Foreign Trade – SS1 Commerce Lesson Note (First Term)

Foreign trade, also called international trade or external trade, is the exchange of goods and services between two or more countries, e.g. Nigeria, Japan and the USA.

Behavioural objectives

1. Define foreign trade.
2. State the reasons for international trade.
3. List the importance and disadvantages of foreign trade.
4. Identify the problems and barriers encountered in foreign trade.
5. Explain the classes of foreign trade: import, export and entrepot; bilateral and multilateral; visible and invisible.

Why do countries trade with each other?

Countries trade with each other because no country can produce everything its people need.

• Uneven distribution of natural resources: no country has every resource, e.g. Nigeria has crude oil while other countries lack it.
• Differences in climate: some crops grow only in certain climates, e.g. cocoa grows well in warm, wet areas.
• Differences in skills and technical know-how: some countries make machines and electronics that others cannot yet produce.
• Need to expand the market: selling abroad gives producers more buyers for their products.
• Differences in cost of production: a country buys a good from abroad when it is cheaper than making it at home.
• Need to add to domestic production: imports fill the gap when local output is too small.
• Differences in the quantity and quality of labour: countries differ in the number and skill of their workers.
• Need for good relationships: trade links bring countries closer in friendship and cooperation.

What is the importance of foreign trade?

The importance of foreign trade is the set of benefits a country and its people gain from buying and selling abroad.

• Government revenue: the government earns money from import duties and export duties.
• Better standard of living: people can buy goods that their country cannot produce.
• International specialisation: each country concentrates on what it produces best, so total output rises.
• Friendly relations: trading partners tend to cooperate with one another.
• Foreign exchange earnings: exports bring in foreign currency for buying imports.
• Transfer of technology: countries learn new methods and machines from their partners.
• Employment: export industries, ports and transport services create jobs.
• Wider market: producers sell to the world, not only to local buyers.
• Economic development: trade supports growth and the building of industries.

What are the disadvantages of foreign trade?

The disadvantages of foreign trade are the harmful effects a country may suffer from trading abroad.

• Loss of cultural and moral values: foreign films, dress and habits can weaken local values.
• Dumping: a country sells goods abroad at very low prices, which harms local producers.
• Over-production: too much specialisation may lead to too much of one product.
• Structural unemployment: local industries shrink when cheaper imports replace their goods, so workers lose jobs.
• Over-dependence: countries rely too much on each other for important goods.
• Balance of payments problems: a country may spend more on imports than it earns from exports.
• Distortions in the economy: some sectors are neglected, e.g. Nigerian agriculture when oil and imports dominate.
• Importation of harmful goods: fake drugs, weapons and other unsafe items may enter the country.

What problems are encountered in foreign trade?

Barriers to foreign trade are the problems that make it difficult for countries to exchange goods and services.

They fall into two groups: natural and practical problems, and artificial and official problems.

Natural and practical problems

• Distance and transport cost: goods travel far, which raises freight and insurance costs.
• Currency differences: each country uses its own money, and changes in exchange rates cause losses.
• Weights and measures: countries may use different units, which causes confusion.
• Language barrier: traders may find it hard to communicate and agree terms.
• Cultural and religious differences: some goods are unwelcome in certain societies.
• Technical specifications: standards for goods, e.g. electrical fittings, may differ.

Artificial and official problems

• Political and diplomatic barriers: quarrels between governments can stop trade.
• Tariff: a tax placed on imported or exported goods.
• Quota: a limit on the quantity of a good that may be imported.
• Embargo: a government ban on trade in certain goods or with a certain country.
• Licence: official permission that a trader must obtain before importing or exporting.
• Documentation: too many complicated forms and procedures delay goods at the port.

How is foreign trade classified?

Foreign trade is classified in three ways: import, export and entrepot; bilateral and multilateral; visible and invisible.

What are import, export and entrepot trade?

Import trade is buying goods from other countries, and export trade is selling goods to other countries.

Entrepot trade is buying goods from one country in order to resell them to another.

What are bilateral and multilateral trade?

Bilateral and multilateral trade differ in the number of countries taking part.

• Bilateral trade: a trade agreement in which two countries exchange goods and services as trading partners.
• Multilateral trade: trade in which a country has more than one trading partner at the same time.

What is the difference between visible and invisible trade?

Visible trade is the exchange of tangible goods that can be seen and touched.

Invisible trade is the exchange of services that cannot be seen, felt or touched.

Evaluation

1. Define foreign trade.
2. State five reasons why countries trade with each other.
3. List four disadvantages of foreign trade.
4. Distinguish between import, export and entrepot trade.
5. Differentiate between visible and invisible trade, giving two examples of each.

Assignment

1. List five problems encountered in foreign trade and explain how any two of them can hinder trade between countries.