INTERNATIONAL TRADE AND

FINANCE ASSIGNMENT
ON
NATURE, ORIGIN AND DEVELOPMENT
OF INTERNATIONAL TRADE

SUBMITTED TO: SUBMITTED BY:

PROF. MD. ENAM FIRDOS MD AHMAR MATIN

BA.LLB(Hons.)

3rd year (5thsemeseter)

 ACKNOWLEDGEMENT

First and foremost, I would like to thank our subject teacher Prof. Enam Firdos sir, for the
valuable guidance and advice. He inspired us greatly to work on this interesting assignment. His
willingness to motivate us contributed tremendously to our assignment. I also would like to
thank him for showing us some sample assignments on how to go about the research assignment.
Besides, I would like to thank the Faculty staff for providing us with a good environment and
facilities for completing this assignment. In addition, I would also like to thank my seniors who
provided me with the valuable information acting as a source of guidance in making the
assignment. Finally, an honorable mention goes to my family and friends for their
understandings and supports in completing this assignment. Without the help of the particulars
mentioned above, making of this assignment would not have been possible.

MD AHMAR MATIN
 SYNOPSIS
I. INTRODCTION
II. THE EVOLUTION OF INTERNATIONAL
TRADE AND MODER DAY TRADE ROUTES
 THE SILK ROAD
 BRITISH-INDIAN SPICE TRADE
 SEA LANES, AIRPLANE AND THE
INFORMATION SUPER HIGHWAYS: THE
TRADE ROUTES OF TODAY
III. ORIGIN AND NATURE OF INTERNATIONAL
TRADE

IV. INTERNATIONAL TRADE THEORY

 ADAM SMITH’S THEORY OF ABSOLUTE
DIFFERENCES IN COST
 DAVID RICARDO’S COMPRATIVE COST
THEORY
 HECKSCHER-OHLIN THEORY OF
INTERNATIONAL TRADE
V. CHARACTERISTICS OF GLOBAL TRADE
VI. ADVANTAGE OF INTERNATIONAL TRADE
VII. DISADVANTAGES OR PROBLRMS OF
INTERNATIONAL TRADE
VIII. FREE TRADE
 LAISSEZ-FAIRE POLICY
 PROTECTIONISM
IX. ROLE OF INTRNAIONAL AND NATIONAL
LAW IN INTERNATIONAL TRADE
X. ROLE OF THE U.N IN INTERNATIONAL
TRADE LAW THROUGH UNCITRAL
XI. BIBLIOGRAPHY
 INTRODUCTION

International trade is the exchange of capital, goods, and services across international

borders or territories. In most countries, such trade represents a significant share of gross
domestic product (GDP). While international trade has existed throughout history (for
example Uttarapatha, Silk Road, Amber Road, scramble for Africa, Atlantic slave trade, salt
roads), its economic, social, and political importance has been on the rise in recent centuries.
Carrying out trade at an international level is a more complex process than domestic trade. Trade
takes place between two or more nations. Factors like the economy, government policies,
markets, laws; judicial system, currency, etc. influence the trade. The political relations between
two countries also influence the trade between them. Sometimes, the obstacles in the way of
trading affect the mutual relationship adversely. To avoid this, international economic and trade
organizations came up. To smoothen and justify the process of trade between countries of
different economic standing, some international economic organizations were formed. These
organisations work towards the facilitation and growth of international trade.
The Evolution of International Trade and Modern Day Trade Routes

Over the past decade, international trade has become more tightly linked than at any point in
human history. Global flows of goods, services and capital have reached unprecedented levels
worth trillions of dollars every year and they continue to rise in accordance with the increasingly
interconnected nature of modern trade.

While governments and large international businesses have been able to conduct vast quantities
of trading with one another for centuries, it would have been unthinkable even thirty years ago
for individuals and even the smallest of business enterprises to easily trade with each other
regardless of their geographical location. However, with the technological improvements made
in international shipping, logistics and – of course – the revolutionary impact of the internet,
such trades are now a commonplace part of the modern economic reality that we currently enjoy.

