Foreign Trade SS1 Commerce Lesson Note

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

REASONS FOR INTERNATIONAL TRADE

1. Uneven distribution of natural resources
2. Differences in climatic conditions
3. Differences in skills and technical know-how i.e. the technological difference
4. The need to expand the existing market for products
5. Differences in the cost of production
6. To augment domestic production of goods and services
7. The differences in quantity and quality of the labour force
8. The need to establish a relationship with other countries

IMPORTANCE OF FOREIGN TRADE 

1. It increases government revenue through taxes such as import duties, export duties etc.
2. It improves the standard of living of participating countries by making available products that cannot be produced by a country
3. It encourages international specialization and its resultant increase in total output
4. It fosters a friendly relationship among nations
5. It is a source of foreign exchange earnings
6. It promotes the transfer of technology
7. It creates employment opportunities in participating countries
8. It widens the world market
9. It enhances the promotion of economic development

DISADVANTAGES OF FOREIGN TRADE

1. It may lead to the destruction of cultural and moral values of a country
2. It encourages dumping of goods
3. Excessive specialization may lead to over-production of goods in a country
4. It may lead to structural unemployment
5. It leads to the over-dependence of countries on each other
6. It creates a balance of payments problems
7. It creates distortions in the economy e.g. neglect of the agricultural sector in Nigeria
8. It leads to the importation of harmful goods.

PROBLEMS/DIFFICULTIES ENCOUNTERED IN FOREIGN TRADE (BARRIERS TO FOREIGN TRADE )

1. The problem of distance, transportation costs etc.
2. Currency differences and exchange rate risks
3. Differences in weights and measures
4. Language barrier and communication problems
5. Cultural and religious barriers
6. Political and diplomatic barriers
7. Artificial barriers/regulations e.g. tariffs, quota, embargo, licenses and other economic barrier
8. Documentation and administrative procedures are too many and more complicated
9. Differences in technical specifications

CLASSIFICATIONS OF FOREIGN TRADE

1. Import, Export and Entrepot

i. Import refers to goods bought from other countries

ii. Export refers to goods sold to other countries

iii. Entrepot refers to buying from one country to resell to another

2. Bilateral and Multilateral Trade

i. Bilateral trade is a trade agreement in which two countries exchange goods and services as trading partners

ii. Multilateral Trade: This refers to a situation where a country has more than one trading partner at the same time.

3. Visible Trade and Invisible Trade

i. Visible trade refers to the trade-in items of tangible goods – goods that can be seen, touched and felt.

ii. Invisible trade refers to the trade-in items that cannot be seen, felt or touched. They are usually services e.g. banking transport, insurance, tourism, aviation/air services, shipping services, consultancy services etc.