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Explain the distinguishing features of foreign trade from domestic trade.

Foreign Trade

Trade Policy can be free trade policy or protective trade policy. A free trade policy is one which does not impose any restriction on the exchange of goods and services between different countries. A free trade policy involves complete absence of tariffs, quotas, exchange restrictions, taxes and subsidies on production, factor use and consumption. Though free trade, theoretically, offers
several advantages, in reality, particularly underdeveloped countries were at a disadvantage in such a system of international trade. As a result, in the early 20th century, international economy saw the emergence of protective trade policies.

A protective trade policy pursued by a country seeks to maintain a system of trade restrictions with the objective of protecting the domestic economy from the competition of foreign products. Protective trade policy constituted an important plank in the commercial policies of underdeveloped countries during the 50s, 60s and 70s and to some extent in the 80s. Many of the underdeveloped countries countinue to have protective trade policies even today

Trade policies may be outward looking or inward looking. An outward looking trade policy encourages not only free trade but also the free movement of capital, workers, enterprises and students, a welcome to the multinational enterprise, and an open system of communications. An inward looking trade policy stresses the need for a country to evolve its own style of development and to be the master of its own fate, with restrictions on the movement of goods, services and people in and out of the country. An inward looking trade policy encourages the development of indigenous technologies appropriate to a country’s resource endowment. Given these, a developing country may adopt commodity specific trade policies such as the following:

1. Primary Outward Looking Policies: Aimed at encouraging agricultural and raw material exports.

2. Secondary Outward Looking Policies: Aimed at promoting
manufactured exports.

3. Primary Inward Looking Policies: Objective is to achieve agricultural self sufficiency.

4. Secondary Inward Looking Policies: Objective is attaining manufactured commodity self-sufficiency through import substitution.
Trade Policy will strongly influence the direction, trend and growth of foreign trade of a country. This, in turn, will have a bearing on the economic development process. Therefore, trade policy is an important economic instrument which can be used by a country, with suitable modifications from time to time, to achieve its long-term objectives

India’s strategy towards trade policy was
driven by perceived foreign exchange scarcities and the desire to ensure that scarce foreign exchange is used only for essential purposes for economic development. Industrialisation and self-sufficiency in essential commodities were the important objectives of India’s trade policy. This was because it was felt that dependence on other, more powerful countries for imports of essential commodities would lead to political dependence on them as well
“The objective of the country as a whole was
the attainment, as far as possible, of national self-sufficiency.

International trade was certainly not excluded, but we were anxious to avoid being drawn into the whirlpool of economic imperialism

These laid the broad framework for the formulation of EXIM policy in the  subsequent years. On the whole, import substitution and protection to domestic industrialisation through a system of tariff and non-tariff controls became the highlights of India’s EXIM Policy for most of the period during 1950-51 to 1990-91, however, India’s exim policy has undergone remarkable liberalisation, as part of the overall economic liberalisation process defined a set of analytical phases with reference to the EXIM policy of a
country. These phases in the foreign trade regime were designed essentially as a classificatory and descriptive device to capture meaningfully the evolution of
foreign trade regime in terms of its restrictionist content and the dimensions and pattern of its use of control and price instruments. There are broadly five phases which are as follows:

Phase I : Characterised by the systematic and significant imposition of quantitative restrictions (QR). It might start in response to an unsustainable balance of payments deficit. Throughout Phase I, controls are generally maintained and often intensified.

Phase II : Characterised by continued reliance upon quantitative restrictions and generally increased restrictiveness of the entire control system. Phase II is distinguished by two additional and related aspects of the QR system, both relatively unimportant during Phase I.
(1) The detailed workings of the control system become increasingly complex, and
(2) Price measures are adopted to address the functioning of the control system.
Both these characteristics of Phase II arise from dissatisfaction with the results of an undifferentiated system and are often the result of many small decisions rather than an overall policy design.
Price measures are introduced to both exports and imports. The continuation or intensification of foreign exchange shortage leads to the recognition that additional export earnings would be desirable. Rebate schemes, import replenishment schemes, special credits for exporters, and a variety of other devices may be instituted that offset part or all of the discrimination against exports implicit in an overvalued exchange rate. As for imports, price measures are also adopted to absorb part of the excess demand for imports. Tariffs may be increased or surcharges added to the cost of importing.
The following aspects of the price situation in Phase II are then evident :
(1) the exchange parity is overlaid by tariffs and subsidies, levied in lieu of formal parity change,
(2) domestic currency is overvalued at the current parity
plus trade tariffs and subsidies, implying a premium on imports.