Still, it has taken a great deal of time, ambition and ingenuity to forge this dynamic and free-
flowing trading environment. To demonstrate this, we take a brief look at some of the key
trading routes established throughout history.

The Silk Road

The Silk Road is a term used to describe an amalgamation of a network of trading routes that
served to link the eastern and western worlds through commerce and cultural exchange as they
extended over 4,000 miles across Europe, Arabia, Persia, India and China. Its name derives from
the incredibly lucrative trade in silk which originated from China around 200 BC and flourished
over the course of the following six centuries.

Despite the value and importance of its namesake, the Silk Road served to convey much more
than bolts of silk. From its gradual establishment in the early centuries BC, right up until its
disintegration along with the decay of the Mongol Empire in the 15th century AD cultural
exchanges flowed as readily as tangible goods. Religious tenants, philosophies, technological
advancements and ideas were transported and spread wide as the traders who navigated the Silk
Road were joined by priests, free-thinkers, soldiers of fortune and all manner of adventurous
individuals.
British – Indian Spice Trade

In 1640 the English East India Company – a joint stock company that grew to such vastly
powerful proportions that it encompassed half of the world’s trade – leased Bombay Island
which marked the start of the Company’s eventual domination of India. From humble beginnings
the Company grew to monopolise lucrative trade resources and made vast fortunes from
exporting silks, cottons and dyes to Europe. Critically, the EIC controlled the global distribution
of India’s spices; trade goods that rose spectacularly in popularity and price.

By the beginning of the 19th century, Britain’s hold over India was complete and the EIC had
such vast resources gained from their trade monopolies that they wielded more power and
influence than most countries.

Sea Lanes, Airplanes and the Information Superhighway: The Trade Routes of Today

Returning to present day, our key trade routes are no longer contiguous and they extend right
across the globe. Air freight allows for goods to be transported as directly as possible between
countries and shipping sea lanes allow for larger cargoes to be moved, albeit more slowly.
Highly developed railway systems are a vital part of the multi-modal transportation network that
links business and manufacturers with their end consumers.

This new network – coupled with the digital trading empire of the internet – has grown and
woven interconnected bonds to become a trade route on a scale never experienced before in
human history. To put it into context, it has grown to the point where US maritime trade alone
accounts for the annual transportation of goods totaling over US$6 trillion. When viewed as a
whole, the global trade network – where every item imaginable is moved by plane, train, ship
and truck – is responsible for the transportation of unimaginable wealth every single day.

The internet’s rapid expansion and refinement throughout its brief lifespan has led it to a point
where goods, services and capital can be traded within the blink of an eye, something our
ancestral traders would be understandably astonished to see! Admittedly, physical goods traded
online still require transportation via air, sea or overland but the fact that they can still be moved
from one side of the globe to the other within hours or days rather than weeks or months is
testament to how far international trade has come. In addition, the development of  secure,
reliable and cost-effective platforms for international online payments has encouraged billions of
traders – from major company CEOs to individuals buying and selling on eBay – to trust in
online trade despite the vast geographical distances involved.

The internet has also allowed for the greatest cultural exchange that humanity has ever
witnessed. Like trade routes of old, it allows ideas and information, theories and philosophies on
every subject to flow like never before. However, the internet’s reach already extends far beyond
that of its historical counterparts and if it enjoys a similar longevity then it will no doubt continue
to shape truly extraordinary changes on the way we live, think and make exchanges.

Origin and Nature of International Trade

As per Halsbury's Laws of England, the word 'trade bears the meaning of : (a) exchange of goods
for goods or goods for money: (b) any business carried on with a view to profit, whether manual
or mercantile, as distinguished from the liberal arts or learned professions and from agriculture.
Now trade' means lending, movements of goods, transactions linked with merchandise or flow of
goods, the promotion of buying and selling advance, borrowings, discounting bills and
mercantile documents, banking and other forms of supply of funds. The word 'business' is a
wider term than trade and it includes any occupation.

