Foreign trade is the exchange of services or products between two or more countries or economic regions, for those nations involved to meet their external and internal market needs. Those countries or regions that participate in foreign trade have what is called an open economy.
Foreign trade is regulated by international treaties, agreements, standards, and conventions so that, in this way, the exchange process is much simpler.
It generates wealth to the countries since it implies the income of foreign currency from the country that it receives for the good. For example, if India sells something to Canada, it will receive a certain amount in Canadian Dollar (Canadian currency) as a form of payment.
How does foreign trade work?
For many countries, foreign trade is vital and becomes the basis of their economy.
For this type of trade to take place, a country must allow the entry of foreign merchandise, there must be commercial freedom, and all prohibitions on the matter be eliminated, which does not mean that this trade is not regulated.
Some countries decide to close their commercial borders to protect the industry itself and thus be able to generate consumption but for local companies. The problem that this generates is that the things that that country does not have cannot exist there either. For many countries, this type of trade is vital and can become the basis of their economy.
New technologies also help make the process of exchanging goods and services easier, especially computer and management systems. For example, they allow you to track the containers that are shipped from a country throughout their journey.
Several theories explain how foreign trade works:
- There are the so-called traditional theories, which are Adam Smith’s model of absolute advantage (the author believed that goods were produced where the cost was lower and exported from there. He also defended free trade).
- David Ricardo’s theory of comparative advantage (unlike the previous author, for him the most important thing is relative costs).
- The Heckscher-Ohlin model (this theory also starts from the previous author, but states that each country produces the good that is most abundant and imports the scarcer one). This set of theories allowed open economy countries to have greater well-being through it.
- And finally, the new theory of international trade (this theory speaks of the fact that there are failures in the market and that a second “optimal” option must be found).
Indian Businessmen work under the import-export / Foreign Trade Policy of India. There are certain taxes, levies, and customs duties that are exempted under certain schemes (AAS or Advance Authorisation Scheme) on the import of raw material that is used as the input to the production of the “to be export” finished goods.
Even there are times when a businessman in India needs machinery or any other capital goods that may be available outside India, they need to import it. The higher the cost of the machinery, the higher will be the customs duty. These restrict the businessmen to compromise with the quality of capital goods and machinery and thus have an impact on their final product. The EPCG Scheme or Export Promotion Capital Goods Scheme empowers the exporters to import such required machinery at the duty-free price.