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TRADE Definitionof'Trade' Abasiceconomicconceptthatinvolvesmultiplepartiesparticipatinginthevoluntarynegotiation andthentheexchangeofone'sgoodsandservicesfordesiredgoodsandservicesthatsomeoneelse possesses.Theadventofmoneyasamediumofexchangehasallowedtradetobeconductedina mannerthatismuchsimplerandeffectivecomparedtoearlierformsoftrade,suchasbartering. Infinancialmarkets,tradingalsocanmeanperformingatransactionthatinvolvesthesellingand purchasingofasecurity.

Types of trade
Trade can be divided into following two types, viz., 1.Internal or Home or Domestic trade. 2.External or Foreign or International trade

1. Internal Trade Internal trade is also known as Home trade. It is conducted within the political and geographical boundaries of a country. It can be at local level, regional level or national level. Hence trade carried on among traders of Delhi, Mumbai, etc. is called home trade. Internal trade can be further sub-divided into two groups, viz., 1.Wholesale Trade : It involves buying in large quantities from producers or manufacturers and selling in lots to retailers for resale to consumers. The wholesaler is a link between manufacturer and retailer. A wholesaler occupies prominent position since manufacturers as well as retailers both are dependent upon him. Wholesaler act as a intermediary between producers and retailers. 2.Retail Trade : It involves buying in smaller lots from the wholesalers and selling in very small quantities to the consumers for personal use. The retailer is the last link in the chain of distribution. He establishes a link between wholesalers and consumers. There are different types of retailers small as well as large. Small scale retailers includes hawkers, pedlars, general shops, etc.

2. External Trade External trade also called as Foreign trade. It refers to buying and selling between two or more countries. External trade can be further sub-divided into three groups, viz., 1.Export Trade : When a trader from home country sells his goods to a trader located in another country, it is called export trade. For e.g. a trader from India sells his goods to a trader located in China. 2.Import Trade : When a trader in home country obtains or purchase goods from a trader located in another country, it is called import trade. For e.g. a trader from India purchase goods from a trader located in China. 3.Entrepot Trade : When goods are imported from one country and then re-exported after doing some processing, it is called entrepot trade. In brief, it can be also called as re-export of processed imported goods. For e.g. an indian trader (from India) purchase some raw material or spare parts from a japanese trader (from Japan), then assembles it i.e. convert into finished goods and then reexport to an american trader (in U.S.A).

International Trade
International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes.

History of international trade

International trade has a rich history starting with barter system being replaced by Mercantilism in the 16th and 17th Centuries. The 18th Century saw the shift towards liberalism . It was in this period that Adam Smith, the father of Economics wrote the famous book The Wealth of Nations in 1776 where in he defined the importance of specialization in production and brought International trade

under the said scope. David Ricardo developed the Comparative advantage principle, which stands true even today. All these economic thoughts and principles have influenced the international trade policies of each country. Though in the last few centuries, countries have entered into several pacts to move towards free trade where the countries do not impose tariffs in terms of import duties and allow trading of goods and services to go on freely. The 19th century beginning saw the move towards professionalism, which petered down by end of the century. Around 1913, the countries in the west say extensive move towards economic liberty where in quantitative restrictions were done away with and customs duties were reduced across countries. All currencies were freely convertible into Gold, which was the international monetary currency of exchange. Establishing business anywhere and finding employment was easy and one can say that trade was really free between countries around this period. The First World War changed the entire course of the world trade and countries built walls around themselves with wartime controls. Post world war, as many as five years went into dismantling of the wartime measures and getting back trade to normalcy. But then the economic recession in 1920 changed the balance of world trade again and many countries saw change of fortunes due to fluctuation of their currencies and depreciation creating economic pressures on various Governments to adopt protective mechanisms by adopting to raise customs duties and tariffs. The need to reduce the pressures of economic conditions and ease international trade between countries gave rise to the World Economic Conference in May 1927 organized by League of Nations where in the most important industrial countries participated and led to drawing up of Multilateral Trade Agreement. This was later followed with General Agreement of Tariffs and Trade (GATT) in 1947. However once again depression struck in 1930s disrupting the economies in all countries leading to rise in import duties to be able to maintain favorable balance of payments and import quotas or quantity restrictions including import prohibitions and licensing. Slowly the countries began to grow familiar to the fact that the old school of thoughts were no longer going to be practical and that they had to keep reviewing their international trade policies on continuous basis and this interns lead to all countries agreeing to be guided by the international organizations and trade agreements in terms of international trade. Today the understanding of international trade and the factors influencing global trade is much better understood. The context of global markets have been guided by the understanding and theories

developed by economists based on Natural resources available with various countries which give them the comparative advantage, Economies of Scale of large scale production, technology in terms of e commerce as well as product life cycle changes in tune with advancement of technology as well as the financial market structures.