International trade is the trade between States or nations entirely foreign to each other. The trade
across the borders of the countries has been carried on since times immemorial. International
trade refers to trade between the residents of two different countries.

The map of the world of today is not similar to that of past. There were many countries or
kingdoms and they were considered foreign to each other. For example, the country India had
been divided as many countries before getting independence. With the division of labour man
could produce surplus and originally, the producers used to export their products to the nearby
countries and gradually extended the export to far-off countries. Trade had been carried by land
by transporting the goods by carrying on the head/shoulders of men, next by bullock-carts and
animal back.
With industrial revolution, the great industrial nations of Europe, i.e., the colonial powers of
Spanish, Portuguese, Dutch, French, Italian, German and British needed colonies to supply them
with raw material. European nations embarked upon imperialism for the sake of finding markets
for their surplus goods and loot. The European nations needed imperialism for the sake of
investment of surplus capital to virgin fields in order to enjoy monopoly. The European nations
embarked upon imperialism for the sake of strategic raw materials and markets for their
products.

Trade to far-off countries started to grow due to sea transportations. Boats and ships had been
built and especially European countries expanded their trade with foreign countries. A few
traders carried on trade with other countries and became rich. Guilts were formed and started to
trade on large scale. Later, companies were formed to carry on trade with the countries of other
continents. There was cut-throat competition among the traders of different European countries.
They were involved in two World Wars to get control over foreign trade. At present trade with
foreign countries has been extended to even perishable goods due to rifling of cargo by air.

The post-World War II period witnessed an unexpected expansion of national companies into
international or multinational companies. The post 1990s period has given greater flip to
international trade. The multinational companies which were producing the products in their
home countries and marketing them in various foreign countries before 1980s started locating
their plants and other manufacturing facilities in other foreign countries. Thus the scope of the
international trade expanded into international marketing and international marketing has
expanded into international business.

International trade takes place due to the geographical division of labour. Quick transport and
communication facilities and improvement in science and technology made the international
trade easy. In international trade international sale contract and dispute settlement requires
uniform codes. Issue of commercial letters of credit by banks is a innovation in facilating
financial credit in export and import. In Carriage of goods by sea, bill of lading and charter party
play a prominent role.
INTERNATIONAL TRADE THEORIES:-

Adam Smith’s Theory of Absolute Differences in Cost:-

In support of international trade, Adam Smith the father of economics says that trade between the
countries would be mutually beneficial if one country could produce one commodity at an
absolute advantage over the other country and other country could in turn produce another
commodity in an absolute advantage over first.

Basing on free trade, Adam Smith explains the advantage of trade between countries through his
absolute cost theory. He observes: “whether the advantage which one country has over another
be natural or acquired is in this respect of no consequence. As long as one country has those
advantageous and the other wants them, it will always be more advantageous for the later rather
to buy of the former than to make them”.

According to this theory, if France produces 10 units of wine and 4 unit of cloth per unit of
labour, and England produces 3 units of wine and 7 units of clothes per unit of labour, France has
an absolute advantage in the production of wine over England and England has an absolute
advantage in the production of clothes over France. Hence according to Adam Smith France
should specialize in the production of wine and meet its requirements of clothes through import
from England. On the other hand England should specialize in the production of cloth and should
obtain wine from France. Such trade would be mutually beneficial. According to Adam Smith
three kinds of benefit accrue to the country from international trade:

(1) productive gain,

(2) absolute cost gain and

(3) vent for surplus gain.

DavidRicardo’s comparative cost theory

Later, DavidRicardo also supported the international trade by his comparative cost theory and
maintain that if trade is left free, each country , in the long run , tends to specialize in the
production and export of those commodities in whose production it enjoys a comparative
advantage in term of real cost, and to obtain that importation those commodities which could be
produced at home at a comparative advantage in terms of real cost and that such specialization is
to the mutual advantage of the country participating in it.

