UNIT 1: International Trade

Meaning and Benefits

International trade has flourished over the years due to the many benefits it has offered to different countries across the globe. International trade is the exchange of services, goods, and capital among various countries and regions, without much hindrance. The international trade accounts for a good part of a countrys gross domestic product. It is also one of important sources of revenue for a developing country.

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With the help of modern production techniques, highly advanced transportation systems, transnational corporations, outsourcing of manufacturing and services, and rapid industrialization, the international trade system is growing and spreading very fast. International trade among different countries is not a new a concept. History suggests that in the past there where several instances of international trade. Traders used to transport silk, and spices through the Silk Route in the 14th and 15th century. In the 1700s fast sailing ships called Clippers, with special crew, used to transport tea from China, and spices from Dutch East Indies to different European countries.

Conti
The economic, political, and social significance of international trade has been theorized in the Industrial Age. The rise in the international trade is essential for the growth of globalization. The restrictions to international trade would limit the nations to the services and goods produced within its territories, and they would lose out on the valuable revenue from the global trade. The benefits of international trade have been the major drivers of growth for the last half of the 20th century. Nations with strong international trade have become prosperous and have the power to control the world economy. The global trade can become one of the major contributors to the reduction of poverty.

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Ricardo, a classical economist, in his principle of comparative advantage explained how trade can benefit all parties such as individuals, companies, and countries involved in it, as long as goods are produced with different relative costs. The net benefits from such activity are called gains from trade. This is one of the most important concepts in international trade. Adam Smith, another classical economist, with the use of principle of absolute advantage demonstrated that a country could benefit from trade, if it has the least absolute cost of production of goods, i.e. per unit input yields a higher volume of output.

Conti
According to the principle of comparative advantage, benefits of trade are dependent on the opportunity cost of production. The opportunity cost of production of goods is the amount of production of one good reduced, to increase production of another good by one unit. A country with no absolute advantage in any product, i.e. the country is not the most competent producer for any goods, can still be benefited from focusing on export of goods for which it has the least opportunity cost of production. Benefits of International Trade can be reaped further, if there is a considerable decrease in barriers to trade in agriculture and manufactured goods.

important benefits of International Trade

Enhances the domestic competitiveness Takes advantage of international trade technology Increase sales and profits Extend sales potential of the existing products Maintain cost competitiveness in your domestic market Enhance potential for expansion of your business Gains a global market share Reduce dependence on existing markets Stabilize seasonal market fluctuations

The Basis for International Trade

The basis for international trade is that a nation can import a particular good or service at a lower cost than if it were produced domestically - In other words, if you can buy it cheaper than you can make it you buy it - This maxim is true for individuals and nations - This is called specialization and exchange

Impact of foreign trade in economic growth

Foreign trade enlarges the market for a country output. Exports may lead to increase in national output and may become an engine of growth. Expansion of a country foreign trade may energize an otherwise stagnant economy and may lead it on to the path of economic growth and prosperity. Increased foreign demand may lead to large production and economies of scale with lower unit costs. Increased exports may also lead to greater utilization of existing capacities and thus reduce costs which may lead to a further increase in exports. Expanding exports may provide greater employment opportunities. The possibilities of increasing exports may also reveal the underlying investment in a particular country and thus assist in its economic growth.

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Rising exports and the consequent increase in domestic output may lead to an increase in domestic income and employment. This will lead to the creation of new effective demand for a number of commodities in the domestic market. As a result, all the industries producing for the domestic market will also get a big boost. Some of the infrastructure specially erected for the development of export industries like new transport facilities; training facilities etc may also assist the development of domestic industries. In recent years, newly industrializing economies (NIC) of Asia namely Hong Kong, Singapore, Taiwan, Malaysia, Thailand and South Korea have achieved remarkable growth by exports of manufacturers. Thus foreign trade has a multiplier effect on economic growth.

Conti
India also has had its share of prosperity due to the development of foreign trade. From times immemorial, India was considered as the workshop of the world. Articles produced by India skilled artisans were considered worth their weight in gold. That explains why, even in the absence of plentiful gold mines, India was a repository of gold.

