In today’s class, we will discuss foreign trade.
Foreign Trade – Introduction
Reasons for foreign trade
Advantages and disadvantages of foreign trade
Barriers to foreign trade
Classification of foreign trade
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
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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 friendly relations 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 the cultural and moral values of a country
2. It encourages the dumping of goods
3. Excessive specialization may lead to overproduction 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 creates a balance of payments problem
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.
Evaluation
1. What five benefits does Nigeria derive from engaging in foreign trade
2. State seven differences and three similarities between foreign trade and internal trade
Problems or difficulties encountered in foreign trade (or 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 barriers
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. Import refers to goods bought from other countries. Export refers to goods sold to other countries
An entrepot refers to buying from one country to resell to another
2. Bilateral and Multilateral Trade: Bilateral trade is a trade agreement in which two countries exchange goods and services as trading partners. 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: Visible trade refers to the trade-in items of tangible goods – goods that can be seen, touched, and felt. 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.
Evaluation
1. State and explain five problems likely to be faced by a businessman who wants to sell his goods overseas
2. Distinguish between the following terms:
3. Bilateral Trade and Multilateral Trade
4. Visible Trade and Invisible Trade
General evaluation
1. What is a bonded warehouse
2. State five importance of warehousing to Commerce
3. What factors should be considered in siting a small retail shop
4. What five benefits does Nigeria derive from engaging in international trade
5. State and explain five problems likely to be faced by a businessman who wants to sell his goods overseas
Theory
1. What is foreign trade?
2. State four disadvantages of foreign trade.
Next class, we will discuss Balance of trade, the terms of trade, the balance of payment, and others.
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