Ricardo illustrates the comparative cost theory, using a two country and two commodity model
that shows that trade between nations can be profitable even if one of the two nation can produce
the commodity more efficiently than the other nation, provided that it can produce one off those
commodities with comparatively greater efficiency than the other commodity. The law of
comparative advantage indicates that a country should specialize in the production of those
goods in which it is more efficient and leave the production of other commodity to the other
country. The two nation will then have more of both goods by engaging in trade.

Ricardo explained his theory through an hypothetical example of production costs of cloth and
wine in England and Portugal England produces a unit of cloth with 100 units of labour and a
unit of wine with 120 units of labour, while Portugal produces a unit of cloth with 90 units of
labour and a unit of wine with 80 units of labour From this, it seems that Portugal has an absolute
superiority in production of both cloth and wine. However, a comparison of the ratio of the cost
of production of wine (80/120) with the ratio of the cost of production of cloth (90/100) in both
the countries reveals that though Portugal has an absolute superiority in both the branches of
production, it will pay her to concentrate on the production of wine in which she has comparative
advantage over England, while importing cloth from England, which has a comparative
advantage in cloth production. England will gain by specialising in producing cloth and selling it
in Portugal in exchange for wine.

According to Ricardo's Comparative Cost Theory, free and unrestricted trade among nations
encourages specialisation on a large scale and brings the following advantages:

i) the most efficient allocation of world resources as well as maximisation of world

production
 ii) a redistribution of relative product demands, resulting in greater equality of product
prices among trading nations, and
iii) a redistribution of relative resources/demands to correspond with relative product
demands, resulting in relatively greater equality of resource prices among trading
nations.
The Ricardian theory of comparative costs has been elaborated with reciprocal
demand and with the introduction of money. Gottfried Haberler has attempted to
restate the theory of comparative costs in terms of opportunity costs.

Heckscher-Ohlin's Theory of International Trade

Eli Heckscher and Berül Ohlin developed the Factor Endowment Theory or General Equilibrium
Theory of International Trade Paul Samuelson and Wolfgang Stolper have further developed this
theory. They have traced the cause of cost differences to relative factor endowments and relative
factor intensities. They have put forward the view that since countries differ in their factor
endowments and also employ factors for production of exports in different intensities, there is
scope for in international trade. According to this theory, a country will specialise in the
production and export of goods whose production requires a relatively large amount of the factor
with which the country is relatively well endowed.

Regions or countries differ from one another in respect of resource endowments or availability of
factors. One country may have an absolute of capital while labour may be scarce. On the
opposite, there may be an abundance of labour in another country with capital may be scarce.
According to this theory, countries which are rich in labour will export labour-intensive goods
and those which are rich in capital will export capital-intensive goods.

The factor price equalisation theorem states that free international trade equalises factor prices
between countries relatively and absolutely, and thus serves as a substitute for international
factor mobility. International trade increases the demand for [20:11, 11/26/2018] ahmarmatin03:
abundant factors (leading to an increase in their prices) and decreases the demand for scarce
factors (leading to a fall in their prices) because when nations trade specialisation takes place on
the basis of factor endowments.
W.F. Stolper and Paul A. Samuelson state that "International trade necessarily lowers the real
wage of the scarce factor expressed in terms of any good." In shon free international trade will
benefit the relatively abundant factor and hurt the relatively scarce factor of production.

Characteristic of global trade

Trading globally gives consumers and countries the opportunity to be exposed to new markets
and products. Almost every kind of product can be found in the international market: food,
clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also traded:
tourism, banking, consulting, and transportation. A product that is transferred or sold from a
party in one country to a party in another country is an export from the originating country, and
an import to the country receiving that product. Imports and exports are accounted for in a
country's current account in the balance of payments.

