What is international trade? A short history
International trade is buying and selling goods and services across national borders. It exists because no country can produce everything it needs.
- Barter: in early times goods were exchanged directly for goods. Money came later to make trade easier.
- Silk Route: an old long-distance trade route of about 6,000 km linking China with the Mediterranean; silk, spices and wool moved along it.
- Colonial and slave trade: after the 15th century, European powers traded in spices and raw materials, and a cruel slave trade forcibly carried people from Africa to the Americas for over 200 years.
- Industrial age: after the industrial revolution, raw materials flowed to factories in Europe and finished goods flowed back.
- After the world wars: GATT (1948) and later the WTO (1995) set rules to lower tariffs and grow trade.
Basis of international trade
- Difference in national resources: resources are unevenly spread because of differences in geology (minerals), landforms and climate (which crops and animals are possible).
- Population factors: size, density, culture and skills decide what people make and what they want to buy (for example handicrafts from some cultures).
- Stage of economic development: less developed countries often export raw materials and import manufactured goods; developed countries do the opposite.
- Extent of foreign investment: investment in mines, plantations and industries in developing countries can boost trade.
- Transport: better and cheaper transport (ships, railways, refrigeration) expands trade to far places.
Volume, composition, direction and balance of trade
Volume is the total value of goods traded. Composition is the kind of goods and services traded. Direction is which countries trade with which.
Balance of trade = value of exports − value of imports.
- Favourable (positive) balance: exports are more than imports (a surplus).
- Unfavourable (negative) balance: imports are more than exports (a deficit). A long deficit can drain a country's foreign exchange.
Types of trade: bilateral, multilateral, free trade, dumping
Bilateral trade: trade between two countries under an agreement to exchange certain goods.
Multilateral trade: trade with many countries at once. A country may give some partners 'most favoured nation' (MFN) status, meaning the best terms it gives anyone.
Free trade (trade liberalisation): removing or lowering barriers like tariffs (import taxes) and quotas so goods and services can move freely. It can bring cheaper goods and more choice, but local producers may struggle to compete, so countries need safeguards.
Dumping: selling a product in another country at a price lower than its cost, or lower than its price at home. It can wipe out local producers, so countries act against it (anti-dumping duties).
WTO and regional trade blocs
World Trade Organisation (WTO)
Set up in 1995 to replace GATT, with headquarters in Geneva. It makes rules for global trade in goods and services, and settles trade disputes between members. It also covers intellectual property. Critics say free trade does not always help poorer countries, and that rich countries protect their own farmers.
Regional trade blocs
Groups of nearby countries that cut tariffs among themselves to boost trade in goods they can supply to each other. Examples:
- ASEAN (South-east Asia): agro products, rubber, palm oil, rice, electronics.
- EU (Europe): single market, common currency (euro) for many members.
- SAFTA (South Asia): free trade area among South Asian neighbours.
- OPEC: oil-exporting countries coordinating crude oil policy.
- Others: CIS, LAIA, NAFTA's successor USMCA, and more.
Ports and their types
Ports are the gateways of international trade. A port's importance depends on its hinterland (the land area it serves), its facilities (docks, cranes, storage) and connections.
By type of cargo
- Industrial ports: bulk cargo like grain, sugar, ore, oil, chemicals.
- Commercial ports: general cargo, packaged and manufactured goods; some also handle passengers.
- Comprehensive ports: handle both bulk and general cargo in large volume.
By location
- Inland ports: away from the sea coast, linked by a river or canal (e.g. Manchester, Kolkata on the Hugli).
- Out ports: deep-water ports built away from the main port to serve big ships (e.g. Piraeus for Athens).
By specialised function
- Oil ports: tanker ports and refinery ports.
- Ports of call: on main sea routes where ships stop for fuel, water and food.
- Packet stations (ferry ports): short crossings for mail and passengers (e.g. Dover–Calais).
- Entrepôt ports: collection centres where goods are brought from many countries and re-exported (e.g. Singapore, Rotterdam).
- Naval ports: serve warships and have repair workshops (e.g. Kochi, Karwar).
Key formulas and definitions
- International trade = exchange of goods and services between countries
- Basis: resources (geology, landform, climate), population, development stage, foreign investment, transport
- Balance of trade = exports − imports; + = favourable (surplus), − = unfavourable (deficit)
- Bilateral = 2 countries; multilateral = many countries (MFN)
- Free trade = lower tariffs and quotas; dumping = selling abroad below cost
- WTO: 1995, replaced GATT, Geneva, trade rules + disputes
- Ports by cargo: industrial, commercial, comprehensive; by location: inland, out port; by function: oil, port of call, packet station, entrepôt, naval
Worked examples
1. A country exports goods worth ₹500 crore and imports ₹650 crore. Find its balance of trade.
500 − 650 = −₹150 crore: an unfavourable balance (deficit).
2. Exports ₹900 crore, imports ₹720 crore. Balance?
900 − 720 = +₹180 crore: favourable (surplus).
3. Country A sells steel abroad at ₹30 per kg though it costs ₹40 per kg to make. What is this?
Dumping: selling below cost in a foreign market.
4. India signs a deal with only Sri Lanka to trade tea and machinery. Which type?
Bilateral trade.
5. Singapore imports goods from many countries and re-exports them. What type of port is it?
An entrepôt port.
6. A country's imports rise by 20% while exports stay the same. What happens to its balance of trade?
It worsens (moves towards or deeper into deficit), because imports grew while exports did not.
Common mistakes
- Reversing the formula. Balance of trade = exports − imports, not imports − exports.
- Thinking dumping means throwing waste in the sea. In trade, it means selling abroad below cost or home price.
- Mixing up WTO and GATT dates. GATT: 1948; WTO: 1995.
- Calling every port 'commercial'. Ports are classified by cargo, location and specialised function.