Role of foreign trade in economic development of countries

April 2, 2018 | Author: maniksethi | Category: Trade, Economic Development, Exports, Economies, Globalization



INTRODUCTION“Trade is not an end in itself, but a means to economic growth and national development. The primary purpose is not the mere earning of foreign exchange but the stimulation of greater economic activity”. The economy of ancient India had a strong cross border trade and commerce relation with China and they mainly traded food grains, spices, cottons, gold, silver, and metals. Further, a more organized form of trans-world trade has been in force from the mid of 14 th century and it started as a means to explore new business destination and opportunities. The 18 th century marks the merging of the modernity with globalization and it also marks the foundation for the creation of international trade law. The modern day Indian economy (1900) had taken cue from the history of globalization and structured its foreign trade policy accordingly. The liberalized economic policy adapted and implemented by the Government of India, finds its root back to the rich history of globalization. Now Globalization is accepted as the New Mantra for economic success of economies over the world where India and China have proved this to some extent. WHAT IS FOREIGN TRADE The exchange of goods and services between the domestic sector of a given nation and its foreign sector (that is, other nations of the world). Also termed international trade when viewed from the perspective of the global economy, this exchange of production is comparable to any exchange, except that buyers and sellers are from different countries. Key insight from the study of foreign trade includes the law of comparative advantage and trade protection policies. Foreign trade arises when an economy exchanges of goods and services with its foreign sector. This includes goods and services produced in the domestic economy of a nation and purchased by the foreign sector, what is termed exports, and goods and services produced in the foreign sector and purchased by the domestic economy, what is termed imports. Foreign trade is also termed international trade. The distinction between the two terms is based on perspective. International trade is viewed from the perspective of the global economy, in which each of the nations of the world are players in the exchange game. Foreign trade is viewed from the perspective of the domestic sector of a given economy. This foreign trade perspective takes a decidedly domestic, geocentric view, that is, "us" (the domestic sector) versus "them" (the foreign sector). The flow of trade between a given nation and its foreign sector is captured by net exports. Net exports are the difference between exports (goods and services produced by the domestic economy and purchased by the foreign sector) and imports (goods and services produced by the foreign sector and purchased by the domestic economy). In addition to highlighting the law of comparative advantage, viewing international trade from a domestic/foreign perspective enables a better understanding of the why and how of foreign trade policies designed to promote exports and/or restrict imports, and thus increase net exports. The key foreign trade policies are tariffs, import quotas, and export subsidies. What is Economic Development? Economic development means different things to different people. On a broad scale, anything a community does to foster and create a healthy economy can fall under the auspice of economic development. Today's economic development professionals are trying harder than ever to define their field in terms that are more concrete and salient to policymakers, the public, and other professionals. There are probably as many definitions for economic development as there are people who practice it. Below is CALED's definition as published in the Economic Development Handbook: From a public perspective, local economic development involves the allocation of limited resources - land, labor, capitol and entrepreneurship in a way that has a positive effect on the level of business activity, employment, income distribution patterns, and fiscal solvency. It is a process of deliberate intervention in the normal economic growth by making it easier or more attractive. Today, communities in California are giving attention to what they can do to promote fiscal stability and greater economic development. Economic development is a concerted effort on the part of the responsible governing body in a city or county to influence the direction of private sector investment toward opportunities that can lead to sustained economic growth. Sustained economic growth can provide sufficient incomes for the local labor force, profitable business opportunities for employers and tax revenues for maintaining an infrastructure to support this continued growth. There is no alternative to private sector investment as the engine for economic growth, but there are many initiatives that you can support to encourage investments where the community feels they are needed the most. It is important to know that economic development is not community development. Community development is a process for making a community a better place to live and work. Economic development is purely and simply the creation of wealth in which community benefits are created. There are only three approaches used to enhance local economic development. They are: Business Retention and Expansion - enhancing existing businesses Business Expansion - attracting