Industrialization, advanced technology, including transportation, globalization, multinational

corporations, and outsourcing are all having a major impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization. Nations would be
limited to the goods and services produced within their own borders without international trade.
International trade is, in principle, not different from domestic trade as the motivation and the
behavior of parties involved in a trade do not change fundamentally regardless of whether trade
is across a border or not. The main difference is that international trade is typically more costly
than domestic trade. This is due to the fact that a border typically imposes additional costs such
as tariffs, time costs due to border delays, and costs associated with country differences such as
language, the legal system, or culture.

Another difference between domestic and internationaltrade is that factors of production such as

capital and labour are typically more mobile within a country than across countries. Thus,
international trade is mostly restricted to trade in goods and services, and only to a lesser extent
to trade in capital, labour, or other factors of production. Trade in goods and services can serve
as a substitute for trade in factors of production. Instead of importing a factor of production, a
country can import goods that make intensive use of that factor of production and thus embody
it. An example of this is the import of labor-intensive goods by the United States from China.
Instead of importing Chinese labor, the United States imports goods that were produced with
Chinese labor. One report in 2010 suggested that international trade was increased when a
country hosted a network of immigrants, but the trade effect was weakened when the immigrants
became assimilated into their new country.

Advantages of International Trade

International trade which enables every country to specialise and to export those things that it
can produce cheaper in exchange for what others can provide at a lowest cost have been and still
are one of the basic factors promoting economic well-being and increasing national income of
every participating country. The world trade can increase real income and consumption too.

International trade has many more benefits. It promotes growth and enhances economic welfare
by stimulating more efficient utilisation of factor endowments of different regions and by
enabling people to obtain goods from efficient sources of supply. Trade also makes available to
people goods which cannot be produced in their country due to various reasons.

Small countries may gain more than large countries from world trade. This is because a small
country can specialise in the production of a single commodity without significantly affecting its
prices in the international market, but if a large country specialises in the production of a single
commodity, the significant increase in the supply would cause a fall in its price, adversely
affecting the terms of trade of the large country.

The gains from international trade may be summed up as follows :

(i) International trade encourages the development of the most efficient sources of
supply:
(ii) International trade enables specialisation on a large scale because of the expanded
market, which enables the realisation of economies of scale. When the size of the
market is limited, certain investments are uneconomical
(iii) International specialisation and the economies in production make goods available
comparatively cheaper.
(iv) International trade increases real incomes and consumption. This could lead to
expansion of employment and output and foster economic growth.
(v) Trade on a global scale makes available even goods that cannot be domestically
produced.
 (vi) Trade enables a country to conserve certain scale resources as commodities which
embody these scarce resources may be imported from countries where they are
abundant.

Disadvantages or Problems of InternationalTrade

International trade has certain disadvantages as well

(1) One important problem is that the gains from trade are not equally distributed. There is a
general feeling that a major part of the gains from trade are cornered by the North, in, developed
countries

(2) International trade sometimes leads to fast exhaustion of non-replenishable resources. This is
especially so in the case of South. I.e. developing countries whose exports are mostly natural
resources or commodities embodying natural resources.

(3) International trade sometimes ruins domestic industries and competition.

(4) International trade sometimes disturbs domestic economic institution and structure, as well as
social and political set ups.

Free Trade

Free Trade (Laissez-faire Policy)

The British colonialism propagated the free trade philosophy in international. The classical
economists like Adam Smith supported the free trade without any sting. The policy of laissez-
faire is the cornerstone of free trade. It is the policy government control of allowing individual
activities (esp. in commerce) to be conducted without.

The free trade concept is based on market mechanism which is controlled by the forces of
demand and supply in a particular market. The government should not interfere in the trade and
commerce and what it has to do is to provide infrastructure which is necessary for the expansion
of market.
Haberler lists the following benefits of free international trade to the developing and less
developed countries:

(1) International trade provides material means (capital goods, machinery and raw and semi-
finished material) indispensable for economic development of developing countries.

(2) International trade is the means and vehicle for the dissemination of technical knowledge, the
transmission of ideas, for the importation of know-how, skills, managerial talents and
entrepreneurship.