Importance of international trade

The buying and selling of goods and services across national borders is known as international trade. International trade is the backbone of our modern, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders. There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes. One of the most controversial components of international trade today is the lower production costs of developing nations. There is currently a great deal of concern over jobs being taken away from the United States, member countries of the European Union and other developed nations as countries such as China, Korea, India, Indonesia and others produce goods and services at much lower costs. Both the United States and the European Union have imposed severe restrictions on imports from Asian nations to try to stem this tide. Clearly, a company that can pay its workers the equivalent of dollars a day, as compared to dollars an hour, has a distinct selling advantage. Nevertheless, American and European consumers are only too happy to lower their costs of living by taking advantage of cheaper, imported goods. One of the biggest components of international trade, both in terms of volume and value of goods is oil. Total net oil imports in 2005 are over 26 million barrels per day (U.S. Energy Information Administration figures) (Note: Imports include crude oil, natural gas liquids, and refined products.) At a recent average of $50 per barrel, that translates to $1billion, three hundred million, PER DAY. The natural resources of a handful of nations, most notably the nations of OPEC, the Organization of Petroleum Exporting Countries, are swept onto the international trade scene in staggering numbers each day, and consumer nations continue to absorb this flow. Other natural resources contribute to the movement of international trade, but none to the extent of the oil trade. Diamonds from Africa, both for industrial and jewelry use, wheat and other agricultural products from the United States and Australia, coal and steel from Canada and Russia, all flow across borders from these nations that have the natural resources to the nations that lack them.

Despite complaints about trade imbalances, effects on domestic economies, currency upheavals, and loss of jobs, the reality of goods and services continually crossing borders will not go away. International trade will continue to be the engine that runs most nations.

Foreign Trade of Pakistan

1. Export of Raw Material and Semi Finished Goods Pakistans exports consist of raw material and semi-finished goods, which fetch very little price in international market. Most dependence of export is on cotton, cotton textile products and basmati rice, whereas production of these goods depends upon natural factors. If natural circumstances go against the cultivation of cotton and rice then export earnings reduce drastically. 2. Import of Machinery and Industrial Raw Material Pakistans imports consist of machinery, industrial raw material, vehicles, medicines, electronic goods and other value added items. The prices of these items are increasing in international market. Therefore the total import bill is increasing day by day. 3. Import of Agricultural Products Pakistan is an agricultural country but to our ill fate we import many agricultural food items such as soyabean oil, palm oil, tea, pulses, spices and many times sugar and wheat from other countries thereby increasing our import bill. 4. Increased Use of Petroleum Products In Pakistan number of motor vehicles and other means of transports are increasing. Similarly due to industrialization, use of machinery is increasing. All these factors are increasing demand of petrol and petroleum products, prices of which are rapidly increasing in the international market, causing increase in the Pakistans import bill. 5. Import of Services and Other Invisible Expenditures Most of the export and import trade of Pakistan is carried on by foreign shipping companies, as our shipping industry is not developed and we do not have many cargo ships. Similarly foreign banks and insurance companies render their services in international trade. Thus lot of foreign exchange is spent on such service charges. 6. Limited Trade Relations Pakistan has very limited trade relations. Most of the trade is being carried out with UK, USA, Japan, Europeans Union and Middle East.

7. International Trade by Private Sector Private sector is dominating international trade of the country. Businessmen themselves are finding export markets by sending their representatives for trade negotiations and trade. 8. Unfavorable Balance of Payments Balance of Trade is usually against Pakistan. Pakistans exports earnings from raw cotton, textile goods, rice, leather and surgical products are very less where as expenses on imports of machinery, industrial raw material, petrol and on electronic goods are greater. Pakistan receives less and pays more, which makes its balance of trade unfavorable. Balance of invisible is always against Pakistan. It is a statement of Pakistans use of foreign ships, insurance companies and banks for which Pakistan has to make payments in foreign currency. Pakistani does not have ships, banks and insurance companies abroad, which may perform services and earn foreign exchange. The drain of foreign exchange is too much on this account. Balance of Payments is always against Pakistan. It is a statement of a countrys trade (visible) and financial transactions (invisible) with the rest of the world. Since both the above balances are against Pakistan, therefore final balance of payments is also against it. This is being balanced by borrowings from World Bank, IMF and friendly countries. Unfavorable balance of payment increases the debt liability of Pakistan. 9. Unfavorable Terms of Trade

Terms of Trade are a price index, which shows a countrys exported goods prices relative to its imported goods prices. It is prepared by taking an index of prices received for export and an index of prices for imports and then export prices are divided by import prices. An improvement in a countrys terms of trade occurs if its export prices rise very slowly whereas import prices rise fast.


