What are benefits of foreign trade on producers and consumers?

Foreign Trade is the exchange of goods and services between two countries in the international market. Foreign Trade facilitates both buyers and producers to buy and sell goods in the international market. Goods travel from one country to another country. Foreign trade provides raw materials and finished goods to countries, that have a scarcity of those products. Natural resources are not equally available in all the countries. Some have an abundance of certain resources and some lack those resources completely. So, foreign trade helps both these countries to meet their requirements through imports and exports. By exporting goods, a country finds the market for its excess resources, and with imports a country fulfils its need for scarce resources.

For example: During the Diwali season, the Indian Market faces huge demand for decorative lights and bulbs. To fulfil this demand Indian market choose to import these items from China.

Foreign trade helps to expand the reach of sellers to global markets and thus helps to create more employment opportunities and raise the standard of living. The most commonly traded items through foreign trade are consumer goods and capital goods such as television, clothing, machinery, etc. Other transactions involve raw materials and services. Private and central banks play an important role in facilitating this trade between the two countries.

Elements of Foreign Trade

The four main elements of foreign trade are Transaction cost, tariff and non-tariff costs, transport cost, and time cost. These elements are discussed as follows:

• Transaction cost: When a country trade with another country they pay in currency, information, negotiations, etc. These payments are called transaction costs.
• Tariff and Non-tariff Costs: When a country trade with another country they are required to pay a certain fee in the form of import duty and indirect taxes, which are called tariff and non-tariff costs. 
• Transport Costs: The expenses incurred from transferring goods from one country to another is said to be transportation cost. It depends on many factors like mode of transportation and distance between countries.
• Time Costs: The time taken by a product to reach the destination is known as time cost. Time cost depends upon the distance. If the distance between two destinations is more, then the time cost will also be increased.

Types of Foreign Trade

1 . Export Trade

When a country has a particular commodity in abundance they prefer to sell it to another country this is called the export of goods. This same applies to services. By exporting goods and services a country increases its deposit of foreign income which helps them to strengthen its economic conditions. The seller of the goods and services is the exporter of these transactions. For example, UAE has an abundance of crude oil, which they export all over the world. In 2023, the largest exporter of consumer goods is China.

Basics of an Export:

By exporting, local businesses are exposed to a new global market which helps their Business to grow outside their home country. Businesses Choose to export products to foreign markets so that they can fetch higher prices from customers and the demand for their products will increase which ultimately leads to higher profits.

Governments encourage exports because it allows the inflow of foreign currency which helps in economic growth.

Some countries are prohibited from exporting certain commodities like firearms, military weapons, and certain military technology which can have national security implications.

Sometimes governments impose sanctions on certain countries because of that other countries are being stopped to trade with that particular country. E.g., when Russia invades Ukraine many countries stop their Export to Russia.

Examples of Export Trade
China is one of the largest exporters of mobile phones in the world. 95% of mobile phones used in India are of Chinese origin. 80% of iPhones used all over the world are manufactured in China.

Due to being a tropical country, Indian soil can grow a variety of spices. That’s why India is one of the largest exporters of species all over the world.

2. Import Trade

When a country has a deficit of certain raw materials or commodity, they purchase that commodity from another country. The purchase of these commodities is called Import trade. Here the flow of goods is from a foreign country to the home country. Some countries import raw materials for producing new goods and some import finished products for domestic consumption.

Basics of an Import:

A country only imports goods in a condition where it can’t produce that good itself or have a higher demand for a commodity than its manufacturing limits.

Most countries try to control their imports because it reduces their foreign capital reserves. Due to Import customers can access those products that are not easily available in their home country. Due to imports, organizations can have access to the latest technology that is only available in developed countries.

In some countries, due to some cultural restrictions, their government doesn’t allow importing certain commodities like import of beef, and beef-related items are prohibited in India.

Examples of Import Trade
Due to the lack of crude oil reserves in India, India imports its crude from other countries like Russia and UAE. India imports crude oil from Russia even after sanctions on Russia because crude oil is provided at cheaper rates by Russia.