new business Business Start-ups - encouraging the growth of new businesses Role of foreign trade in economic development of countries Role of foreign trade in economic development of countries Introduction of foreign trade: There is no country in the world today which produces all the commodities it needs. Every country, therefore, tries to produce those commodities in which it has comparative advantage. It exchanges part of those commodities with the commodities produced by other countries relatively more efficiently. The relative difference in factor endowments, technology, tastes etc, among the nations of the world have greatly widened the basis of international trade. Role of foreign trade in economic development The role of foreign trade can be judged by the following faces: • Foreign trade and economic development. Foreign trade plays very important role in the economic development of any country. Pakistan also exports a lot of agricultural product to other countries and imports the capital goods from other countries. Therefore, it is not wrong to say that economic development of a country depends of foreign trade. • Foreign exchange earning Foreign trade provides foreign exchange which can be used to remove the poverty and other productive purposes. • Market expansion The demand factor plays very important role in increasing the production of any country. The foreign trade expands the market and encourages the producers. In Pakistan home market is very limited due to poverty. So it is necessary chat we should sell our product in other countries. • Increase in investment Foreign trade encourages the investor to increase the investment to produce more goods. So the rate of investment increases. • Foreign investment • Besides the local investment, foreign trade provides incentives for the foreign investors to invest in those countries where there is a shortage of investment. Increase in national income Foreign trade increases the scale of production and national income of the country. To meet the foreign demand we increase the production on large scale so GNP also increases. • Decrease in unemployment With the rise in the demand of goods domestic resources are fully utilized and it increases the rate of development in the country and reduces the unemployment in the world. • Price stability Foreign trade helps to bring stability in price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. There by stopping fluctuation in prices. • Specialization There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts the specialization in the production of those commodities, in which it has comparative advantage. So all trading countries enjoy profit through international trade. • Remove monopolies Foreign trade also discourages the monopolies. Where every any monopolist increases the prices, government allows the import of goods to reduce the prices in the country. • Removal of food shortage India is also facing the food shortage problem. To remove the food shortage India has imported the wheat many times. So due to foreign trade we are solving this problem for many years. • Agricultural development Agricultural development is the back bone in our economy. Foreign trade has played very important role for the development of our agriculture sector. Every year we export rice, cotton, fruits and vegetables to other countries. The export of goods makes our farmer more prosperous. It inspires the spirit of development in them. • Import of consumer goods India and Pakistan imports the various consumer goods from other countries, which are not produced inside the country. Today the shortage of any commodity can be removed through international trade. • To improve quality of local products Foreign trade helps to improve quality of local products and extends market through changes in demand and supply as foreign trade can create competition with the rest of the world. • External economics External economics can also be achieved through foreign trade. The industries producing foods on large scale in Pakistan and India are enjoying the external economics due to international trade. • Competition with foreign producers We can compete with the foreign producers in foreign trade so it improves the quality and reduces the cost of production. It is also an advantage of foreign trade. • Useful for the world peace Today all the countries are tied in trade relations with each other. So foreign trade also contribute to peace and prosperity in the world. • Import of capital goods and technology The inflow of capital goods and technology in the less developed countries has increased the rate of economic development, and this is due to foreign trade. • Import substitution These countries not only produce import substitute, but also reduce deficit in balance of payment of their countries. • Better understanding Foreign trade provides an opportunity to the people of different countries to meet, discuss, and exchange views and ideas related to their social, economic and political problems. • Dissemination of knowledge Foreign trade is also responsible for dissemination of knowledge and learning from developed countries to under developed countries. • Interdependence Foreign trade is responsible for creating economic depending and establishing economic interest in the economy of the countries having trade relations. • Factors productivity Through foreign trade the productivity of labour and capital and organization increases. Demand make them mobile on national as well as international level which helps underdeveloped countries to