their markets to the goods of developing countries……..it was not just that the more advanced industrial countries continued to subsidize agriculture, making it difficult for the developing countries to compete, while insisting that developing countries eliminate their subsidies on industrial goods.”

4. Problem of balance of payments : An important problem of international trade for underdeveloped economies is unfavourable balance of payments. The biggest contributor to the deficit in the balance of payment has been the balance of trade. Even though the quantitive restrictions are being completely eliminated under the WTO agreements, developed countries restrief imports from developing countries by adopting various non-tariff barriers, such as health laws that do not permit import of agricultureal goods from under. developed countries in USA and some other grounds of posing health hazards to the people.

5. Exploitation of natural resources : International trade encourages exploitation of natural resources. Poor planning, mindless and ruthless exploitation of natural resources degrade physical environment. The progressive depletion of a country’s forest wealth may result into driving the country towards an ecological collapse thereby increasing floods, soil erosion, heavy damaged situation of dams are the dangerous consequences of deforestation and extraction coal, iron and other minerals like mica and manganese, copper, lead and zinc are of economic importance. Through over extraction and exports mineral wealth of India may be exhausted.

6. Exploitation of poor countries : Foreign trade is supposed to be an ideological weapon of the dominant countries. It is a known fact that the strong countries exploit the poor countries through the policy of liberalisation, decay the home industries, permanent injury to economic interests, economic imbalances and economic dependence, when developed countries are not able to compete with imports they levy anti-dumping duties negating all WTO arguments and norms.

7. Obstacles in development : Difference in comparative costs arise because of the fact that different countries have different factor endowments and because of diferent commodities are best produced with a predominance of one or another factor. Each country specialises in the production of those commodities for which it has greater relative advantage. In this way, it accounts for the lopside development of the country. The developing country like India requires overall development of the economy to increase employment. A nation should have a variety of sources of production and employment. Depending on one industry or on a few indusries is dangerous both politically and economically. Politically it means too much dependence on foreign trade which may get cut off during a war. Economically, a country depending on a few industries is exposed to the danger of serious economic dislocation in case some adverse circumstances affect such an industry. International trade has worked to the disadvantage of the underdeveloped countries and perpetuated their poverty. As Prof. Raul Prebish has observed, there has been a secular stagnation in the terms of trade of the underdeveloped countries.

EXERCISE QUESTIONS

Long Answer Questions

1 What is the impact of international trading environment on economic development of underdeveloped countries?

2 What is the meaning of international trading environment? Explain the profit-losses of international trading environment.

3. Write an essay on present international trading environment.

4. Explain the importance and need of international trading environment.

5. Throw light on prospects and main demerits of international trading environment

Short Answer Questions

1 What do you understand by international trading environment?

2. Write three advantages of international trading environment.

3. Write four demerits of international trading environment.

4. Write four prospects of international trading environment.

5. Why international trading is need of environment? Objective Questions

(1) Select the Correct Alternatives :

1 At present no country is :

(a) powerful

(b) self-reliant

(c) weak

(d) all of above

2. The main adantage of international trading environment is:

(a) international cooperation

(b) mutual relations

(c) equal opportunities

(d) none of these

3. Sale and purchase of goods and services between two or more countries is known as:

(a) inter-regional trade

(b) international trade

(c) internal trade

(d) all of above

4. Among the following which one is important in the world economy:

(a) domestic trade

(b) internal trade

(c) international trade

(d) all of above

5. International trade is said to be:

(a) domestic trade

(b) foreign trade

(c) international trade

(d) all of above

[Ans: 1. (b), 2. (a), 3. (b), 4. (c), 5. (a)]

(II) State True or False :

1 Today international trade is not the symbol of prestige and prosperity.DAT

2. Among various forms of trade international trade is the most wide form.

3. Many industries may be managed without international cooperation.

4. International trade widens the size of the market.

Ans: 1. False, 2. True, 3. False, 4. True]

(III) Fill in the Blanks :

1 Nature has blessed some countries with some rare materials whose optimum utilisation is not ……………….. without international cooperation.

2. ……………………. are the basic incentives of modern world.

3. Increasing …….. is the essential factor for industrial development.

4. Sometimes natural and other causes decrease the

[Ans: 1. possible, 2. Physical assets, 3. demand, 4. supply of commodities)