FOREIGN TRADE - THE MAIN CHANNEL

FOREIGN TRADE -  THE MAIN CHANNEL

For a long time, foreign trade has been the main channel connecting countries. In history, you would have read about the trade routes connecting India and South Asia to markets both in the East and West and the extensive trade that took place along these routes. Also, you would remember that it was trading interests which attracted various trading companies such as the East India Company to India. What then is the basic function of foreign trade?

To put it simply, foreign trade creates an opportunity for the producers to reach beyond the domestic markets, i.e., markets of their own countries. Producers can sell their produce not only in markets located within the country but can also compete in markets located in other countries of the world. Similarly, for the buyers, the import of goods produced in another country is one way of expanding the choice of goods beyond what is domestically produced.

In general, with the opening of trade, goods travel from one market to another. The choice of goods in the markets rises. Prices of similar goods in the two markets tend to become equal. And, producers in the two countries now closely compete against each other even though they are separated by thousands of miles! Foreign trade thus results in connecting the markets or integration of markets in different countries.

Small traders of readymade garments facing stiff competition from both the MNC brands and imports

Chinese Toys in India

Chinese manufacturers learn of an opportunity to export toys to India, where toys are sold at a high price. They start exporting plastic toys to India. Buyers in India now have the option of choosing between Indian and Chinese toys. Because of the cheaper prices and new designs, Chinese toys become more popular in the Indian markets. Within a year, 70 to 80 percent of the toy shops have replaced Indian toys with Chinese toys. Toys are now cheaper in the Indian markets than earlier. 

The effect of foreign trade through the example of Chinese toys in the Indian markets.

What is happening here? As a result of trade, Chinese toys come into the Indian markets. In the competition between Indian and Chinese toys, Chinese toys prove better. Indian buyers have a greater choice of toys and at lower prices. For the Chinese toy makers, this provides an opportunity to expand the business. The opposite is true for Indian toy makers. They face losses, as their toys are selling much less.

Let’s work these out

1.  What was the main channel connecting countries in the past? How is it different now?

2.  Distinguish between foreign trade and foreign investment.

3.  In recent years China has been importing steel from India. Explain how the import of steel by China will affect.

       (a)  steel companies in China.

      (b) steel companies in India.

      (c) industries buying steel for the production of other industrial goods in China.

4.  How will the import of steel from India into the Chinese markets lead to the integration of markets for steel in the two countries? Explain.

Source: This topic is taken from NCERT TEXTBOOK