Foreign trade and its determinants

Foreign trade is essential for the development of modern economy. Since the supply and demand for capital, natural resources, labour and management and consequently the costs and prices of goods and services produced by them are not the same, a nation can obtain cheaper and better goods and services, satisfy its needs and desires and may improve the living standards of its people only through trade with other nations. The role of international trade in the economic development of a country is widely recognized. Prof. Haberler lists of the following advantage of international trade :
It provides material means, viz. capital goods, machinery, raw and semi-finished materials etc. which are dispensable for economic development.
It is an important source of technical knowledge, managerial talents and entrepreneurship.
It is supposed to be a transmitter of capital.
It creates an atmosphere of healthy competition by checking monopolies and restrictive trade practices.
International trade creates structural changes in a country's economic characteristics, proportions and relationships. Nations must exchange needed goods to make up each other's deficiencies. In this way, they can mutually satisfy their requirements and other needs. International trade strengthens the relations, both economic and political, with the trading countries and provides an opportunity to enter into customs unions which bring for thee trade creating and trade diverting benefits. Apart from this, it can also foster mutual support and strong co-operation among the countries at the various levels of the development. A claim might be made for free trade on the grounds that it is an important safeguard against monopolistic markets, it helps disseminate technological knowledge and provides countries with capital. Recent investigations suggest significant relationship between growth of exports and growth of G.D.P.
International trade is influenced by both political and economic considerations. Historically, nations used it as a leverage to advance their diplomatic interest.Moreover, differences in fiscal and trade policies, monetary system, economic policies and domestic laws governing the freedom and rights of alien traders require mutual concession of sovereign rights by the countries involved. Hence the nature of economic progress of most of the present industrially advanced countries of the world is attributable to their ever expanding external trade. In Asia, Japan which could entirely reconstruct its economy through development of foreign trade has a sound image in the world market. So it is evident that foreign trade is a catalyst for economic development and it is based on quality, mutually and respect for each other's sovereignty and aspirations.
Foreign trade is a crucial problem before the developing countries of the world because these countries have no developed industries and face major obstacles for lack of availability of capital goods, equipments and technical know -how even while these countries are having substantial natural resources. For the exploitation of these resources there is an acute need of building a sound infrastructural base for industrialization and this has to be procured from abroad. Hence it is evident that industrial development is a panacea to enhance foreign trade. The task of ‘growth through industrialization' in the present day competitive international arena is very tough for developing countries because of the lack of finance whereas the advanced, countries are in a position to procure their requirements easily and quickly with the help of friendly nations and also from international agencies. Since advanced countries tend to exploit the developing or under-developed countries through regional groupings like EEC and EFTA among western countries, LAFTA and CACM in Latin American countries, CMEA among the socialist countries, so the developing and under-developed countries are forced to safeguard their economy through regional and intra-regional trade. It also appears more advantageous in view of trade barriers imposed by developed countries that developing countries of ASEAN region should take initiative by giving preferential treatments to each other's goods either by lowering tariffs or increasing quota or arranging long-term purchase and sale agreements.
In the general environment of uncertainty the only alternative to regional co-operation lies in international trade co-operation e.g. WTO and UNCTAD. There can be no doubt about the desirability of international trade co-operation but the experience of WTO and UNCTAD is not very encouraging. Hence as a sequel to the international policy of exploitation adopted by the developed countries, the developing countries of the world new gradually realize that their economic salvation lies in their close co-operation in trade and economic activities.
Determinants of Trade Pattern :
It is a well know fact that natural resources and man's innate abilities in different parts of the globe are not equal. There are sharp differences in climate, geographical and topographical conditions, quality and quantum of human resources. Some countries are having sound environment for rice production whereas others are having other specialties in other fields - coffee, banana, apples etc. Thus it is obvious the factors of production are not equally distributed among different regions of the world and their movement is also restricted. Consequently, there arises the differences in costs of production among different countries. The existing geographical and political delimitations of countries have created many deficiencies to undo which there has apparently emerged the pressing need for international trade. The pattern of international and inter-regional trade is generally influenced by the following major factors.
