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

By the end of the lesson, students should be able to:

• define foreign trade;
• state the reasons for international trade;
• list the importance and disadvantages of foreign trade;
• identify the problems and barriers encountered in foreign trade;
• explain the classifications of foreign trade: import, export and entrepot; bilateral and multilateral; visible and invisible trade.

Why do countries trade with each other?

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. Differences in the quantity and quality of the labour force
8. The need to establish a relationship with other countries

What is the importance of foreign trade?

1. It increases government revenue through taxes such as import duties and export duties.
2. It improves the standard of living of participating countries by making available products that a country cannot produce itself.
3. It encourages international specialisation and the resultant increase in total output.
4. It encourages friendly relationships 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 promotes economic development.

What are the disadvantages of foreign trade?

1. It may lead to the destruction of the cultural and moral values of a country.
2. It encourages dumping of goods.
3. Excessive specialisation may lead to over-production of goods in a country.
4. It may lead to structural unemployment.
5. It leads to over-dependence of countries on each other.
6. It can create 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.

What problems are encountered in foreign trade?

These problems are also called 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 and regulations, e.g. tariffs, quotas, embargoes, licences and other economic barriers
8. Documentation and administrative procedures that are too many and too complicated
9. Differences in technical specifications

How is foreign trade classified?

Import, export and entrepot

• Import refers to goods bought from other countries.
• Export refers to goods sold to other countries.
• Entrepot refers to buying goods from one country to resell to another.

Bilateral and multilateral trade

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

Visible and invisible trade

• Visible trade refers to trade in tangible goods, that is, goods that can be seen, touched and felt.
• Invisible trade refers to trade in items that cannot be seen, felt or touched. These are usually services, e.g. banking, transport, insurance, tourism, aviation (air services), shipping services and consultancy services.

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.
2. Explain bilateral trade and multilateral trade.
3. State five ways in which foreign trade is important to a country.