Phase III : In this phase, attempts are made to systematise the changes introduced during the previous phase: It may consist of a mere “tidying-up” operation directed at replacing the diverse import premiums by reasonably uniform tariffs such that the differential incentive effects caused by diverse premiums on different imports are greatly reduced or virtually eliminated.

Alternatively, the tidying-up operation may replace the existing tariffs and export subsidies with a formal parity change, the result being that the effective exchange rates on exports and imports do not change much but the dispersion of tariffs is replaced by uniform devaluation.
On the other hand, Phase III may take the form of a devaluation cum liberalisation package. Such a package may have a gross devaluation large enough to leave a net devaluation despite the removal of trade tariffs and subsidies, and measures of import liberalisation.

Phase IV : The continued liberalisation in Phase III leads to the emergence of Phase IV. There will be consistent decline in QR and import tariffs. The effective exchange rate for exports will come closer to the effective exchange rate for imports.

Phase V : The transition into Phase V occurs when the exchange regime is virtually liberalised. There will be full convertibility on current account and quantitative restrictions will not be employed as a means of regulating the balance of payments. Thus, Phase V represents a total alternative to the QR regimes of Phases I and II. The pegged exchange rate will be at its equilibrium level and a flexible exchange rate policy will be in operation


two objectives, namely,
(i) to double india’s  percentage share of global merchandize trade within 5 years and (ii) use trade expansion as an effective instrument of economic growth and employment generation.

The short term objective of the  policy is to arrest and
reverse the declining trend of exports and to provide additional support especially to those sectors which have been hit badly by recession in the developed world. We would like to set a policy objective of achieving an annual export growth of 15% with an annual export target of US$ 200 billion by March 2011.
In the remaining three years of this Foreign Trade Policy i.e. upto 2014, the country should be able to come back on the high export growth path of around 25% per annum. By 2014, we expect to double India’s exports of goods and services. The long term policy objective for the Go Government is to double India’s share in global trade by 2020.
In order to meet these objectives, the Government would
follow a mix of policy measures including fiscal incentives,
institutional changes, procedural rationalization, enhanced
market access across the world and diversification of export markets. Improvement in infrastructure related to exports;
bringing down transaction costs, and providing full refund of all indirect taxes and levies, would be the three pillars, which will support us to achieve this target. Endeavour will be made to see that the Goods and Services Tax rebates all indirect taxes and levies on exports.
At this juncture, it is our endeavour to provide adequate
confidence to our exporters to maintain their market presence even in a period of stress. A Special thrust needs to be provided to employment intensive sectors which have witnessed job losses in the wake of this recession, especially in the fields of textile, leather, handicrafts, etc.
We want to provide a stable policy environment conducive
for foreign trade and we have decided to continue with the
DEPB Scheme upto December 2010 and income tax benefits under Section 10(A) for IT industry and under Section 10(B) for 100% export oriented units for one additional year till 31st March 2011. Enhanced insurance coverage and exposure for exports through ECGC Schemes has been ensured till 31st March 2010. We have also taken a view to continue with the
interest subvention scheme for this purpose.
We need to encourage value addition in our manufactured
exports and towards this end, have stipulated a minimum 15% value addition on imported inputs under advance authorization scheme.
It is important to take an initiative to diversify our export
markets and offset the inherent disadvantage for our exporters in emerging markets of Africa, Latin America, Oceania and CIS countries such as credit risks, higher trade costs etc., through appropriate policy instruments.
We have endeavored to diversify products and markets through rationalization of incentive schemes including the enhancement of incentive rates which have been based on the perceived long term competitive advantage of India in a particular product group  and market. New emerging markets have been given a special
focus to enable competitive exports. This would of course be contingent upon availability of adequate exportable surplus for a particular product. Additional resources have been made available under the Market Development Assistance Scheme and Market Access Initiative Scheme. Incentive schemes are being rationalized to identify leading products which would catalyze the next phase of export growth.

