International Trade

Written and reviewed by Subhra Gupta, Humanities faculty at UniDrill (M.A. Sociology, University of Delhi · 7 years teaching Humanities). Based on NCERT Geography Class XII (Fundamentals of Human Geography), Chapter 8.

Why does your salary have salt in it?

The word salary comes from the Latin salarium, meaning payment by salt. In ancient times salt could be made only from rock salt, because producing it from sea water was unknown, so it was rare and expensive, and therefore worked as payment. The story shows how trade began: people exchanged what they had for what they needed, and slowly found things that everyone would accept. This chapter follows that story from village barter to a world market with its own rule-making body, and then looks at the ports through which all of it passes.

The big idea: nations trade because they differ

Trade is the voluntary exchange of goods and services between two parties: one sells and the other buys, and both gain. It can be conducted at two levels, national and international. International trade is the exchange of goods and services among countries across national boundaries. Countries trade to obtain commodities they cannot produce themselves or can buy elsewhere at a lower price.

The earliest form was barter, direct exchange of goods. Its weakness is that you need to find someone who wants what you have and has what you want. If you are a potter who needs a plumber, you must find a plumber who needs pots. Money solved this. Before paper and coin currency, objects of high intrinsic value served as money, such as flintstones, obsidian, cowrie shells, tiger's paws, whale's and dog's teeth, skins, furs, cattle, rice, peppercorns, salt, small tools, copper, silver and gold. Barter has not vanished entirely: every January after the harvest, the Jon Beel Mela in Jagiroad, 35 km from Guwahati, brings people from various tribes and communities to exchange their products, and it is possibly the only fair in India where the barter system is still alive.

How trade grew: a timeline

Why does international trade exist?

International trade results from specialisation in production. If countries specialise and divide labour in producing goods or services, the world economy benefits, and every kind of specialisation can create trade. It rests on three principles.

In principle trade should be mutually beneficial to partners. In modern times it is the basis of the world's economic organisation and is related to the foreign policy of nations. With well-developed transport and communication, no country wants to forgo its benefits.

Beyond the textbook. For the exam: trade follows comparative advantage, complementarity and transferability. In reality: the idea of comparative advantage is usually credited to the economist David Ricardo in the early nineteenth century. His insight was that a country gains from trade even if it is better than its partner at producing everything, as long as it concentrates on the goods where its edge is greatest. Why it matters: it explains why rich and poor countries both trade, a common source of assertion-reason questions.

The five bases of trade

Pause and predict: a country has a very large population and low average incomes. Will its foreign trade per person be high or low, and why?

Check your answer: low. Densely populated countries use most of their farm and factory output in local markets, so internal trade is large and external trade is small. With a low standard of living, few people can buy costly imported goods.

Balance of trade

The balance of trade compares what a country imports with what it exports.

$$\text{Balance of trade} = \text{Value of exports} - \text{Value of imports}$$

If imports are worth more than exports, the balance is negative (unfavourable). If exports are worth more than imports, it is positive (favourable). For example, if a country sells goods worth 120 units and buys goods worth 150 units, its balance is $120 - 150 = -30$ units, which is unfavourable. A negative balance means the country spends more on buying goods than it earns by selling its goods, which would ultimately exhaust its financial reserves. The balance of trade and the balance of payments both have serious implications for a country's economy.

Types of international trade

Free trade, protection and dumping

Opening economies by bringing down trade barriers like tariffs is called free trade or trade liberalisation. It lets goods and services from everywhere compete with domestic products. Globalisation along with free trade can harm developing countries if conditions are unequal. The chapter's concern is that free trade should not only let rich countries enter markets, and that countries should be cautious about dumped goods, which can harm domestic producers.

Dumping is selling a commodity in two countries at prices that differ for reasons not related to costs.

Two views. For the exam: free trade lets goods compete freely and benefits partners, but dumping and unequal conditions can hurt developing economies. Another reading: many economists argue that open trade lowers prices and spreads technology, while others argue that young industries in developing countries need temporary protection. The chapter itself presents both the benefits and the concerns, so a balanced answer names each.

The World Trade Organisation

In 1948, some countries formed the General Agreement on Tariffs and Trade (GATT) to liberalise the world from high customs tariffs and other restrictions. In 1994 member countries decided to set up a permanent institution for promoting free and fair trade, and GATT was transformed into the World Trade Organisation (WTO) from 1 January 1995.

Critics argue that free trade does not make ordinary people's lives more prosperous and widens the gap between rich and poor, because influential nations in the WTO focus on their own commercial interests, many developed countries have not fully opened their markets to developing countries, and issues of health, workers' rights, child labour and the environment are ignored.

Regional trade blocs

Regional trade blocs have come up to encourage trade between countries with geographical proximity, similarity and complementarity in trading items, and to curb restrictions on trade of the developing world. Today 120 regional trade blocs generate 52 per cent of world trade. They grew because global organisations failed to speed up trade within regions. Blocs remove tariffs among members, but in future it could get harder for free trade to take place between different blocs.

Beyond the textbook. For the exam: regional blocs remove tariffs inside the group and encourage trade among neighbours. In reality: well-known examples are the European Union, which has a common market and a common external tariff, and the Association of Southeast Asian Nations (ASEAN), which works towards freer trade among its members. Why it matters: the chapter's warning that trade between blocs may get harder is why geographers study blocs as both a step towards free trade and a possible barrier to it.

Concerns related to international trade

As countries compete to trade more, use of natural resources spirals up and they get used up faster than they are replenished. Marine life is depleting, forests are being cut and river basins are being sold to private drinking-water companies. The chapter warns that when multinational operations in oil, gas, mining, pharmaceuticals and agri-business put profit first and ignore environmental and health concerns, they do not follow the norms of sustainable development.

Gateways of international trade: ports

Ports and harbours are the chief gateways of trade. They provide docking, loading, unloading and storage, and the port authority maintains navigable channels, tugs and barges, and labour and management. A port's importance is judged by the size of cargo and the number of ships handled, and the quantity of cargo shows the level of development of its hinterland.

Pause and predict: a mega ship is too big to dock at the main port of a city. What kind of port helps, and what is the classic pair of names?

Check your answer: an out port, a deep-water port built away from the parent port. The classic pair is Athens (parent port) and Piraeus (out port).

Why it matters. A single port can belong to more than one class. Singapore, for example, is both a port of call and an entrepot in the chapter, so in a question always read what the stem describes (the cargo, the location or the function) before choosing the class.

Exam traps

60-second revision

Where this chapter connects

• Previous: Transport and Communication explains the ships, canals and sea routes that carry the goods traded.
• Next: International Trade in India applies these ideas to India's imports, exports, ports and trade partners.
• Also read: Tertiary and Quaternary Activities introduces trade and commerce as a service activity, and Mineral and Energy Resources shows why unevenly spread resources create trade.