Just like India doesn’t have enough reserves of tungsten that’s why they import semiconductors from other countries like Taiwan.

3. Entrepot Trade

This is the process in which a country imports from another country and then after re-processing it, exports them to another country. In other words, a country buys raw materials from another country then creates finished products and exports them to other countries.

For example, India imports aluminium from the UK, processes it, and then exports it to a different country like Bhutan.

Basics of Entrepot Trade :

It is a process in which a country imports products to export them again. They don’t consume the products themselves. In this scenario, the country works as an intermediary, that’s why no import duties are charged. It is also called the re-export trade. This type of trade is more common in those countries which are more focused on manufacturing like Asian countries.

In most cases, the value of the products rises after processing. This is beneficial for the intermediary countries. This type of trade also creates numerous job opportunities in local markets.

Thus, international trade helps local workers by creating more job opportunities and enhancing their living standards. It also helps local consumers by providing high-quality goods at competitive prices.

Benefits of Foreign Trade for Producers

There are various benefits of foreign trade for a producer. These are discussed as follows:

1. Promotes Efficiency in Production: International trade helps to increase efficiency in production because of the higher level of competition, producers try to make their products cheaper and focus on improving product quality.  Whichever country creates a product with the lowest cost and the highest possible quality will be able to gain and maintain a larger share of the market. That’s why efficiency is the main factor in foreign trade. If the country produces higher quality products that will increase the life quality of consumers.

2. Expanding Target Markets & Increasing Revenues: With the help of foreign trade, domestic and local producers gain a global market and earn higher profits. More jobs are created when businesses will be expanded their target markets and then ultimately demand increases and thus, revenue also increases.

3. Improved Risk Management:  In addition to a larger target market size, producers also get the benefit of a diversified consumer base. Different people have different tastes, so some products do better in different countries than in their home country. 
4. Cheaper labour: Due to the low labour rates in developing countries, big organizations focus to expand their business in these countries.

5. Competition:  Foreign trade has brought different Markets together. This is a good thing for consumers but because of this regional producers higher level of competition, now they have to stay up-to-date with global trends.

6. Opportunities to Specialize:  Foreign trade has provided the opportunity for producers to choose a market for their specialization. In other words, now producers can craft their products for a special market. Now producers don’t have to focus on different markets, so now they can focus on improving their products for a special market.

7. Enhanced Company Reputation: The reputation of the business can be enhanced with the help of foreign trade. Businesses can be expanded to neighbouring countries based on their reputation. If they still provide quality products, their goodwill will be increased globally.

Benefits for Foreign Trade for Buyers

There are various benefits of foreign trade for a consumer. These are discussed as follows:

1. Greater Variety of Goods Available for Consumption: Due to international trade, consumers now have different options to choose from. This gives consumers more options. Thus, they can choose whatever is the best suitable for their needs. This gives consumers a lot of variety.

2. Consumption at Cheaper Cost: International trade brings a Higher level of competition with it. In the race of providing Better products at cheaper rates, consumers now have various options for their favourite products at the very lowest rates.

3. Reduces Price Fluctuations: Due to foreign trade now Producers have a bigger market supply for products and because of high demand and supply, the prices of goods tend to remain more stable.

4. Stimulates Economic Growth: By having a large variety of products at a reasonable price, people now tend to spend more. More spending power of a consumer indication of a growing economy because all this spending provides cash flow in the market which is necessary for economic growth.

Benefits of Foreign Trade to a Country

There are various benefits of foreign trade for a country. These are discussed as follows:

1. Foreign Exchange: With the help of foreign Trade, the country’s foreign exchange reserves boost up which helps them to pay their loans and import more products.

2. Efficient Allocation and Better Utilization of Resources: Efficient Due to expansion in trade, countries can use their resources effectively and efficiently. Wastage of products is being avoided due to better resource management.

