Today, hardly is there any country which is not engaged in international trade. The economies of certain small countries are dependent mainly on international trade. Here, a genuine question arises as to Why Countries Enter Into International Trade. There are a number of factors which contribute to the development of foreign trade. Most important among them are-
1. Natural Resources and Geographical Factors. Each country differs in natural resources and geographical distribution of various factors of production. Diversities in natural and geographical conditions make a country more efficient in the production of one commodity and another country in some other country. These countries specialize themselves in the production of such commodities and supply them to other countries, in exchange for the commodities which they do not produce but other countries haves specialization their production. For example, because of favorable natural conditions India and Sri Lanka taken together produce 87 percent of the world total production of tea. Mica in India, manganese in the Russia and oil in Arab countries are a few examples in of specialization.
2. Occupation Distribution. The population and its occupational distribution also differs from country to country. Occupational structure of its population decides the field of specialization. For example, a large part of India’s population is engaged in agriculture hence it has specialized in the production of food grains and other agricultural products. England, on the other hand, has specialized itself in the production of industrial goods as it has abundance of capital and scarcity of land and a large part of its population is engaged in industries. Thus, countries specialize themselves on the basis of their occupations. Specialization gives birth to international trade.
3. Means of Transport. Means and costs of transportation also contribute to the international trade. Industries using weight-losing raw materials are generally localized at places near to the raw materials because the transport costs are the deciding factor. The countries where such raw materials are found in abundance get specialized in their end-products. For example, India is a large producer -of sugarcane and therefore, sugar industry is located mainly in India. At international level, the factors of production are not freely movable, because they involve high cost of transportation. Other countries, therefore, cannot setup sugar industries and shall make imports of sugar from India and other sugar producing countries.
4. Large-Scale Production. Large scale production of a commodity gives many advantages of scale. The industry of such a commodity can produce it at a lower cost because of scale economics and specialization. After meeting the demand for the commodity in the, market, the surplus can easily be exported at a fair price fetching a handsome profits to the industry. For example, an industrial unit producing locomotive engines for the Indian Railways, can specialize itself in the production of locomotives. Large scale production of locomotives may enable the unit to export them to neighboring countries.
5. Differences in Costs. Production costs of a commodity differ from country to country due to a number of factors—
- Availability of natural resources and geographical conditions
- occupational structure
- large-scale production
- development, in the field of science and technology etc.
Countries-having favorable conditions can produce the commodities at lower costs and other countries at higher costs. Higher domestic costs of production shall encourage the imports of that commodity into the county y and lower costs items may be exported.
6. Degree of Self-Sufficiency. No country of the world is self-sufficient. The degree of self-sufficiency however differs from country to country. For example, Russia imports 2 to 3 percent of its requirements and the U.S.A. only 4 to 5 percent of its total consumption. The degree of self-sufficiency is 40 to 50 percent in underdeveloped countries. Therefore, the countries which cannot produce at all or can produce only at a very high cost, arrange the supply of such through imports from other countries.
Thus, due to the above factors, a country arranges for the imports and exports of goods. International trade is necessary now-a-days for attaining the self-reliance and self-sufficiency.