The Government seeks to promote Brand India through
six or more ‘Made in India’ shows to be organized across the world every year.
In the era of global competitiveness, there is an imperative
need for Indian exporters to upgrade their technology and
reduce their costs. Accordingly, an important element of the Foreign Trade Policy is to help exporters for technological upgradation. Technological upgradation of exports is sought to  be achieved by promoting imports of capital goods for certain sectors under EPCG at zero percent duty.
Under the present Foreign Trade Policy, Government
recognizes exporters based on their export performance and they are called ‘status holders’. For technological upgradation of the export sector, these status holders will be permitted to import capital goods duty free (through Duty Credit Scrips equivalent to 1% of their FOB value of exports in the previous year), of specified product groups. This will help them to upgrade their technology and reduce cost of production.

For upgradation of export sector infrastructure, ‘Towns of
Export Excellence’ and units located therein would be granted additional focused support and incentives.
The policy is committed to support the growth of
project exports. A high level coordination committee is being established in the Department of Commerce to facilitate the export of manufactured goods / project exports creating synergies in the line of credit extended through EXIM Bank for new and emerging markets. This committee would have representation from the Ministry of External Affairs, Department of Economic Affairs, EXIM Bank and the Reserve Bank of India. We would like to encourage production and export of ‘green products’ through measures such as phased
manufacturing programme for green vehicles, zero duty EPCG scheme and incentives for exports.
To enable support to Indian industry and exporters,
especially the MSMEs, in availing their rights through trade remedy instruments under the WTO framework, we propose to set up a Directorate of Trade Remedy Measures.
In order to reduce the transaction cost and institutional
bottlenecks, the e-trade project would be implemented in a
time bound manner to bring all stake holders on a common platform. Additional ports/locations would be enabled on the Electronic Data Interchange over the next few years. An Inter- Ministerial Committee has been established to serve as a single
window mechanism for resolution of trade related grievances.


Domestic Business and International Business
Conducting and managing international business operations is more complex than undertaking domestic business. Differences in the nationality of parties involved, relatively less mobility of factors of production, customer heterogeneity across markets, variations in business practices and political systems, varied business regulations and policies, use of different currencies are the key aspects that differentiate international businesses from domestic business. These, moreover, are the factors that make international business much more complex and a difficult activity.
Differences between International Trade and Domestic Trade
Scope: Scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments. Domestic business pertains to a limited territory. Though the firm has many business establishments in different locations all the trading activities are inside a single boundary.
Benefits: International business benefits both the nations and firms. Domestic business have lesser benefits when compared to the former.
•   To the nations: Through international business nations gain by way of earning foreign exchange, more efficient use of domestic resources, greater prospects of growth and creation of employment opportunities. Domestic business as it is conducted locally there would be no much involvement of foreign currency. It can create employment opportunities too and the most important part is business since carried locally and always dealt with local resources the perfection in utilization of the same resources would obviously reap the benefits.
•   To the firms: The advantages to the firms carrying business globally include prospects for higher profits, greater utilization of production capacities, way out to intense competition in domestic market and improved business vision. Profits in domestic trade are always lesser when compared to the profits of the firms dealing transactions globally.
Market Fluctuations: Firms conducting trade internationally can withstand these situations and huge losses as their operations are wide spread. Though they face losses in one area they may get profits in other areas, this provides for stabilizing during seasonal market fluctuations. Firms carrying business locally have to face this situation which results in low profits and in some cases losses too.
Modes of entry: A firm desirous of entering into international business has several options available to it. These range from exporting/importing to contract manufacturing abroad, licensing and franchising, joint ventures and setting up wholly owned subsidiaries abroad. Each entry mode has its own advantages and disadvantages which the firm needs to take into account while deciding as to which mode of entry it should prefer. Firms going for domestic trade does have the options but not too many as the former one.
To establish business internationally firms initially have to complete many formalities which obviously is a tedious task. But to start a business locally the process is always an easy task. It doesn't require to process any difficult formalities.
Purvey: Providing goods and services as a business within a territory is much easier than doing the same globally. Restrictions such as custom procedures do not bother domestic entities but whereas globally operating firms need to follow complicated customs procedures and trade barriers like tariff etc.
Sharing of Technology: International business provides for sharing of the latest technology that is innovated in various firms across the globe which in consequence will improve the mode and quality of their production.
Political relations: International business obviously improve the political relations among the nations which gives rise to Cross-national cooperation and agreements. Nations co-operate more on transactional issues.
he following are the major differences between domestic trade and international trade:-
1.Mobility in Factor Of Production
•   Domestic Trade: Free to move around factors of production like land, labor, capital and labor capital and entrepreneurship from one state to another within the same country
•   International Trade: Quite restricted
2.Movement Of Goods
•   Domestic trade: easier to move goods without much restrictions. Maybe need to pay sales tax,etc
•   International Trade: Restricted due to complicated custom procedures and trade barriers like tariff, quotas or embargo
3.Usage of different currencies
•   Domestic trade: same type of currency used
•   International trade: different countries used different currencies
4.Broader markets
•   Domestic trade: limited market due to limits in population, etc
•   International trade: Broader markets
5.Language And Cultural Barriers
•   Domestic trade: speak same language and practice same culture
•   International trade: Communication challenges due to language and cultural barriers   