develop and maintain a high level of growth of developed countries. GLOBALIZATION AND CHALLENGES OF TRADE IN INDIA The rise in the international trade is essential for the growth of globalization. International trade and its impact on economic growth crucially depend on globalization. The restrictions to international trade would limit the nations to the services and goods produced within its territories, and they would lose out on the valuable revenue from the global trade. India must evolve an appropriate framework to wrest maximum benefits out of international trade and investment. This framework should include (a) making explicit the list of demands that India would like to make on the multilateral trade system, and (b) steps that India should take to realize the full potential from globalization. Without being exhaustive, the demands of the developing countries on the multilateral trading system should include (1) establishing symmetry as between the movement of capital and natural persons, (2) delinking environmental standards and labor related considerations from trade negotiations, (3) zero tariffs in industrialized countries on labor intensive exports of developing countries, (4) adequate protection to genetic or biological material and traditional knowledge of developing countries, (5) prohibition of unilateral trade action and extra territorial application of national laws and regulations, and (6) effective restraint on industrialized countries in initiating anti-dumping and countervailing action against exports from developing countries. The purpose of the new trading system must be to ensure “free and fair” trade among countries. The emphasis so far has been on “free” rather than “fair” trade. It is in this context that the rich industrially advanced countries have an obligation. While requiring developing countries to dismantle barriers and join the main stream of international trade, they have been raising significant tariff and non-tariff barriers on trade from developing countries. Although average tariffs in the United States, Canada, European Union and Japan – the so called Quad countries – range from only 4.3% in Japan to 8.3% in Canada, their tariff and trade barriers remain much higher on many products exported by developing countries. In fact, these trade barriers impose a serious burden on the developing countries. It is important that if the rich countries want a trading system that is truly fair, they should come forward to reduce the trade barriers and subsidies that prevent the products of developing countries from reaching their markets. Otherwise the pleas of these countries for a competitive system will sound hollow. If development is accepted as the major objective of trade as the Doha declaration proclaimed, it should be possible to work out a trading arrangement that is beneficial to all countries. There have been protracted negotiations at WTO in reforming the trade system. Admittedly, the tariff and non-tariff barriers are coming down. The second set of measures that should form part of the action plan must relate to strengthening India’s position in international trade. India has much strength, which several developing countries lack. In that sense, India is different and is in a stronger position to gain from international trade and investment. Having a greater freedom of movement of skilled manpower, India should attempt to take all efforts to ensure that it continues to remain a frontline country in the area of skilled manpower. India can attract greater foreign investment, if it can accelerate our growth with stability. It must make good use of the extended time given to developing countries to dismantle trade barriers. The world cannot marginalize India. But India, if it chooses, can marginalize itself. More than many other developing countries, India is in a position to wrest significant gains from globalization. However, it must voice its concerns and in cooperation with other developing countries modify the international trading arrangements to take care of the special needs of such countries. CONCLUSION India being an open economy not only its exports are raising but imports has also risen reflecting her potentials to emerge as a super power. Even a limited attempt of globalization has benefited Indian economy in the best possible way. India should overcome the constraints of trade such as electricity shortages and inadequate transportation infrastructure and utilize trade as an effective engine for accelerating the pace of inclusive development in the country. To become a major player in world trade it has to reduce import restrictions which are required to stimulate our economy. It is necessary to mention that International trade alone cannot bring about economic growth and prosperity in any country. Apart from flexible trade policies there are also other factors like favorable macroeconomic scenario and political stability that need to be there to complement the gains from trade. India can achieve a 5% share of world trade in both goods and services by the year 2020 which is a fourfold increase in our percentage share in the next 11 years provided the policy measures and economic infrastructure are accommodative enough to cope with the changes in social and financial scenario that result from it. If so, India of 2025 is sure to occupy a very different place, and a much more dominant force in the world economy, than was the case twenty five years ago or at the beginning of the new millennium. BIBLIOGRAPHY 1. 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