Historical - Linkage :
Certain common historical links of culture, religion and even international commerce have been existing among the countries of ASEAN even from the pre-colonial era. These links enhance the mutual understanding which facilitates regional trade co-operation.
Climate and Soil :
The topography and climate are very much different in different parts of the world, e.g. tropical fruit like banana, hardwoods such as mahogany and beverages like tea and coffee cannot be grown in a cold region. Further, sub-tropical fruits like orange and grapes, coniferous woods such as pines, spruce and crops like wheat are unfit for Tundra type climate. Rice needs a fertile soil and heavy rainfall while coffee requires an iron rich and soil and humid climate and jute is produced under special climate and soil conditions.
India, Pakistan, Bangladesh and Brazil have monopoly in coffee and jute production while U.S.A., China and Egypt are fit for cotton production accounting for about 60 percent of the world's output. Clearly some items are produced in some countries and not in others. Such countries require foreign market for their surplus and have to depend on international and inter-regional trade.
Trade and Tariff Policy :
It is a well known fact that industrialized countries are having sound reputation because they can provide quality products at cheaper prices. Since these countries are adopting new sophisticated technologies, they are having more surplus which they can afford to dispose of at throw away prices. Their trade policies often help in promoting international and inter-regional and also enable them to raise their productive efficiency as well as utilize their national industries to the fullest extent. This leads to production of goods under the most favourable conditions and thus increases their total national wealth. In case there is shortage of raw material, they can import it. They are in a position to make the best utilization of finished products as well as raw materials hence the necessity of a liberal trade policy among the under-developed and developing countries which can help boost up trade and economic relations among them. A strict trade policy on the other hand tends to restrict trade relations and thereby hamper economic growth.
In modern era tariff policies are also a very important tool to regulate international trade activities. Since these policies hit the trade of a country directly so every country frames its policies to safeguard its interest, decisions on monetary, fiscal, credit and trade policies are of made as they should be made by taking into consideration their medium and long-term impact on the trade of the country. As such, trade and tariff policy is a major determinant of international trade pattern.
Stage of Development :
Difference in the rates and stages of economic development and adoption of production techniques exercise a significant impact on international trade. Prof. W.W. Rostow has identified five stages which substantially influence trade relations with other countries. The traditional stage is the first stage of economic development whose structure is developed with in limited production functions. In the second stage of growth, the preconditions for take off are developed. The third or the ‘take-off' stage requires ‘the developments of one or more substantial manufacturing sectors with a high rate of growth, and the existence or quick emergence of political, social and institutional framework which exploits the impulse to expansion in the modern sector and the potential external economic effects of the take-off and gives an on-going character'. The economy becomes self sustaining and growth becomes its normal condition. Under the fourth or ‘Orive to Maturity' stage, "the make up of the economy changes unceasing as technique improves, new industries accelerate, older industries level off". The final stage is the ‘Age of High Mass consumption', where, in time, the leading sectors shift durable consumer goods and services. Hence it is very clear that the stage of the economic growth of a country greatly influence its trade with other countries.
Pace of Technological Changes :
In the competitive race, every country plans to manufacture new sophisticated items at lesser cost. That is why innovation has become a continuous process now-a-days. The pace of R and D (Research and Development) is very fast in advanced countries e.g. Japan, U.S.A., Honkong, Russia, India, Germany, France, U.K. etc. for example Japan ranks first in exporting readymade garments in the world while the cotton production of this country is insufficient to meet the requirements of the industry. In order to fulfill its requirement of cotton, Japan has to depend on the cotton producing countries, its ranks first in importing cotton.
It can be inferred from the above analysis that technological parameters are the essential requirements of speedy industrialization which in turn enhances the economic growth of a country rapidly and provides employment opportunities, exploits its available resource and increases the national and per capita income. Hence it is evident that the trade pattern is determined, inter-alia, by the technological development as well as the growth rate of an economy.