Hseb Notes - Economics XI - Foreign Trade

Foreign Trade

Meaning

The transaction of goods and services between the people of different countries is called foreign trade. It is also called international trade. According to G.L. Luckeet, “The purchase of goods and services by the citizens of one country from the citizens of another country is called international trade.”

Importance of foreign trade

Foreign trade plays an important role in economic development of a country because all countries cannot produce all goods efficiently. The role of foreign trade in economic development are as follows:

1. Benefit of technological progress

There should be foreign trade in order to take the benefit of specialization. The specialization depends on availability of raw materials, geographical situation and availability of factors of production. The specialization leads to large scale production.

2. Availability of raw materials

All countries don’t have all kinds of raw materials. The raw materials can be imported from other countries through foreign trade.

3. Expansion of market

The foreign trade integrates a country with other countries. Therefore, it widens the market for goods which is produced in a country.

4. Increase in employment opportunities

The development of foreign trade leads to the development of export oriented industries in the country. This increases employment opportunities.

5. Increase in fair competition

The foreign trade destroys monopoly and it increases competition. The competition reduces the cost of production and increases the quality of the products. Thus, the people can get high quality goods at lower prices.

Growth and trends of foreign trade of Nepal

            Exports and Imports are the two components of foreign trade. The difference between the value of export and value of import is called trade balance. The foreign trade of Nepal is increasing over the years. The trend shows that there is increasing in the value of exports, imports as well as total volume of trade. The following table shows the growth and trends of foreign trade of Nepal.

Year	Export	Import	Trade Balance (Rs. In million)
2004	53910.7	136277.1	-82366.4
2005	58705.7	149473.6	-90767.9
2006	60234.1	173780.3	-113546.2

This table shows that the total export and import is increasing over the years but it also shows that there is continuously large amount of trade deficit in Nepalese foreign trade.

Composition of foreign trade of Nepal

            The composition of foreign trade means the items of export and import between countries. Nepal’s major import items are finished goods, machinery, equipments, chemicals, mineral fuels, crude materials, drugs, etc. Similarly, Nepal’s major export items are woolen carpet, ready made garments, handicrafts, gold and silver goods, paper products, jute products, etc.

Direction of foreign trade of Nepal

            Nepal is a landlocked and least developed country. In the past, Nepal’s foreign trade was directed toward India. At that time, about 95% of the total trade was with India and a small percentage of trade was with Tibet. The trade with overseas countries was almost nill. But at present Nepal’s foreign trade is directed towards a wide range of countries. But India is still a major trading partner of Nepal. The following table shows the direction of foreign trade of Nepal:

Direction	Export (2061/062)	Import (2061/062)
India	67.4 %	63.6 %
Rest of the world	32.6 %	36.4 %

Problems of foreign trade of Nepal

            There are various problems of foreign trade of Nepal which are as follows:

1. Land-locked position

Nepal is a land-locked country. It is surrounded by India from 3 sides and by China from 1 side. The nearest point to reach sea from Nepal 2900 Km. It is the major obstacle to take independent trade policy. Thus, it is difficult to freely trade with overseas countries.

2. Concentrated on limited goods and countries

Nepal’s foreign trade is concentrated on few goods and few countries. Nepal’s major export items are woolen carpet and ready made garments. They together contribute more than 80 % of Nepal’s export.

3. Low production

Due to slow development of industries, production level is very low in Nepal. Similarly, the agricultural production is also declining due to traditional method of farming. Thus, the export of Nepal is declining and import is increasing. As a result, Nepal is facing the problem of trade deficit.

4. Lack of Capital

Sufficient capital investment is essential to develop foreign trade of the country. Well developed capital market is necessary to provide sufficient amount of credit for the export oriented industries but the capital market of Nepal is still unable to supply sufficient amount of credit.

5. Defective Government Policy

The Government Policy regarding foreign trade is defective. The Government hasn’t been able to provide adequate export incentives.

6. Low quality goods

The goods produced in Nepal are of inferior quality. Therefore, these goods cannot complete in international market.

7. Lack of studies and research

There is lack of studies and research regarding foreign trade of Nepal. But research is necessary for the exploration and expansion of market in foreign countries.