Trade was limited to people and manufacturers within a town or country in earlier times. However, the development of technology, communication, and transportation systems enabled people to conduct trade activities between two or more countries. This benefitted the consumers as they had a new variety of products and perhaps got better quality products at lower prices. It also benefited the sellers as not every country had all goods or raw materials in surplus. Thus, trade allowed countries to export the goods they had in surplus and import the ones they were deficient in while maintaining a balance.
What Is External Trade?
Every country relies on another to fulfil its needs for specific commodities. For instance, a country can be wealthy in iron steel and iron but deficient in raw resources such as wheat and spices. As a result, it must source wheat and other food raw materials from several countries with surplus production, such as agriculturally rich countries like India. Furthermore, countries with excess production of specific commodities find exporting these products to other countries advantageous.
Many technologically advanced countries like America achieve specialisation in manufacturing certain items due to sophisticated technology. However, not every country has the advanced technology required; hence, they import products from countries like America.
As a result of this unequal distribution of some natural resources and abundance of one particular product, goods and services are exchanged between countries. This process is called external trade, also known as international trade or foreign trade.
Types of External Trade
The three main types of external trade are given as follows-
- Import trade – Import trade occurs when a country’s business purchases items from another country. Import trade, like, is when the Indian government imports gold, textile machinery, and other items from foreign countries.
- Export trade—Export trade occurs when a company in one country sells items to a company in another country. The sale of steel and iron, spices, coal, and other products by Indian enterprises to other countries is referred to as export trade.
- Entrepot trade—Entrepot trade or re-export trade for a country occurs when a company purchases items to export them again to companies in another country, with or without modification.
Entrepot trade for India, for example, is when an Indian corporation imports latex from Thailand and exports it to Japan.
The reason for one country acting as the mediator here is that the export country may not have any trade routes connecting the import countries. The imported items might require processing and finishing before exporting, and the exporting country may not have the necessary technology or labour.
External trade can be further classified as:
- Visible trade is the exports and imports of tangible products, which means something that exists in physical form.
- Invisible trade is services obtained from or provided to other nations, such as insurance and shipping services, foreign technician services, interest on loans, and so on.
Importance of External Trade
External trade is a vital measure of a country’s economic health. External trade benefits both importing and exporting countries. To be more specific-
- Encourages specialisation– Specialisation is aided by external commerce. When the demand for a particular commodity grows, the producer is encouraged to specialise in that commodity’s production. For example, our country has specialised in the manufacture of tea, coffee, and sugar, and as a result, India’s performance in these areas has risen.
- Raises living standards – Import trade allows a country to consume items that it does not manufacture, increasing consumer choice. As a result, import and export trade contribute to a country’s increasing standard of living.
- Increases competitiveness– External trade increases competitiveness, forcing the companies within a country to improve their production technologies, product quality, etc. It eventually benefits consumers by providing a wider range of higher-quality products at various pricing.
- Assists in creating job opportunities– External trade promotes the expansion of agricultural, commercial, and industrial activity, resulting in more significant job opportunities for the general public.
- Relations with other countries– External trade allows two countries to know about each other’s requirements and improves the relations between them, which benefits other sectors functioning as well. All of these activities foster peaceful and friendly relations between nations.
Conclusion
We saw the various reasons external trade is needed and beneficial for a country. The larger motive or importance is that every country’s economic growth is primarily determined by the volume of its external trading. If a country specialises in a specific commodity, it must produce more to meet global demand.
As a result, by producing and exporting more goods and services, the country can compete actively in the global competition, maintain trade relations, and accelerate its economic growth.
