BCom Foreign Trade and Economic Development Notes Study Material
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Foreign Trade and Economic Development Notes Study Material
INTRODUCTION OF FOREIGN TRADE
There is no country in the world today which produces all the commodities it needs. Every country, therefore, tries to produce those commodities in which it has 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 have greatly widened the basis of international trade.
The issues of international trade and economic growth have gained substantial importance with the introduction of trade liberalization policies in the 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 policy makers 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 unfavourable changes in the economic and financial scenarios of the 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, 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.
The other group of economists, which speaks in favour of globalization and international trade, come with a brighter view of the international trade and its impact on economic growth of the developing nations. According to them developing countries, which have followed trade liberalization policies, have experienced all the favourable effects of globalization and international trade. China and India are regarded as the trend-setters 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 the opportunities of global market to the entrepreneurs of the developing nations. International trade also makes the latest technology readily available to the businesses operating in these countries. It results in increased competition both in the domestic and global fronts. 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 o related opportunities for the countries that are involved in international trade.
The role of foreign trade can be judged by the following points:
- Accelerate Economic Development: Foreign trade plays 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 countries and imports the capital goods from other countries. Therefore, it is not wrong to say that economic development of a country depends of foreign trade.
- Source of Foreign Exchange: Foreign trade provides foreign exchange which can be used to remove the poverty and other productive purposes.
- Market expansion: The demand factor plays very important role in increasing the production of any country. The foreign trade expands the market and encourages the 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.
- Increase in Investment: Foreign trade encourages the investor to increase the investment to produce more goods. So the rate of investment increases.
- Foreign Investment: Besides the local investment, foreign trade provides incentives for the foreign investors to invest in those countries where there is a shortage of investment.
- Increase in National Income: Foreign trade increases the scale of production and national income of the country. To meet the foreign demand we increase the production on large scale so GNP also increases.
- Decrease in Unemployment: With the rise in the demand of goods domestic resources are fully utilized and it increases the rate of development in the country and reduces the unemployment in the world.
- Price Stability: Foreign trade helps to bring stability in price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. There by stopping fluctuation in prices.(Foreign Trade and Economic Development Notes Study Material)
- Specialization: There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts the specialization in the production of those commodities, in which it has comparative advantage. So all trading countries enjoy profit through International trade.(Foreign Trade and Economic Development Notes)
- Remove Monopolies: Foreign trade also discourages the monopolies practices. When monopolists start to increases the prices, government allows the import of goods to reduce the prices in the country.
- Removal of Food Shortage: Developing countries like India is 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.(Foreign Trade and Economic Development Notes)
- Agricultural Development: Agricultural development is the back bone in our economy. Foreign Trade has played very important role for the development of our agriculture sector. Every year we export rice, cotton, fruits and vegetables to other countries. The export of goods makes our farmer more prosperous. It inspires the spirit of development in them.
- Import of Consumer Goods: Developing countries like India and Pakistan imports the 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.
- To Improve Quality of Local Products: Foreign trade helps to improve quality of local products and extends market through changes in demand and supply as foreign trade can create competition with the rest of the world.
- 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.
- Competition with Foreign Producers: We can compete with the foreign producers in foreign trade so it improves the quality and reduces the cost of production. It is also an advantage of foreign trade.
- Import of Capital Goods and Technology: The inflow of capital goods and technology in the less developed countries has increased the rate of economic development, and this is due to foreign trade.
- Better Understanding: Foreign trade provides an opportunity to the people of different countries to meet, discuss and exchange views and ideas related to their social, economic and political problems.
- Dissemination of Knowledge: Foreign trade is also responsible for dissemination of knowledge and learning from developed countries to under developed countries.(BCom Foreign Trade and Economic Development Notes)
- Useful for the World Peace: Today all the countries are tied in trade relations with each other. So, foreign trade contributes to establish peace and prosperity in the world.(BCom Foreign Trade and Economic Development Notes)
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, favourable macroeconomic scenario 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 lack of appropriate policy measures. Some negative effects of international trade are as below:
- 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 cost may high due to costly labour and materials in comparison to imported goods.
- 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.
- Higher Foreign Debt: When imports exceed exports, a nation trade deficit rises. Using India as an example that each year the 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.
- 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.
- 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 labour and abusive child labour. 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 Foreign Trade and Economic Development Notes)
- 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.
In conclusion it can be said that, international trade leads to economic growth provided the policy measures and economic infrastructure are accommodative enough to cope with the changes in social and financial scenario 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. 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 roles in these globalizing trends that have removed trade barriers to achieve world trade benefits to all countries in world.
Foreign Trade and Economic Development Notes Study Material
Foreign Trade and Economic Development Notes Study Material