International Trade: Meaning, Benefits and Importance

International trade allows Indian businesses to reach global markets, unlocking opportunities for growth, innovation, and revenue. In this blog post, we’ll explore the types of international trade, their benefits, and how they contribute to business success and economic progress.

What is international trade?

International trade is the exchange of goods, services, and capital across borders. This includes both imports and exports via any mode of transportation—air, land, and ocean freight. Import and export together fuel economic interactions and growth between countries.

• Export: Process of selling goods and services to other countries.
• Import: Process of buying goods and services from other countries.

Reasons for international trade

Countries engage in international trade for various reasons, driven by economic, strategic, and developmental goals. Some key reasons are as follows:

Access to scarce resources:

International trade allows countries to trade abundant resources and purchase resources scarce or absent in their own region.

Specialization and efficiency in production:

International trade enables countries to focus on producing goods where they have a comparative advantage in resources, technology, or expertise. By importing products that are less efficient or costlier to produce domestically, nations can enhance economic efficiency and make optimal use of their resources.

Exchange of technological skills and resources:

International trade fosters the exchange of new technologies, skills, and ideas, boosting innovation and economic development.

Importance of international trade

Some factors that contribute to the importance of international trade as are follows:

• Expands market reach: Companies can market their products internationally, resulting in higher revenue streams.
• Develops global collaboration: Trade agreements strengthen diplomatic ties and foster peaceful relations among countries.
• Boosts worldwide production: International trade enhances the global production landscape as nations leverage their unique strengths and resources.
• Creates employment opportunities: As businesses expand into international markets, they generate new domestic job opportunities.
• Enables cultural interchange: International trade facilitates the exchange of culture, as nations share ideas and practices along with their products.

What are the Types of International Trade

International trade is broadly categorized under two types:

• Bilateral trade is the exchange of goods between two countries, where both countries agree to sell goods and services to each other. For instance, country X might export machinery to country Y in exchange for oil.
• Multilateral trade is the exchange of goods between more than two countries. One country might enter into trade agreements with multiple countries at a time.

What are the benefits of international trade?

International trade can bring various benefits to countries that participate in it. Some of these are as follows:

1. Utilization of resources:

Countries can better use their natural resources by exporting surplus resources in the absence of sufficient local demand.

2. Greater choice for customers:

Services and products that are not available in a particular country can be imported from other countries. Customers can choose from a wider variety of goods, depending on their tastes and preferences.

3. Growth in economic activity:

International commerce enhances the economic activity of a country and consequently its GDP. When goods are being both exported and imported in great quantities, there is a rise in employment levels, more industries are set up, and the quality of life improves.

4. Creation of jobs:

International trade generates jobs as companies diversify their workforce. Global trading produces employment opportunities in fields like manufacturing, transportation, shipping, and distribution.

5. Strengthening of international relations:

Export and import strengthen diplomatic relations among nations. When countries are dependent on each other through trade, they have a higher incentive to make cordial and mutually beneficial policy decisions.

Documents required to start international trade

Before exporting goods from India, businesses must ensure compliance with Indian and international trade laws. Here are some key documents required:

• Importer Exporter Code (IEC)
• Goods and Services Tax (GST) registration
• PAN card of the business
• Current account with authorized dealer bank
• Registration-Cum-Membership Certificate (RCMC)
• Bill of lading or air waybill
• Commercial invoice and packing list
• Shipping bill
• Certificate of Origin (CoO)
• Letter of credit or bank guarantee
• Insurance certificate
• Product-specific certifications (e.g., FSSAI, APEDA, etc.)

Steps to start international trade from India

Venturing into international trade requires planning, compliance, and market understanding. Here’s a broad overview of some key steps involved in the process of starting an international trade business from India:

Step 1: Establish your business:

The first step is to have a legally registered business entity, such as a sole proprietorship, partnership, or private limited company.

Step 2: Obtain essential documentation and licenses:

Secure mandatory licenses and registrations required to trade internationally. You may also require additional documents and certifications based on your product category and destination country.

Step 3: Market research and product selection:

Identify potential overseas markets for your products. Analyze demand, competition, and pricing to devise a sound market entry strategy.

Step 4: Find buyers:

Sell globally on e-commerce platforms like Amazon, participate in international trade fairs, and leverage the networks of Export Promotion Councils to connect with potential buyers.

Step 5: Pricing and sampling:

Develop a competitive pricing strategy that accounts for production costs, freight, insurance, and other export-related expenses. Providing high-quality samples is often a key step in securing orders.

Step 6: Logistics and shipping:

Partner with a reliable freight forwarder or outsource fulfillment to services like Fulfillment by Amazon (FBA) to handle the transportation of your goods. Ensure proper packaging and labeling as per international standards.

Step 7: Documentation and customs clearance:

Prepare and submit all the required documents to the customs authorities for clearance.

Step 8: Realize export proceeds:

Ensure that the payment from the buyer is received within the stipulated time frame as per the guidelines of the Reserve Bank of India (RBI).

International trade policies and their examples

Here are some key international trade policies Indian exporters should know:

• Foreign Trade Policy (FTP) of India: Sets the framework for India’s export and import regulations, including incentives like duty drawbacks and EPCG schemes.
• Export Promotion Capital Goods (EPCG) Scheme: Allows exporters to import capital goods at zero customs duty, subject to fulfilling export obligations.
• Remission of Duties and Taxes on Exported Products (RoDTEP): Provides refunds on various taxes and duties not reimbursed earlier, improving competitiveness.
• Free Trade Agreements (FTAs): India has FTAs with countries like ASEAN, the UK, and South Korea, offering reduced tariffs and easier market access.
• World Trade Organization (WTO) Rules: Global trade norms that India follows, covering tariffs, subsidies, and dispute resolutions.
• Customs Rules and HS Code Regulations: Defines how products are classified and taxed internationally, impacting export documentation and compliance.
• Quality Standards Compliance: Adherence to international quality and safety standards (like CE, FDA, etc.) is critical for entry into certain markets.

Difference between international trade and foreign trade

While the terms international trade and foreign trade are often used interchangeably, they differ in scope, usage, and context. Here’s a table that outlines the key distinctions:⁶AspectInternational tradeForeign tradeDefinitionExchange of goods and services between two or more countries across the world.Exchange of goods and services between a specific country and one or more foreign nations.ScopeBroad, includes all global trade relationships and multilateral trade agreements.Narrower, focuses only on a specific country’s trade with foreign nations.Geographical focusGlobal (e.g., India trading with multiple continents and regions).Country-specific (e.g., India’s trade with the US or UAE).Usage in policy/reportsCommonly used in global economic reports and international trade bodies like WTO.Often used in national policy documents and customs reports (e.g., DGFT or CBIC reports).