BCom 1st Year Foreign Trade and Economic Development Notes Study Material

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BCom 1st Year Foreign Trade and Economic Development Notes Study Material

INTRODUCTION OF FOREIGN TRADE

There is no country in the world today that produces all the commodities it needs. Every country, therefore, tries to produce those commodities in which it has a comparative advantage. It exchanges part of those commodities with the commodities produced by other countries relatively more efficiently. The relative difference in factor endowments, technology, tastes, etc, among the nations of the world, has greatly widened the basis of international trade. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

The issues of international trade and economic growth have gained substantial importance with the introduction of trade liberalization policies in developing nations across the world. International trade and its impact on economic growth crucially depend on globalization. As far as the impact of international trade on economic growth is concerned, the economists and policymakers of the developed and developing economies are divided into two separate groups.

One group of economists is of the view that international trade has brought about unfavorable changes in the economic and financial scenarios of developing countries. According to them, the gains from trade have gone mostly to the developed nations of the world. Liberalization of trade policies, reduction of tariffs, and globalization have adversely affected the industrial setups of the less developed and developing economies.

As an aftermath of liberalization, the majority of the infant industries in these nations have closed their operations. Many other industries that used to operate under government protection found it very difficult to compete with their global counterparts. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

The other group of economists, which speaks in favor of globalization and international trade, come with a brighter view of international trade and its impact on the economic growth of developing nations. The developing countries, which have followed trade liberalization policies, have experienced all the favorable effects of globalization and international trade. China and India are regarded as trendsetters in this case.

ROLE OF FOREIGN TRADE IN ECONOMIC DEVELOPMENT

There is no denying that international trade is beneficial for the countries involved in trade if practiced properly. International trade opens up opportunities for the global market to entrepreneurs of developing nations. International trade also makes the latest technology readily available to businesses operating in these countries. It results in increased competition both on the domestic and global fronts. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

To compete with their global counterparts domestic entrepreneurs try to be more efficient and this in turn ensures efficient utilization of available resources. Open trade policies also bring in a host of related opportunities for the countries that are involved in international trade.

The role of foreign trade can be judged by the following points:

1. Accelerate Economic Development: Foreign trade plays a very m e role in the economic development of any country. Developing countries like Pakistan, Bangladesh, etc. also exports a lot of agricultural product to one country and import capital goods from other countries. Therefore, it is not wrong to say that the economic development of a country depends on foreign trade.
2. Source of Foreign Exchange: Foreign trade provides foreign exchange which can be used to remove poverty and other productive purposes.
3. Market expansion: The demand factor plays a very important role in increasing the production of any country. Foreign trade expands the market and encourages producers. In underdeveloped countries, domestic markets are very limited due to poverty. So it is necessary that they should sell our products in other countries. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)
4. Increase in Investment: Foreign trade encourages investors to increase their investment to produce more goods. So the rate of investment increases.
5. Foreign Investment: Besides local investment, foreign trade provides incentives for foreign investors to invest in those countries where there is a shortage of investment. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)
6. Increase in National Income: Foreign trade increases the scale of production and national income of the country. To meet the foreign demand we increase production on a large scale so GNP also increases.
7. Decrease in Unemployment: With the rise in the demand for goods domestic resources are fully utilized and which increases the rate of development in the country and reduces unemployment in the world.
8. Price Stability: Foreign trade helps to bring stability to the price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. Thereby stopping fluctuation in prices. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)
9. Specialization: There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts specialization in the production of those commodities, in which it has a comparative advantage. So all trading countries enjoy profit through International trade.
10. Remove Monopolies: Foreign trade also discourages monopolies practices. When monopolists start to increase the prices, the government allows the import of goods to reduce the prices in the country.
11. Removal of Food Shortage: Developing countries like India are also facing the food shortage problem. To remove the food shortage India has imported wheat and pulses many times. So due to foreign trade, we are solving this problem for many years.
12. Agricultural Development: Agricultural development is the backbone of our economy. Foreign Trade has played a very important role in the development of our agriculture sector. Every year we export rice, cotton, fruits, and vegetables to other countries. The export of goods makes our farmers more prosperous. It inspires the spirit of development in them.
13. Import of Consumer Goods: Developing countries like India and Pakistan import various consumer goods from other countries, which are not produced inside the country. Today the shortage of any commodity can be removed through international trade.
14. To Improve Quality of Local Products: Foreign trade helps to improve the quality of local products and extends the market through changes in demand and supply as foreign trade can create competition with the rest of the world.
15. External Economics: External economics can also be achieved through foreign trade. The industries are producing products on large scale and enjoying the external economics due to international trade.
16. Competition with Foreign Producers: We can compete with foreign producers in foreign trade so it improves the quality and reduces the cost of production. It is also an advantage of foreign trade.
17. Import of Capital Goods and Technology: The inflow of capital goods and technology in less developed countries has increased the rate of economic development, and this is due to foreign trade. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)
18. Better Understanding: Foreign trade provides an opportunity for the people of different countries to meet, discuss and exchange views and ideas related to their social, economic, and political problems.
19. Dissemination of Knowledge: Foreign trade is also responsible for the dissemination of knowledge and learning from developed countries to underdeveloped countries. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)
20. Useful for World Peace: Today all the countries are tied in trade relations with each other. So, foreign trade contributes to establishing peace and prosperity in the world. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