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The opening of Suez Canal in 1869 led to a reduction of distance between India and Europe which led to an increase in the demand for India commercial crops. As a result, production and exports of commercial crops increased. The process was encouraged by the import of foreign capital for the provision of irrigation facilities and railway lines to connect the interior with the port towns. The rise in the output of such agricultural crops as oilseeds, cotton, jute and tea, was largely due to a flourishing export trade. This initiated the process of economic growth in India, albeit on not very desirable lines.

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Even now foreign trade continues to engender growth in India. For example, many export processing zones and special economic zones have been established to facilitate manufacture or reprocessing for export. All such efforts create a lot of employment opportunities and lead to an increase in incomes which lead to the demand for many new products which are very often manufactured in the country itself.

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Foreign trade induces economic growth in other ways too. The appearance of imported commodities in a country invariably creates new demands. This provides an inducement to the people in general to work hard and earn enough money to be able to purchase some of the imported articles. This necessarily leads to economic growth. Again, there is an urge in enterprising industrialists to produce the things imported in the country itself. Japan provides an excellent example of this type. It is said Japan never imports a manufactured article twice. This has happened in almost all countries including India. In fact, this natural urge for import substitution provides a strong stimulus to economic growth.

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The strategy behind India earlier development plans was mainly one of import substitution. The existence of a large domestic market also provides a strong incentive for import substitution as, for example, consumer industries in India. In the case of basic and strategic industries, economic independence and self reliance have been the motive force behind import substitution, and in these cases cost becomes a secondary consideration. In many a case, successful import substitution adds to the export potential. Many of the new industrial products manufactured in India are exported.

Balance of trade
The difference between a country's imports and its exports. Balance of trade is the largest component of a country's balance of payments. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus. Also referred to as "trade balance" or "international trade balance."

Balance Of Payments - BOP'

Definition: A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa.

Conti.
Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency.
This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners.

Barriers to International Trade

Free trade refers to the elimination of barriers to international trade. The most common barriers to trade are tariffs, quotas, and nontariff barriers. A tariff is a tax on imports, which is collected by the federal government and which raises the price of the good to the consumer. Also known as duties or import duties, tariffs usually aim first to limit imports and second to raise revenue. A quota is a limit on the amount of a certain type of good that may be imported into the country. A quota can be either voluntary or legally enforced.

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The effect of tariffs and quotas is the same: to limit imports and protect domestic producers from foreign competition. A tariff raises the price of the foreign good beyond the market equilibrium price, which decreases the demand for and, eventually, the supply of the foreign good. A quota limits the supply to a certain quantity, which raises the price beyond the market equilibrium level and thus decreases demand. Tariffs come in different forms, mostly depending on the motivation, or rather the stated motivation. (The actual motivation is always to limit imports.) For instance, a tariff may be levied in order to bring the price of the imported good up to the level of the domestically produced good. This so-called scientific tariffwhich to an economist is anything buthas the stated goal of equalizing the price and, therefore, leveling the playing field, between foreign and domestic producers. In this game, the consumer loses.

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A peril-point tariff is levied in order to save a domestic industry that has deteriorated to the point where its very existence is in peril. An economist would argue that the industry should be allowed to expire. That way, factors of production used by that inefficient industry could move into a new one where they would be better employed. A retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In the eyes of an economist, retaliatory tariffs make no sense because they just start tariff wars in which no oneleast of all the consumerwins.

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Nontariff barriers include quotas, regulations regarding product content or quality, and other conditions that hinder imports. One of the most commonly used nontariff barriers are product standards, which may aim to serve as barriers to trade. For instance, when the United States prohibits the importation of unpasteurized cheese from France, is it protecting the health of the American consumer or protecting the revenue of the American cheese producer? Other nontariff barriers include packing and shipping regulations, harbor and airport permits, and onerous customs procedures, all of which can have either legitimate or purely anti-import agendas, or both.

world trade organisation(WTO)

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.

