International trade is trade between nations. Trading activities between Nigeria and other countries like Britain, Togo, United States of America and others are international or foreign trade.
International trade is based on the principle of comparative cost advantage. Nations tend to concentrate in the production or manufacture of goods in which they have the least cost of production when compared to other nations. This principle propounds that if countries specialize in the production of those goods in which they enjoy the lowest comparative cost, total worls output would increase. Study the chart below:
- BEFORE SPECIALISATION
Nigeria 50 100
Ghana 100 50
Total 150 150
Imagine that these countries are the only producers of these products in the world. Using the same resources, these are the total production.
- AFTER SPECIALISATION
Nigeria – 200
Ghana 200 –
Total 200 200
After specializing in those products where they have comparative advantage, total production increased in both countries from 150 units to 200 each.
Nigeria 60 140
Ghana 140 60
Total 200 200
You will notice that the production of both countries has increased, and they now have more of each product after exchange before specialization.
This principle is based on a lot of assumptions. It assumes that there are only two countries in the world. It also assumes that there are two commodities in the world. Moreover, Labor is mobile and so on.
TERMS OF TRADE
It is the rate at which exports exchange for imports. Terms of trade determine whether it is more expensive to import than to export. It is price related. It is calculated thus:
Index of export prices/index of import prices. Multiply the result by 100 to obtain the percentage. It is favorable when the result is positive and unfavorable when negative.
BALANCE OF TRADE
It is the relationship between total imports and total exports in a given period expressed in monetary terms. Where total imports exceed total exports in value, it is unfavorable and favorable when exports exceed imports. Are we selling more than we are buying? What is the difference in monetary terms? Nigeria import too many products and services, and this tend to affect the balance of trade negatively.
BALANCE OF PAYMENT
It is a statement of affairs of a country’s total visible and invisible imports and exports over a given period. Visible items of trade could include petroleum and gas, cocoa, rubber, hides and skin, cotton, foods, machinery etc. Invisible items of trade are
- Shipping, insurance and banking services
- Remittances of income, dividends, interest and profits
- Education and government expenses abroad like maintenance of High commissions and Embassies abroad, estacodes of government officials.
- Tourism including medical tourism
- International sporting activities abroad
- Gifts and grants
In a nutshell, it is the total income and expenditure of a country in international transactions in a given period expressed in monetary terms. Where total import exceeds total exports, it is a deficit or unfavorable and vice versa.
HOW TO CORRECT A DEFICIT BALANCE OF PAYMENT
A country suffering from a deficit balance of payment must device strategies to correct the situation before it degenerates further through the followings:
- Import restriction: To restrict import is to reduce the quantity of foreign spending through embargo or total ban of some products from being imported, placing a quota of the quantity allowed to be imported, imposing an increase in custom duties on undesirable imports and so on.
- Strict Foreign exchange control: This will make it difficult for the importers to have access to foreign exchange to import goods. Where there is scarcity of foreign currency by the central bank of Nigeria, importation would naturally drop. If this is also complied with by government agencies, it becomes more effective.
- Borrowing from Richer countries or organizations: This is a common strategy by developing countries. They go abroad to borrow from countries like China, United Kingdom, Germany etc. Others borrow from big clubs and organizations that do so for profit.
- Borrowing from the International Monetary Fund (IMF) or the world Bank. These are United Nation financial institutions with the mandate to advance credit or grants to needy nations to stabilize their economy. These loans however come with conditionalities.
- Selling foreign investments abroad: Where a country has investments or properties abroad, it could sell it to finance balance of payment deficit. Most developing countries do not have such foreign investments to sell.
- Devaluation of Currency: This is the reduction of the exchange rate of a local currency in relation to foreign currencies to stimulate export and inhibit imports. Devaluation makes foreign goods to be very expensive and this will force people to look inwards for alternative locally. On the other hand, it makes exports very lucrative because the value of the foreign currency earned from export is very high when converted to the local currency.
- Reducing Inflation: Government can reduce inflation through monetary policies by reducing bank lending power, increasing the liquid asset ratio, raising the interest rate, reducing government spending and increasing taxation. This can be done through the central bank.
- By spending the nation’s foreign reserve. This is the last resort and it is hardly used. A country that exhaust its foreign research could collapse economically.
DIFFERENCE BETWEEN HOME TRADE AND FOREIGN TRADE
There are a lot of differences between the two types of trade. Let us examine some basic difference below:
- Language: In home trade, there might be difference in language but there is usually a common language/s that people could use to communicate. This is not true of foreign trade. The Russian or Chinese language is not spoken anywhere in Nigeria. Even our neighboring countries speak different languages. Often, interpreters are used.
- Cultural differences: There is difference in the culture of various countries. This is very vital in international trade. What is acceptable in Nigeria may not be acceptable in Norway due to cultural differences. Exporters must be guided in packaging of their goods for acceptability in foreign countries to avoid rejection for violating their cultural values.
