International Trade in 2020
-Guest post by Ecofin
Imagine a situation where we know about i-phone, but we cannot buy it nor we can import it. Imagine a situation where production of rice in our country is in excess but 30% of the total production just going into waste!!!! And the same output we cannot even export it. I will name this situation “a world without International Trade”. Imagine 2020 without International Trade!! Oh! We are already here, thanks to Covid-19.
What is International Trade?
In simple words, International Trade is exchange of goods and services as well as resources between countries. International Trade has more complexity compared to Internal Trade, as the former involves exchange of currencies, diversification in customer segment, differences in legal system, restrictions in the form of taxes, regulations, trade barriers, restraint to movements of specified goods and services and issues related to shipping and documentations.
International Trade has its own benefits and disadvantages. Few of them are as follows:
Benefits of International Trade
- Export of Goods and resources helps in reducing unemployment and improves standard of living;
- Due to increase in competition from foreign companies, domestic industries are compelled to improve quality of the goods. It further improves domestic business practices in order to bring them at par with the foreign companies;
- Consumers get wide variety of goods and services at competitive prices, which increase the consumer surplus;
- Increase in world output;
- Stimulus to economic efficiency, contributes to economic growth and rise in income;
- Brings revenue to Government in the form of duties which can be utilised for the welfare of people;
- Gives opportunities for countries to earn out of and get rid of excessive surplus of resources. For example, Arab nations, rich in oil, has run out of storage space for excessive oil, the supply of which has come to a halt after the barriers were imposed on international borders amidst lockdown due to Coronavirus crisis around the globe.
Disadvantages of International Trade
- Threat to unskilled labor, due to utilisation of advanced technology;
- Each nation focuses on exports rather than imports in order to improve their balance of payment;
- Inter-dependence on developed nations impair economic autonomy (self-rule). Such reliance often leads to exploitation and loss of cultural identity. Because of such dependence a country may try to intermeddle between the sovereign and internal matters of the state. For example, China and United States, has time and again suggested to mediate in the border-dispute between India and Pakistan;
- Excessive exports cause shortages of essentials item such as rise in price of onion in 2014;
- Trade rivalry may result in distortion of harmonious relationships among nations.
Due to scarcity of resources, it is natural for each nation to engage in international trade. It is true that fair competition doesn’t always exist and international trade also brings sever distortion to many domestic companies and industries. Therefore, individuals and organization continue to pressurize policymakers and government to restrict imports and/or to boost up exports. This is undertaken through trade policy measures that a country adopts to protect their domestic industries.
Tariffs, also known as import duty or custom duty. It is basically a form of tax that country charges on goods and services which are imported or exported. It is a financial charge in the form of a tax, which is imposed at the border on goods moving from one custom territory to another.
There are two types of Tariff measures, namely, Tariffs and Non-Tariffs Measures.
Tariffs Measures: Tariffs are mostly visible and universally used as trade measure that determine market access for goods. Tariffs are aimed at changing the relative prices of imported goods to the price of domestic substitute. The main goal of raising tariffs is to increase revenue to the government and to support domestic industries. Example, Specific Tariff, Ad-valorem tariff, Tariff Rate Quota, MFN Tariff, Bound Tariff, anti-dumping duties, etc.
Non-Tariffs Measure: On the other hand, non-tariff measures are invisible tariff. NTM which have come into greater prominence than the conventional tariffs barriers. NTM comprise all types of barriers which results in alteration of regulations, trade policy, and reduction in quantities traded or price or both. Example, Import Quota, Government Procurement Policy, Rules of Origin, Restriction on Post-Sales Services, Administrative Procedures, Financial restrictions, embargoes etc.
Evolution of International Trade:
In 17th century, when the work was manualized, the output was comparatively less. After Industrial Revolution, there was excess of production of goods. European traders were worried about the inventory they were holding. Then famous Economist Adam smith came up with his theory of Absolute Advantage which shows that each country has expertise or resources for production of some or the other commodity and their production exceeds the domestic demands. Thus, they can export the excess production and import the commodity in which it has absolute disadvantage. So that’s how international trade evolved.
Today, we enriched ourselves so much because of International trade however, due to unfair Non-Tarriffs measures, we could not achieve our main objective and this failure is further substantiated with the rise of Coronavirus. Now, international trade seems like a distant dream as nations around the globe have closed their borders. Only essential commodities like Hydroxychloroquine and ventilators will be exchanged. Indian PM Narendra Modi, also emphasized on the concept of ‘go vocal for local’.
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