Foreign Trade – Introduction

Back to: COMMERCE SS1

 

Welcome to class! 

In today’s class, we will be talking about foreign trade. Enjoy the class!

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 labour force
8. The need to establish a relationship with other countries

Importance (disadvantages) 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 a friendly relation 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 cultural and moral values of a country
2. It encourages dumping of goods
3. Excessive specialization may lead to over-production 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 problems
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
   • Entrepot refer 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
4. Visible trade refers to the trade-in items of tangible goods – goods that can be seen, touched and felt.
5. 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

Reading assignment

Essential Commerce for SSS by O.A. Longe Page 44 – 53

Comprehensive Commerce for SSS by J.U. Anyaele Page 117 – 137

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.

 

In our next class, we will be talking about the Balance of trade, the term of trade, the balance of payment and others.  We hope you enjoyed the class.

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