 The World Trade Organization the WTO is the international organization whose primary purpose is to open trade for the benefit of all. The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application. The current body of trade agreements comprising the WTO consists of 16 different multilateral agreements (to which all WTO members are parties) and two different plurilateral agreements (to which only some WTO members are parties).

About the WTO a statement by the Director-General

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Over the past 60 years, the WTO, which was established in 1995, and its predecessor organization the GATT have helped to create a strong and prosperous international trading system, thereby contributing to unprecedented global economic growth. The WTO currently has 155 members, of which 117 are developing countries or separate customs territories. WTO activities are supported by a Secretariat of some 700 staff, led by the WTO DirectorGeneral. The Secretariat is located in Geneva, Switzerland, and has an annual budget of approximately CHF 200 million ($180 million, 130 million). The three official languages of the WTO are English, French and Spanish.

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Decisions in the WTO are generally taken by consensus of the entire membership. The highest institutional body is the Ministerial conferance, which meets roughly every two years. A General Council conducts the organization's business in the intervals between Ministerial Conferences. Both of these bodies comprise all members. Specialised subsidiary bodies (Councils, Committees, Subcommittees), also comprising all members, administer and monitor the implementation by members of the various WTO agreements.

 negotiating the reduction or elimination of obstacles to trade (import tariffs, other barriers to trade) and agreeing on rules governing the conduct of international trade (e.g. antidumping, subsidies, product standards, etc.) administering and monitoring the application of the WTO's agreed rules for trade in goods, trade in services, and trade-related intellectual property rights monitoring and reviewing the trade policies of our members, as well as ensuring transparency of regional and bilateral trade agreements

More specifically, the WTO's main activities are:

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settling disputes among our members regarding the interpretation and application of the agreements building capacity of developing country government officials in international trade matters assisting the process of accession of some 30 countries who are not yet members of the organization conducting economic research and collecting and disseminating trade data in support of the WTO's other main activities explaining to and educating the public about the WTO, its mission and its activities.

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The WTO's founding and guiding principles remain the pursuit of open borders, the guarantee of most-favourednation principle and non-discriminatory treatment by and among members, and a commitment to transparency in the conduct of its activities. The opening of national markets to international trade, with justifiable exceptions or with adequate flexibilities, will encourage and contribute to sustainable development, raise people's welfare, reduce poverty, and foster peace and stability. At the same time, such market opening must be accompanied by sound domestic and international policies that contribute to economic growth and development according to each member's needs and aspirations.

Principles of the trading system

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy games Five principles are of particular importance in understanding both the pre-1994 GATT and the WTO: Non-discrimination. It has two major components: the most favoured nation (MFN) rule, and the national treatment policy. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these areas. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members, i.e. a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members. "Grant someone a special favour and you have to do the same for all other WTO members." National treatment means that imported goods should be treated no less favorably than domestically produced goods (at least after the foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards et al. discriminating against imported goods).

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Reciprocity. It reflects both a desire to limit the scope
of free-riding that may arise because of the MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a nation to negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral liberalization; reciprocal concessions intend to ensure that such gains will materialise Binding and enforceable commitments. The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions. These schedules establish "ceiling bindings": a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.

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Transparency. The WTO members are required to publish
their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO. These internal transparency requirements are supplemented and facilitated by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM). The WTO system tries also to improve predictability and stability, discouraging the use of quatus and other measures used to set limits on quantities of imports. Safety valves. In specific circumstances, governments are able to restrict trade. The WTOs agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health.

INDIAN EXIM POLICY

EXIM export import policy of the government also known as the foreign trade policy. The Government of India, Ministry of commerce and industry announced new foreign trade policy on 27th August 2009 for the period 2009-2012. Announced every five years. General provisions regarding exports and imports promotional measures, duty exemption schemes, export promotion schemes special economic zone programmes and other details for different sectors. Every year, on the 31st of march the government announces a supplement to this policy Trade policy governs exports from and imports into a country It is one of the various policy instruments used by a country to attain the goals of economic development DGFT (Directorate General of Foreign Trade) in matters related to the import and export of goods in India