3. More Employment: Foreign trade helps to bring different markets together which ultimately leads to more employment opportunities for the country’s population which ultimately results in better economic growth of a country.

4. Utilization of Surplus Produce:  When a country has a surplus of a resource they tend to export that resource to increase their foreign currency reserves.

5. Better Relations Between Countries: With foreign trade, a country not just consumes another country’s products but also consumes their culture which brings the people of these countries closer to each other. Foreign trade also makes every country dependent on each other because no country is self-sufficient. This helps in creating more harmonic relationships between countries.

6. Peace and Goodwill: Every country is dependent on each other for export and import. If a specific country tries to misuse its military powers other countries can come together and impose sanctions on that country. This helps to create a peaceful global environment.

7. Economic Benefits: International trade helps to improve the gross domestic product of the country which helps to increase the national income of a country.

8. Development of Transport and Communication: International trade helps to boost the transportation and communication facility between two countries, which will help in the development of these facilities for the population of the country.

Importance of Foreign Trade

1. Full Utilization of Resources: Developing countries don’t have the proper technology to fully utilize their resources, so by exporting their resources to developed countries they make sure that their resources get fully utilized.

2. Service Sector Trade: Global trade provides new opportunities to the service sector. This improves other sectors related that are related to the service sector like banking, insurance, and information technology.

3. Getting rid of surplus production: When a country has excess resources, they export them to other countries for better utilization.

4. Competitiveness: Foreign trade promotes healthy competition among different countries and entrepreneurs.

5. Global Growth: It acts as the intermediary between producers and consumers in the global markets. Ultimately leads to benefits for the exporter as well as the importer.

Conclusion

To summarize all this, foreign trade facilitates both buyers and producers to buy and sell goods in the international market. By exporting goods, a country finds the market for its excess resources, and with imports a country fulfils its need for scarce resources. In simple terms, foreign trade helps to bring all countries closer to each other. Countries don’t just exchange goods and commodities with each other, they also exchange their values and cultures and thus create better relationships among countries.

Related Questions

Q1. What are the different types of trade barriers that countries use to protect their domestic industries?

Ans. Different types of trade barriers are discussed as follows:

a)  Specific Tariff: The fixed price charged on a specific product.

b) Licenses: licenses are the permission given by the government to trade in their country.

c) Import quotas: Certain goods can only be imported in limited quantities. These restrictions on the quantity of these goods are said to be import quotas.

Q2. What role do international organizations, such as the World Trade Organization, play in regulating foreign trade?

Ans. a) WTO establishes the rules for foreign trade.

b) It is the organization that makes negotiations in trade agreements.

c) It helps developing countries for growth.

d) It also helps to settle arguments and disputes between different countries.

Q3. How does international trade affect a country’s balance of trade?

Ans. When a country’s net export exceeds the net import, it is said to be a positive balance of trade. When a country’s net import exceeds the net export, it is said to be a negative balance of trade.

Q4. How has globalization affected foreign trade over the past few decades?

Ans. Globalization helped in making connections among countries all over the world. It enhanced the trade between different countries globally. It made communication easy among countries and helped in facilitating more variety of products globally. Thus, helped in the overall growth and development of countries.

Q5. How do countries determine their exchange rates? How do exchange rates affect international trade?

Ans. Various factors affect the exchange rate of a country. These are:

a) Inflation

b) Demand and Supply

c) Political and economic conditions

d) Money supply

e) Interest rates

When there is an increment in the exchange rate, the currency’s value is also increased and due to this, the prices of the product are also increased which results in, lesser exports from the country and increase in imports into that country.

Q6. What is the impact of foreign trade on a country’s GDP and economic growth?

Ans. a) Foreign trade increases healthy competition.

b) It helps in the capital formation of a country.

c) It enhances the productivity of the firms.

d) It acts as a tool for enhancing technological Advancement.

e) It helps in removing poverty from a country through economic growth.

f) The country’s GDP will be increased.

g) It enhances the best utilization of resources of a country.