Various advantages are named for the countries entering into trade relations on a international scale such as: A country may import things which it cannot produce International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Therefore it becomes cost cheaper to import from other countries through foreign trade.

Maximum utilization of resources International trade helps a country to utilize its resources to the maximum limit. If a country does not takes up imports and exports then its resources remain unexplorted. Thus it helps to eliminate the wastage of resources. Benefit to consumer Imports and exports of different countries provide opportunities to the consumer to buy and consume those goods which cannot be produced in their own country. They therefore get a diversity in choices. Reduces trade fluctuations By making the size of the market large with large supplies and extensive demand international trade reduces trade fluctuations. The prices of goods tend to remain more stable. Utilization of Surplus produce International trade enables different countries to sell their surplus products to other countries and earn foreign exchange. Fosters International trade International trade fosters peace, goodwill and mutual understanding among nations. Economic interdependence of countries often leads to close cultural relationship and thus avoid war between them.


International trade does not always amount to blessings. It has certain drawbacks also such as: Import of harmful goods Foreign trade may lead to import of harmful goods like cigarettes, drugs etc. Which may run the health of the residents of the country. E.g. the people of China suffered greatly through opium imports. It may exhaust resources Internation trade leads to intensive cultivation of land. Thus it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources. Over Specialization Over Specialization may be disasterous for a country. A substitute may appear and ruin the economic lives of millions. Danger of Starvation A country might depend for her food mainly on foreign countries. In times of war there is a serious danger of starvation for such countries.

One country may gain at the expensive of Another One of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. The Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century. It may lead to war Foreign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and second world war.

Pakistan Exports, Imports & Trade

Pakistans international trade is suffering from huge amount of deficit due to low demand for its exports. Domestic political instability also accounts for trade deficit. The trade deficit stood at US$3.946 billion in 2010. Pakistan is a member of several international organizations such as ECO (Economic Cooperation Organization), SAFTA(South Asian Free Trade Area) , WIPO(World INtellectual Property Organization) and WTO (World Trade Organization). Steps have been taken to liberalize the trade and investment regimes of the country. Due to increasing current account deficit, the trade gap range of maximum tariffs was raised from 20%-25% to the 30%35% on 300 luxury items by Pakistani government in the 2008-09 budget. This measure brought about the decrease in imports and the increase in exports, thus lowering trade deficits from US$9.261 billion in 2009 to US$3.946 billion in 2010. Pakistan's failure to explore and exploit its own oil and gas resources to its full capacity has led to them relying on imports to meet the growing energy demands in the country. By 2011, experts forecasts that Pakistan's oil imports will rise to US$13.221 billion from the US$10.089 billion in 2010. List of Pakistan's FTAs Pak-Afghanistan Trade Agreement Agreement on South Asian Free Trade Area Pak-Malaysia Trade Agreements Pak-China Trade Agreements

Pak-Sri Lanka Free Trade Agreement Pak-Iran Preferential Trade Agreement Pak-Mauritius Preferential Trade Agreement Pakistan's Import and Export Indicators and Statistics at a Glance (2010) Total value of exports: US$20.29 billion Primary exports - commodities: textiles (garments, bed linen, cotton cloth, yarn), circe, leather goods, sports goods, chemicals, manufactures, carpets and rugs Primary export partners: US (15.87 percent of total valor of exports), UAE (12.35 percent), Afghanistan (8.48 percent), UK (4.7 percent), China (4.44 percent). Total value of imports: US$32.71 billion Primary imports - commodities: petroleum, petroleum products, machinery, plastics, transportation equipment, edible oils, paper and paperboard, iron and steel, tea Primary import partners: China (15.35 percent of total imports), Saudi Arabia (10.54 percent), UAE (9.8 percent), US (4.81 percent), Kuwait (4.73 percent), Malaysia (4.43 percent), India (4.02 percent).