Internal and International Trade:
By internal or domestic trade are meant transactions taking place within the geographical boundaries of a nation or region. It is also known as intra-regional or home trade. International trade, on the other hand, is trade among different countries or trade across political frontiers.
International trade, thus, refers to the exchange of goods and services between one country or region and another. It is also sometimes known as “inter-regional” or “foreign” trade. Briefly, trade between one nation and another is called “international” trade, and trade within the territory (political boundary) of a nation “internal” trade.
For all practical purposes, trade or exchange of goods between two or more countries is called “international” or “foreign” trade.
International trade takes place on account of many reasons such as:
1. Human wants and countries’ resources do not totally coincide. Hence, there tends to be interdependence on a large scale.
2. Factor endowments in different countries differ.
3. Technological advancement of different countries differs. Thus, some countries are better placed in one kind of production and some others superior in some other kind of production.
4. Labour and entrepreneurial skills differ in different countries.
5. Factors of production are highly immobile between countries.
In short, international trade is the outcome of territorial division of labour and specialisation in the countries of the world.
Salient Features of International Trade:
The following are the distinguishing features of international trade:
(1) Immobility of Factors:
The degree of immobility of factors like labour and capital is generally greater between countries than within a country. Immigration laws, citizenship, qualifications, etc. often restrict the international mobility of labour.
International capital flows are prohibited or severely limited by different governments. Consequently, the economic significance of such mobility of factors tends to equality within but not between countries. For instance, wages may be equal in Mumbai and Pune but not in Bombay and London.
According to Harrod, it thus follows that domestic trade consists largely of exchange of goods between producers who enjoy similar standards of life, whereas international trade consists of exchange of goods between producers enjoying widely differing standards. Evidently, the principles which determine the course and nature of internal and international trade are bound to be different in some respects at least.
In this context, it may be pointed out that the price of a commodity in the country where it is produced tends to equal its cost of production.
The reason is that if in an industry the price is higher than its cost, resources will flow into it from other industries, output will increase and the price will fall until it is equal to the cost of production. Conversely, resources will flow out of the industry, output will decline, the price will go up and ultimately equal the cost of production.
But, as among different countries, resources are comparatively immobile; hence, there is no automatic influence equalising price and costs. Therefore, there may be permanent difference between the cost of production of a commodity.
In one country and the price obtained in a different country for it. For instance, the price of tea in India must, in the long run, be equal to its cost of production in India. But in the U.K., the price of Indian tea may be permanently higher than its cost of production in India. In this way, international trade differs from home trade.
(2) Heterogeneous Markets:
In the international economy, world markets lack homogeneity on account of differences in climate, language, preferences, habit, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, be different.
(3) Different National Groups:
International trade takes place between differently cohered groups. The socio-economic environment differs greatly among different nations.
(4) Different Political Units:
International trade is a phenomenon which occurs amongst different political units.
(5) Different National Policies and Government Intervention:
Economic and political policies differ from one country to another. Policies pertaining to trade, commerce, export and import, taxation, etc., also differ widely among countries though they are more or less uniform within the country. Tariff policy, import quota system, subsidies and other controls adopted by governments interfere with the course of normal trade between one country and another.
(6) Different Currencies:
Another notable feature of international trade is that it involves the use of different types of currencies. So, each country has its own policy in regard to exchange rates and foreign exchange.
For the sake of brevity, features of international trade are mentioned in Chart 1.