HISTORY
HISTORY In the year 1962, the Government of India appointed a special Exim Policy Committee to review the government previous export import policies The committee was later on approved by the Government of India Mr. V. P. Singh, the then Commerce Minister announced the Exim Policy on the 12th of April, 1985 Initially the EXIM Policy was introduced for the period of three years with main objective to boost the export business in India

Exim Policy Documents:

The Exim Policy of India has been described in the following documents: Interim New Exim Policy 2009 2010 Exim Policy: 2004- 2009 Handbook of Procedures Volume I Handbook of Procedures Volume II ITC(HS) Classification of Export- Import Items

OBJECTIVES
To accelerate the economy by making it a globally oriented vibrant economy and to derive maximum benefits from expanding global market opportunities To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components,' consumables and capital goods required for augmenting production To enhance the techno local strength and efficiency of Indian agriculture, industry and services, thereby, improving their competitiveness To generate new employment opportunities and encourage the attainment of internationally accepted standards of quality To provide quality consumer products at reasonable prices

Exim Policy or Foreign Trade Policy 2009 - 2014 Highlights:

100% export oriented units for one additional year till 31st March 2011 The Government seeks to promote Brand India through six or more Made in India shows to be organized across the world every year To encourage production and export of green products through measures such as phased manufacturing programme for green vehicles, zero duty EPCG scheme and incentives for exports Incentive available under Focus Market Scheme (FMS) has been raised from 2.5% to 3% Incentive available under Focus Product Scheme(FPS) has been raised from 1.25% to 2%

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Income Tax exemption to 100% EOUs under Section 10B and 10A of Income Tax Act, has been extended for the financial year 2010-11 in the Budget 2009-10 In Tea Sector Minimum value addition under advance authorisation scheme for export of tea has been reduced from the existing 100% to 50% Time limit of 60 days for re-import of exported gems and jewellery items, for participation in exhibitions has been extended to 90 days in case of USA Duty Free Import of samples by exporters, number of samples/pieces has been increased from the existing 15 to 50 Free Sale Certificate has been simplified and the validity of the Certificate has been increased from 1 year to 2 years

Higher Support for Market and Product Diversification:

Market Linked Focus Product Scheme (MLFPS) expanded by inclusion of products classified under as many as 153 ITC(HS) Codes at 4 digit level Major products include- Pharmaceuticals, Synthetic textile fabrics, value added rubber products, value added plastic goods, glass products Benefits to these products will be provided, if exports are made to 13 identified markets (Algeria, Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine, Vietnam, Cambodia, Australia and New Zealand)

 Marine sector Fisheries have been included in the sectors which are exempted from maintenance of average EO under EPCG Scheme, subject to the condition that Fishing Trawlers, boats, ships and other similar items shall not be allowed to be imported under this provision Gems & Jewellery Sector A new facility to allow import on consignment basis of cut & polished diamonds for the purpose of grading/ certification purposes has been introduced

Leather Sector
Leather sector shall be allowed re-export of unsold imported raw hides and skins and semi finished leather from public bonded ware houses, subject to payment of 50% of the applicable export duty For all other Authorisations/ licence applications, maximum applicable fee is being reduced to Rs. 100,000 from the existing Rs 1,50,000 (for manual applications) and Rs. 50,000 from the existing Rs.75,000 (for EDI applications)

Indias Pharmaceutical EXIM Policy:

Liberalized with the exception of a restricted list permitting imports under a special licensing scheme The export of chemicals, drugs and pharmaceuticals had an extraordinary performance and growth rate and for the three years of 1989 to 2001 there has been a total export of over twenty two thousand crore rupees with an average growth rate of around seventeen percent To assist and promote Indian exports an export promotion cell was specifically set up for the industry in particular Among its many functions it undertakes promotional activities for acceleration of exports

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Another function of the Council is the organization of seminars and workshops on standards, quality control requirements of the importing countries Several programs beside the drug development projects to support creation of facilities essential for new drug development have been initiated Specific screening facilities, pharmacological testing, etc., have planned for immediate implementation The National Pharmaceutical Pricing Authority (NPA) has been entrusted with the task of price fixation, revision and other related matters