(3) International trade is also the vehicle for the international movement of capital especially
from the North (developed countries) to the South (developing countries)

(4) Free international trade is the best anti-monopoly policy and the best guarantee for the
maintenance of healthy degree of free competition

(5) International trade leads to division of labour on an international scale leading to greater
specialisation, efficiency and economy in production

(6) Free international trade benefits the consumers by providing large variety of goods at the
cheapest prices.

According to D.H. Robertson, international trade is an engine of growth Haberler has argued that
international trade has made a tremendous contribution to the South, ie, the developing countries
in the 19th and 20th centuries.

Protection (Protectionism)

Free trade ruled the world for a long time. It enabled the industrially developed es to
expand their trade throughout the world and enriched them. But some Countries, especially
Germany, later, favoured the strategic protective measures in their interest by restricting free
trade by imposing trade barriers. The barriers refer government policies and measures which
obstruct the free now of goods and Services across national borders.

The GATT is intended to reduce the tariff and non-tariff barriers in the trade in goods.
They restrict the free trade. Trade barriers refer to the government policies and measures which
obstruct the tree flow of goods and services across national borden The main objectives of
imposing trade barriers are :

1. to protect domestic industry from foreign competition

2. to guard against dumping
3. to promote indigenous research and development
4. to conserve the foreign exchange resources of the country
5. to make the balance of payment position more favourable; and
6. to curb conspicuous consumption and mobilise revenue for the government.

The trade barriers may be broadly divided into two groups, namely, trail camera and non-tariff
barriers (NTBs).

Role of International and National Law in International Trade

Every country has national sovereignty. Every country has its own laws relating to domestic and
international trade. The conflict between international law and national sovereignty is subject to
vigorous debate. Certainly, there is a growing trend towards judging a State's domestic actions in
the light of international law and standards. Numerous people now view the nation-State as the
primary unit of international affairs and believe that only States may choose to voluntarily enter
into commitments under international law, and that they have the right to follow their own
counsel when it comes to interpretation of their commitments. Some argue that these modern
developments endanger nation States by taking power away from State Governments and ceding
it to international bodies such as the U.N., the World Bank, the I.M.F. and the W.T.O. It is
argued that international law has evolved to a point where it exists separately from the mere
consent of States, and discern a legislative and judicial process to international law that parallels
such processes within domestic law. This especially occurs when States violate or deviate from
the expected standards of conduct adhered to by all civilised nations.

International organizations play an increasingly important role in the relationships

between nations. An international organization is one that is created by international agreement
or which has membership consisting primarily of nations. The United Nations, the most
influential among international organizations, was created on June 26, 1945. The declared
purposes of United Nations are to maintain peace and security. To develop friendly relations
among nations international co-operation in solving international problems, and to be a center for
harmonizing the actions of the nations and attaining their common ends. The Charter of the
United Nations has been adhered to by virtually all States. Even the few rename non-member
States have acquiesced in the principles it established, The International Court of Justice was
established by the U.N. Charter as its principal judicial organ.

Role of the U.N. in International Trade Law through UNCITRAL

Trade laws of different States failed in reducing legal obstacles to the flow onInternational trade
International Law Commission of UN could not find time to take up questions of private
international trade. In response to the need of forming International Trade Laws, the General
Assembly of U.N. through its Resolution 2205 XXI) established the United Nations Commission
for International Trade Law (UNCITRAL) on 17th December, 1966.
 BIBLIOGRAPHY

WEBSITEREFERRED

• LEGAL SERVICE INDIA

• LEGAL CRYSTAL

• LAWCTOPUS

BOOKSREFERRED

• DR. SR MYNENI, ALLAHBAD LAW AGENCY; 3RD

EDITION, 2017

• SCHMITTHOFF: THE LAW AND PRACTISE OF

INTERNATIONAL TRADE, SWEET & MAXWELL,

12TH EDITION, 25TH SEPTEMBER 2012