Differences between Internal Trade and International Trade:
Characteristically, there are marked differences between internal and international trade as stated below:
1. Specific Terms:
Exports and Imports. Internal trade is the exchange of domestic output within the political boundaries of a nation, while international trade is the trade between two or more nations. Thus, unlike internal trade, the terms “export” and “import” are used in foreign trade. To export means to sell goods to a foreign country. To import goods means to buy goods from a foreign country.
2. Heterogeneous Group:
An obvious difference between home trade and foreign trade is that trade within a country is trade among the same group of people, whereas trade between countries takes place between differently cohered groups. The socio-economic environment differs greatly between nations, while it is more or less uniform within a country. Frederick List, therefore, put that: “Domestic trade is among us, international trade is between us and them.”
3. Political Differences:
International trade occurs between different political units, while domestic trade occurs within the same political unit. The government in each country is keen about the welfare of its own nationals against that of the people of other countries. Hence, in international trade policy, each government tries to see its own interest at the cost of the other country.
4. Different Rules:
National rules, laws and policies relating to trade, commerce, industry, taxation, etc. are more or less uniform within a country, but differ widely between countries.
Tariff policy, import quota system, subsidies and other controls adopted by a government interfere with the course of normal trade between it and other countries. Thus, state interference causes different problems in international trade while the value of theory, in its pure form, which is laissez faire, cannot be applied in toto to the international trade theory.
5. Different Currencies:
Perhaps the principal difference between domestic and international trade is that the latter involves the use of different types of currencies and each country follows different foreign exchange policies. That is why there is the problem of exchange rates and foreign exchange. Thus, one has to study not only the factors which determine the value of each country’s monetary unit, but also the divergent practices and types of exchange resorted to.
6. Heterogeneous World Markets:
In a way, home trade has a homogeneous market. In foreign trade, however, the world markets lack homogeneity on account of differences in climate, language, preferences, habits, customs, weights and measures etc.
The behaviour of international buyers in each case would, therefore, be different. For instance, Indians have right-hand drive cars, while Americans have left-hand driven cars. Hence, the markets for automobiles are effectively separated. Thus, one peculiarity of international trade is that it involves heterogeneous national markets.
7. Factor Immobility:
Another major difference between internal and international trade is the degree of immobility of factors of production like labour and capital which is generally greater between countries than within the country. Immigration laws, citizenship qualifications, etc., often restrict international mobility of labour. International capital flows are prohibited or severely limited by different governments.
Advantages of International Trade:
The following are the major gains claimed to be emerging from international trade:
(1) Optimum Allocation:
International specialisation and geographical division of labour leads to the optimum allocation of world’s resources, making it possible to make the most efficient use of them.
(2) Gains of Specialisation:
Each trading country gains when the total output increases as a result of division of labour and specialisation. These gains are in the form of more aggregate production, larger number of varieties and greater diversity of qualities of goods that become available for consumption in each country as a result of international trade.
(3) Enhanced Wealth:
Increase in the exchangeable value of possessions, means of enjoyment and wealth of each trading country.
(4) Larger Output:
Enlargement of world’s aggregate output.
(5) Welfare Contour:
Increase in the world’s prosperity and economic welfare of each trading nation.
(6) Cultural Values:
Cultural exchange and ties among different countries develop when they enter into mutual trading.
(7) Better International Politics:
International trade relations help in harmonising international political relations.
(8) Dealing with Scarcity:
A country can easily solve its problem of scarcity of raw materials or food through imports.
(9) Advantageous Competition:
Competition from foreign goods in the domestic market tends to induce home producers to become more efficient to improve and maintain the quality of their products.
(10) Larger size of Market:
Because of foreign trade, when a country’s size of market expands, domestic producers can operate on a larger scale of production which results in further economies of scale and thus can promote development. Synchronised application of investment to many industries simultaneously become possible. This helps industrialisation of the country along with balanced growth.
Disadvantages of International Trade:
When a country places undue reliance on foreign trade, there is a likelihood of the following disadvantages:
1. Exhaustion of Resources:
When a country has larger and continuous exports, her essential raw materials and minerals may get exhausted, unless new resources are tapped or developed (e.g., the near-exhausting oil resources of the oil-producing countries).
2. Blow to Infant Industry:
Foreign competition may adversely affect new and developing infant industries at home.
3. Dumping:
Dumping tactics resorted to by advanced countries may harm the development of poor countries.
4. Diversification of Savings:
A high propensity to import may cause reduction in the domestic savings of a country. This may adversely affect her rate of capital formation and the process of growth.
5. Declining Domestic Employment:
Under foreign trade, when a country tends to specialize in a few products, job opportunities available to people are curtailed.
6. Over Interdependence:
Foreign trade discourages self-sufficiency and self-reliance in an economy. When countries tend to be interdependent, their economic independence is jeopardised. For instance, for these reasons, there is no free trade in the world. Each country puts some restrictions on its foreign trade under its commercial and political policies.
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