What is External Trade?

No country in the world has everything that its citizens require. As a result, they must all rely on others to meet their needs for specific items. For example, A country may be rich in iron and steel but deficient in aluminum. As a result, it must source aluminum from countries that have a surplus of metal. Not only that, but countries with excess production of certain products find it advantageous to sell them to other countries and purchase products from others in which they are deficient. It has also been observed that some countries achieve specialization in the production of certain products as a result of advanced technology adoption, whereas others find it difficult or expensive to do so in their own country. They prefer to purchase the former’s goods. As a result of the unequal distribution of natural resources and the specialization achieved in the production of certain products, goods and services are exchanged between countries. This exchange of goods and services is known as External Trade. It is also known as international trade or foreign trade. In other words, external trade is the buying and selling of goods and services across the national borders of different countries. 

Three Types of External Trade

External trade can be divided into three types based on the sale and purchase of goods and services. 

1. Import trade
2. Export trade
3. Entrepot trade

1. Import trade

Import trade occurs when a country’s business firm purchases goods from another country’s business firm. In other words, the inflow of goods from a foreign country in the domestic region of a country is known as import trade. For example, the Indian government purchases petroleum products, electronic goods, gold, machines, and other items from other countries.

2. Export trade

Export trade occurs when a company in one country sells goods to a company in another country. In other words, the outflow of goods from the domestic region of a country to a foreign country is known as export trade. For example, the sale of iron and steel, tea, coffee, coal, and other products by Indian companies to other countries.

3. Entrepot trade

Entrepot trade or re-export trade for a country occurs when a company imports goods with the intention of exporting them to companies in another country, with or without modification. For example, when an Indian company imports rubber from Thailand and exports it to Japan it is considered an Entrepot Trade.