- Government trade restriction policies: In home trade, there is little or no regulation. Foreign trade is highly controlled. Government agencies like the Customs Service are mandated to ensure compliance with government regulations on imports and exports. Products prohibited by the law are ceased and the importers prosecuted but this cannot happen in home trade.
- Difference in Currency: You cannot buy from another country with your local currency. You must exchange it for the currency of the country you want to trade with. This can be difficult especially if the government places restrictions. In home trade, the same currency is used across the country. There are no problems of difference.
- Distance and Transportation cost: The distance between two trading countries could be a major problem in foreign trade. Buying products from the United States, Japan, Germany etc. require freighting by air or shipping. Both means of transportation are expensive. Collecting the goods at the port of discharge could also involve costs. Example of such cost may be custom duties and freighting to importers destination. We may pay for transportation within a country, but it can not be compared to distant countries in terms of time of delivery and extra cost as seen above.
- Difference in Legal Systems: The laws of Nigeria as passed by the National Assembly and States within a country in trade regulation are different from other countries. This require that we must try to understand what the laws of other lands are saying concerning exports to their country. Many citizens have found themselves at the wrong side of the law in foreign countries. It could in simple packaging or that the product is in their prohibition list. Nationals of same country know the law. They are used to it and so, do not violate it. Ignorance is no excuse in law.
- Mobility of labor: Within a country, it is easy to move from one part to the other easily and freely without visa. This is no possible with international trade. You must have valid travelling documents to migrate to other countries. Except granted citizenship, you could be repatriated if your visa elapses and you refuse to leave. In Nigeria, you can live anywhere forever. It is your choice and the law allow it.
Trade without restriction is called free trade. There is hardly anything like it in the world. However, if trade is free among nations, the following would be the advantages:
- Increased variety: As a result of specialization and exchange, there will be a variety of goods and services. International trade has made it possible for us to enjoy products from other countries.
- World peace: International trade promote peace across the world. Nobody would wake up one morning and start to fight a trade partner when you know that you will cease to enjoy his products and services if you fight him. Disputes are resolved amicably for mutual benefit.
- Increase in world production: If nations were to produce goods and services for their consumption alone, Production would have been low, and this would have told on the variety we have today. It would also have increased poverty. Nigeria cannot consume its abundant petroleum products alone. The world is a wider market for all to trade and sustains its economy.
- The wider market for goods and services is possible with international trade. Now you can produce and sell to other countries. Nigeria sells and imports a lot of products that it cannot produce but available in the world market through international trade.
- Mass production: Organizations can produce to optimum capacity at reduced unit cost when there is the market. Prices are forced down due to mass production which would have been impossible without international trade.
- It increases the standard of living: The standard of living has increased across the world as a result of international trade. People can acquire products and services that they do not produce. Look at the Nigerian society and you will see a lot of foreign products. This also breaks the monopoly that would have existed in a closed economy. The standard of living is enhanced worldwide if you can afford it.
- Even development: The world nations have the potential to develop evenly as a result of international trade.
IMPORT AND EXPORT
International trade involves import and export of goods and services from one geographical area to another. Imports are goods and services purchased from foreign countries to meet domestic needs while exports are goods and services sold to foreign countries to also meet their needs. Recall the theory of international trade earlier discussed. We shall examine import and export procedures and documentation in the next paragraphs.
IMPORT ORDER: An order to buy goods from foreign countries could be sent directly to the dealer, manufacturer or an agent. An international order is called an indent. There are two types of indents: a closed indent and an open indent. An indent is closed where the importer clearly specify the product, the manufacturer and any other information peculiar to it. It means that the agent must buy that product alone and not something similar from another manufacturer. For example, if the importer wants a J9 Samsung android phone, the agent cannot buy a similar phone made by Nokia or another manufacturer. An indent is open where the agent has the freedom to purchase products of his choice that would suit the importer. In the above example, he can buy a similar android phone from any manufacturer.
BILL OF LADING: It is a document of title, an acknowledgement of the ship’s willingness to convey goods to the importer or destination. It also serves as a negotiable instrument. This means that the importer can sell the goods in transit by exchanging the bill of lading for value. It is usually prepared in triplicate. Two are sent to the importer by different mails. The ship captain retains a copy to enable him identify the importer at the port of destination. In the absence of a bill of lading, the ship captain can produce a bill of sight.
THE CONSULAR INVOICE: This is an export invoice signed by a Consul of the importing country certifying that the goods are in order as far as the importing country’s laws and regulations on imports from foreign countries is concerned. This is possible only where there is diplomatic relations between the two countries. This is another way of ensuring that contraband are not allowed to be shipped by unscrupulous importers.
EXPORT INVOICE: An export invoices states the goods exported and the price. It is sent by the exporter to the importer and aids the customs authorities in determining the duties payable on the imported goods.
CERTIFICATE OF ORIGIN: This is a document that attest to the origin of goods been imported or exported. It is an evidence that the goods emanate from the country named on it.
CERTIFICATE OF INSURANCE: It is an evidence that the goods imported or exported are insured against maritime perils. It is compulsory to insure goods in transit as some ship owners may not accept to carry goods without insurance.