International trade

International trade is the exchange of goods and services between countries.

Trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in their own countries, or which would be more
expensive domestically.
The importance of international trade was recognized early on by political
economists like Adam Smith and David Ricardo.
Still, some argue that international trade actually can be bad for smaller nations,
putting them at a greater disadvantage on the world stage.

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 Understanding International Trade

International trade was key to the rise of the global economy.

In the global economy, supply and demand—and therefore prices—both impact
and are impacted by global events.
Political change in Asia, for example, could result in an increase in the cost of labor.
This could increase the manufacturing costs for an American sneaker company that
is based in Malaysia, which would then result in an increase in the price charged for
a pair of sneakers that an American consumer might purchase at their local mall.

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 Imports and Exports

A product that is sold to the global market is called an export, and the product that is bought from the
global market is an import.
Imports and exports are accounted for in the current account section in a country's balance of
payments.
Global trade allows wealthy countries to use their resources—for example, labor, technology, or 
capital—more efficiently.
Different countries are endowed with different assets and natural resources: land, labor, capital, and
technology, etc. This allows some countries to produce the same good more efficiently—in other
words, more quickly and with less of a cost.
Therefore, they may sell it more cheaply than other countries.
If a country cannot efficiently produce an item, it can obtain it by trading with another country that
can.
This is known as specialization in international trade.

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 Comparative Advantage

These two countries realize that they could produce more by focusing on those products with
which they have a comparative advantage.
Country A begins to produce only wine, and Country B begins to produce only cotton sweaters.
Each country can now create a specialized output of 20 units per year and trade equal
proportions of both products.
As such, each country now has access to 20 units of both products.
the opportunity cost of producing both products is greater than the cost of specializing.
More specifically, for each country, the opportunity cost of producing 16 units of both sweaters
and wine is 20 units of both products (after trading).
Specialization reduces their opportunity cost and, therefore, maximizes their efficiency in
acquiring the goods they need. With the greater supply, the price of each product would
decrease.
Thus, their choice to engage in specialization provides an advantage to the end consumer as
well.

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 Free Trade

Free trade is the simpler of the two theories.

This approach is also sometimes referred to as laissez-faire
 economics.
With a laissez-faire approach, there are no restrictions on trade.
The main idea is that supply and demand factors, operating on a
global scale, will ensure that production happens efficiently.
Therefore, nothing needs to be done to protect or promote trade
and growth, because market forces will do so automatically.

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 Protectionism -

Holds that regulation of international trade is important to ensure that markets

function properly.
 Advocates of this theory believe that market inefficiencies may hamper the
benefits of international trade, and they aim to guide the market accordingly.
Protectionism exists in many different forms, but the most common are tariffs, 
subsidies, and quotas.
These strategies attempt to correct any inefficiency in the international market

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 Types of risks in International Trade

1. Commercial risks
2. Political risks
3. Risks arising out of foreign laws
4. Cargo Risks
5.  Credit risks
6. Foreign exchange fluctuations risks.

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 Commercial risks

Commercial risks exist in domestic market too.

Their impact in international market: is greater, in comparison domestic market.

The changes in international market are hazardous and difficult to anticipate.

Suitability and acceptability of the product international market is rather difficult to gauge.

Variations in demand and supply conditions are more unpredictable.

Most of the commercial risks are to be borne by the exporters.

Exporters cannot shift these risks to the professional risk bearers, paying insurance premium.

The exporter is not, aware of the conditions in the foreign market as the way he is aware of

domestic market. 8
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 Commercial risks
Long distances to travel along with cost and time implications distinguish international trade from

domestic trade.

Exporter cannot visit Paris with the same ease he does Mumbai from Bhopal.

If goods are not sold or price realization is lower than anticipated, due to changes in demand or

supply, exporter has to bring back the goods, incurring additional freight cost or opt to sell the

goods at a loss.

In international market, as in domestic market, presence of competitors influences the demand

and supply conditions and entry of new competitors depresses the market more.

Further, local production may bring down the prices. Introduction of substitutes to capture the

market may take away the exporter's share in the market.

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 Commercial risks

Changes in Exchange Rates

Changes in import Duties or Tariff
Barriers:
Changes in Transport costs

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 Political Risks
Political Risks change in These risks arise due to change in political situations in the concerned

importing and exporting countries.

Following are the factors, affecting the political situation:

Changes in the party in power in the concerned countries, followed by 1 head of the Government;

Coups, civil wars and rebellions:

Wars between the countries or among- many countries and

Capture of cargo by enemies during war.

Political Asks can be avoided, to a certain extent, by judicious selection of the countries to which goods

are exported.

Insurance companies may agree to provide cover for some of these risks, by collecting additional

premium. Export Credit. Guarantee Corporation (ECGC.) also 'covers seine of the risks.

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 Risks Arising out of Foreign Laws (Legal Risks) 

Every country has its own commercial law.

Different laws prevail both in exporter and importer countries.
Legal proceedings are complex as well as expensive.
In every relationship, however cordial and long-standing may be,
differences are likely to arise.
Legal risks can be avoided to a great extent by incorporating the
provision for appointment of an arbitrator, in case of dispute about
contractual terms.

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 Cargo risks

Cargo risks Transportation of cargo has undergone radical improvements over a

period.
Most of the goods are transported by sea. Transit risks are a common hazard for
those engaged in export/import business.
The list of dreary and hazardous risks in transit is long viz. Storms, collisions, theft,
leakage, explosion, spoilage, fire, and high sea robbery.
Every exporter should have working knowledge of marine insurance so that he
knows whether he is getting the required risk protection at the minimum cost
It is always possible to transfer the financial losses resulting from perils of sea and
perils in transit to professional risk bearers known as underwriters
Principles of marine insurance are also equally applicable to insurance of air cargo
also.
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 Credit Risks,

Credit Risks, Risks are inherent in credit transactions; more so in

international business. International business is invariably riskier than
the domestic trade.
Credit risk. is not the same whether one sells the goods in domestic
market or in foreign market.
Success, in international business depends, largely, on the ability of
the exporters to give credit to importers on tree competitive and
favorable terms.

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 Credit Risks,

Export business has become highly risky as selling on credit has become very common.

Importers are sought after so it is but natural they dictate terms as there are many exporters

competing for the cake of international trade.

Insolvency rate is on the increase.

Balance of payment difficulties has severely affected the capacity of many countries to pay the

import price.

However, offering credit has become unavoidable to the exporters to face competition. Two issues

stand before the exporters:

(i) The exporter must have sufficient funds to offer credit to the buyers abroad and

(ii) The exporter should be prepared to take credit risks.

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