Ways to improve terms of trade

i) An import Tariff restricts the imports from foreign countries., thus encouraging local industry as the import tariff adds additional costs on the product, which makes that products or services more costly, thus indirectly making people in native country to prefer cheaper, local goods or products. ii) Also, Since imports are indirectly restricted, which means, the country is a self-sufficient in a particular good or product, which a small improvement in production and technological practices helps in maintaining healthy improved foreign exchanges.

iii)With appreciation(increase in value) of foreign exchanges, the local currency gets prosperous and may be become market driven currency. iv)This practise of import tariff imposition is known as 'Protectionism', protecting local economy by making foreign goods costlier. v)Countries, which surpass or maintain self-sufficiency in their goods production follow these practices. Also, if a country feels their foreign exchanges are dipping, which directly influence currency values, then it imposes import tariffs, for example goods like Gold. v) Historically, Britain followed this method effectively against exported Indian Cotton goods. Now, US follows in the matters of Steel , so is China. vi) But these import tariffs can not be used discriminately, but in compliance with WTO rules and regulations - countries signed under it. vii)Import tariffs also encourage local employment rates, local productivity, more taxes to the govt. -> more revenue -> can have more expenditure -> more good for the society. In summary, Tariffs have three primary functions: a)to serve as a source of revenue, b)to protect domestic industries, and c)to remedy trade distortions (punitive function). ->The revenue function comes from the fact that the income from tariffs provides governments with a source of funding. In the past, the revenue function was indeed one of the major reasons for applying tariffs, but economic development and the creation of systematic domestic tax codes have reduced its importance in the developed countries. ->For example, Japan generates about one trillion yen in tariff revenue, but this is less than two percent of total tax revenues . In some developing countries, however, revenue may still be an important tariff function.

Tariffs is also a policy tool to protect domestic industries by changing the conditions under which goods compete in such a way that competitive imports are placed at a disadvantage. ->In point of fact, a cursory examination of the tariff rates employed by different countries does seem to indicate that they reflect, to a considerable extent, the competitiveness of domestic industries. ->In some cases, "tariff quotas" are used to strike a balance between market access and the protection of domestic industry. Tariff quotas work by assigning low or no duties to imports up to a certain volume (primary duties) and then higher rates (secondary duties) to any imports that exceed that level. ->The WTO bans in principle the use of quantitative restrictions as a means of protecting domestic industries but does allow tariffs to be used for this purpose.3 The cost of protecting domestic industry comes in the form of a general reduction in the protecting country's economic welfare and in the welfare of the world economy at large, but tariffs are still considered to be more desirable than quantitative restrictions. ->Punitive tariffs may be used to remedy trade distortions resulting from measures adopted by other countries. For example, the Antidumping Agreement allows countries to use "antidumping-duties" to remedy proven cases of dumping; similarly, the Subsidies Agreement allows countries to impose countervailing duties when an exporting country provides its manufacturers with subsidies that, while not specifically banned, nonetheless damage the domestic industry of an importing country.

Fluctuating world demand for its exports, domestic political uncertainty, and the impact of occasional droughts on its agricultural production have all contributed to variability in Pakistan's trade deficit. The trade deficit in 2010 amounted to over 15 billion, with Pakistan's imports of over 30.2 billion and exports of about 15 billion. In the six months to December 2003, Pakistan recorded a current account surplus of $1.761 billion, roughly 5% of GDP. Pakistan's exports continue to be dominated by cotton textiles and apparel, despite government diversification efforts. Exports grew by 19.1% in FY 2002-03. Major imports include petroleum and petroleum products, edible oil, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products.

Pakistan's exports increased more than 100% from $7.5 billion in 1999 to stand at $18 billion in the financial year 2007-2008. Trade policies and practices reform can substantially strengthen the overall trade environment and reduce the costs associated with exporting and importing goods. Trade Project's approach to policy reform builds on past trade policy reform successes and addresses the critical issues that remain, including: (1) strengthening trade policy frameworks and implementation capacity within the GoP, (2) reducing trade transaction costs through better Customs practices and more innovative approaches to trade facilitation, and (3) improving export promotion and market information programs. The reforms focus on liberalization, transparency and globalization with a basic thrust on outward orientation focusing on export promotion activity. These trade policy reforms will be carried out by enhancing Pakistan's current portfolio of bilateral and multilateral trade agreements, participating more actively in the DOHA round negotiations and other multi-lateral investment and trade initiatives, developing new free trade agreements, improving the duty drawback system and other offset mechanisms.

Pakistan Economy | Economy Watch XE - Six Steps to Improve Your Trading Advantages and Disadvantages of International Trade | International Trade Challenges And Opportunities For Pakistan Cotton-textile And Apparel Sector Pakistan Research Repository Terms of Trade (TOT), and its Types ~ Notes for Pakistan