International Trading Environment Meaning, Need, Components

Components of International Trading Environment

Table of Contents:-

  • International Trading Environment Meaning
  • What is International Trading Environment?
  • Need for International Trading Environment
  • Components of International Trading Environment

International Trading Environment Meaning

Trade refers to the buying and selling of commodities or articles for valuable consideration. For example, a shopkeeper sells goods in exchange for monetary value, which can be paid either in currency or in exchange for other goods or items. Trade can occur both domestically and internationally depending upon the businesses.

International trade also known as global trade involves the exchange of capital, goods, and services across international borders or territories. This practice plays a vital role in the economies of many countries, contributing significantly to their GDP (gross domestic product). Although international trade has been a part of human history for centuries, its social, economic, and political importance has risen exponentially in recent times.

The International Trading Environment consists of trade negotiations between countries to form agreements by giving away some of their sovereign rights for a common mutually beneficial objective.  

All countries require goods and services to satisfy the needs and wants of their people. However, the production of goods and services is dependent on the availability of resources. Unfortunately, every country has limited resources, so no country can produce all the goods and services it requires. Therefore, every country has to purchase goods and services from other nations that it is unable to produce or produce in insufficient quantities. Countries can sell goods to other nations which it has in surplus amount. Hence, it leads to the import and export of goods and services between the countries.

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What is International Trading Environment?

In today’s global economy, no country can be completely self-sufficient, It has to depend upon other nations for importing goods which are either non-available with it or are available in insufficient quantities. Similarly, it can export goods, that are either unavailable or insufficiently produced domestically.

International trade means trading goods or services between two or more countries. For example, trading between India and the United States of America (USA) is called international trade. The goods or services sent by India to the USA shall be exported goods or services by India to the USA and for the USA, these goods or services shall be imported. Therefore, what is coming into the country is an ‘Import’ and going out of the country is an ‘Export’.

International Trade

International trade operates on the same principles as domestic trade, as the motivations and behaviours of the parties involved remain fundamentally unchanged regardless of whether the trade occurs across the country’s borders or not. The main difference is that international trade is typically more costly than domestic trade, due to additional costs imposed by borders, such as tariffs, delays caused by border inspections, and expenses associated with differences in language, legal systems, and culture between countries. These factors can greatly increase the cost of doing business across borders, making international trade a more complex and challenging task than domestic trade.

Trade and investment promote growth, alter economic activities’ composition and geographical distribution, stimulate competition, and facilitate the international diffusion of technologies. By improving resource allocation, liberalising trade and investment regimes can also directly enhance environmental protection as well as indirectly promote demand for better quality ambient air, water, and other media.

Likewise, the evidence indicates that economic growth plays an important role in reducing poverty. While trade and investment are not the only factors driving these trends, they both amplify and accelerate these more fundamental processes with implications for sustainable development. The linkages between trade, investment, the environment, and social issues need to be analysed – along with the role of existing policies in each of these before deciding whether and how to intervene to better promote sustainable development

Need for International Trading Environment

Just as an individual household or a business firm produces only skill and efficiency, similarly, a nation confines its production to only those commodities which it can produce with great efficiency and at the minimum possible cost. The need for International trade and investment arises from the following reasons:

1) Degree of Self-Sufficiency

No country in the world is self-sufficient. Every country has to join in International Trade to arrange for goods which they cannot produce at all or will produce at a very high cost. For example, Soviet Russia imports only 2% to 3% of the total goods which the people of Russia consume. The United States of America imports 4% to 5% goods of its total requirements. In underdeveloped countries, the extent of imports is 50% to 60%.

2) Large-Scale Production

The principles of economics on a large scale can be applied only when the goods are produced on a large scale in big quantities. Large-scale production enables a producer to minimise costs and maximise profits. For example, a single industrial unit producing locomotive engines may be sufficient to meet the demands of the Indian Railways within India. However, this unit can specialise in the production of locomotives and export them to neighbouring nations.

3) Occupational Distribution

The size of the population and its occupational distribution varies from country to country. India has specialisation in the production of food grains and other agricultural products because of the characteristic features of its population. Likewise, England specialised in manufacturing goods because of the scarcity of land and abundance of capital resources. Therefore, nations employ their population in different occupations based on specialisation.

4) Geographic Factors

Countries differ in factor endowment. Diversities in geographical conditions make a country more efficient in the production of a particular commodity and another country in another commodity. For example, India and Sri Lanka jointly produce about 87% of the world’s tea production because of favourable natural conditions. Manganese in Russia, Mica in India, oil in the Arab countries, etc., are some examples of geographical factors which promote International Trade.

5) Compensating the Production

There is always a need for international trade because countries have different capabilities and they specialise in producing different things. To compensate for what they do not produce, they have to involve themselves in trade with other countries. For example, not all nations have oil resources, the rest of the nations import oil from other oil-producing nations. Most of the oil-producing countries on the other hand import finished goods because they do not produce enough.

6) Means of Transportation

Raw materials used in production are typically classified into two categories:

i) Materials like soil, sand, etc., and

ii) Localised like coal, iron-ore, mineral oil, etc. Localised materials are further sub-divided into:

a) Weight loss materials like sugarcane, and fruits.

b) Materials not losing weight like steel, cloth, etc. Industries using raw materials to lose weight and involving high transportation costs will be located at places where the raw material is localised. At the international level, the mobility of factors of production is restricted because they involve the high cost of transportation.

Components of International Trading Environment

The main components of International trade and investment are as follows:

Components of International Trading Environment

1) Trade in Goods and Services

Data relating to trade in goods and services correspond to each nation’s exports to and imports from the rest of the world. All these data are collected to compile the balance of payments. Data relating to international trade in goods are also collected in customs surveys, but as a general rule, they are not comparable to the balance of payment data. Since data on trade in services are collected solely for use in compiling balances of payments, the latter has been chosen as source data to ensure that trade in goods and trade in services are comparable.

2) Foreign Direct Investment

Foreign direct investment is when an investor resident in another economy owns 10% or more of the ordinary shares or voting power in the firm where the investment is made (direct investment enterprise). This 10% limit means that the direct investor can influence and participate in the management or control of a foreign investment enterprise. The direct investment comprises not only the initial transaction establishing the relationship between the investor and the enterprise but also all subsequent transactions between them and among affiliated enterprises, both incorporated and unincorporated.

3) Portfolio Investments

In cases where the foreign investor holds less than 10% of the capital (ordinary shares of voting power) of a firm, the investment is considered to be a “portfolio investment”. This type of investment usually corresponds to investment transactions in which the investor has no intention of influencing the management of a company.

4) Investment Income

It covers two types of transactions between residents and non-residents:

i) Those involving compensation of workers which is paid to non-resident workers, and

ii) Those involving investment income receipts and payments on external financial liabilities and assets. Included in the latter are receipts and payments on direct investment, portfolio investment, other investments and receipts on reserve assets.

5) Other Investment

This is a residual category that involves all financial transactions that are not covered in direct investment, portfolio investment or reserve assets. This type of investment comprises loans, trade credits, currency and deposits and other assets and liabilities.

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