NEGATIVE IMPACT OF FOREIGN TRADE ON ECONOMIC DEVELOPMENT

When we take the positive impacts of international trade, it is important to consider that international trade alone cannot bring about economic growth and prosperity in any country. There are many other factors like flexible trade policies, favorable macroeconomic scenarios, and political stability that need to be there to complement the gains from trade. There are examples of countries, which have failed to reap the benefits of international trade due to a lack of appropriate policy measures. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

Some negative effects of international trade are as below:

1. Lost Jobs: International trade creates jobs for exporting industries but eliminates them in other sectors, as cheaper foreign goods displace domestic products. Job losses are especially high in manufacturing sectors because here production costs may high due to costly labor and materials in comparison to imported goods. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)
2. Reduced Wages: Labour represents one of the highest business costs in producing products. World trade opens markets to goods produced in countries where workers earn far less than their domestic competitors—depresses the wages of domestic workers as their employees try to reduce costs to compete more effectively with overseas firms. Lower wages for domestic workers contribute to rising wage inequality across the economy.
3. Higher Foreign Debt: When imports exceed exports, a nation’s trade deficit rises. Using India as an example that each year India runs a trade deficit it must borrow from overseas lenders to finance the difference, w e increases foreign debt that the nation must pay with interest. Higher foreign debts and their accompanying interest payments threaten long-term living standards.
4. Rising Global Poverty: The World Trade Organization and the World Bank report that the years since 1980 have seen the most growth in liberalized trade, in which international trading activities expand as trade barriers fall. However, world poverty has risen during that same period. The World Bank reports that the number of people throughout the world living on less than $ 2 a day has risen by about 50 percent since 1980. In addition, a growing number of people are living on less than $ 1 a day.
5. Adverse Working Conditions: As underdeveloped countries attempt to cut costs to gain a price advantage, many workers in these countries face low pay, substandard working conditions, and even forced labor and abusive child labor. This “race to the bottom,” as critics call this drive to cut costs at the expense of human rights, is a key target of protests aimed at the WTO. The WTO notes developing countries insist any attempt to include working conditions in trade agreements is meant to end their cost advantage in the world market. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)
6. Environmental Damage: According to critics, the increase of corporate farms in developing countries increases pesticide and energy use, and host countries ignore costly environmental standards. In some countries, for instance, replacing native crops with coffee and cocoa trees reduces erosion. The WTO is criticized for not allowing barriers to imports based on inadequate environmental standards in countries where goods are produced. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

CONCLUSION

In conclusion, it can be said that international trade leads to economic growth provided the policy measures and economic infrastructure is accommodative enough to cope with the changes in social and financial scenarios that result from it. Trade agreements ratified since the early 1990s have helped to create a global marketplace, expanding global trade by opening more markets to goods from around the world. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

Agreements such as the World Trade Organization (WTO), United Nations Conference on Trade and Development (UNCTAD), G7 (Group of 77 Underdeveloped Countries), SAARC, etc. have played a crucial role in these globalizing trends that have removed trade barriers to achieve world trade benefits to all countries in the world. (BCom 1st Year Foreign Trade and Economic Development Notes Study Material)

BCom 1st Year Foreign Trade and Economic Development Notes Study Material

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