Difference between Domestic Trade and International Trade

This article will help you to learn about the difference between domestic trade and international trade.

Difference between Domestic Trade and International Trade

International trade refers to trade between two different countries (such as India and Bangladesh) or one country and the rest of the world (e.g., India and Great Britain, Germany, U.S.A., etc.). The former is called bilateral trade and the latter multilateral trade.

Domestic trade or internal trade is the trade which takes places between the different regions of the same country (e.g., the trade between Calcutta and Mumbai or Calcutta and Chennai, etc.). It is to be noted that there are some points of similarities between these two kinds of trade.

All trade, whether domestic or interna­tional, arises from specialisation. As one region of a country brings the goods from other regions to make up the deficiencies, one country tries to bring goods and services, in which it has deficiencies, from other countries.

Land, labour and the other resources used in production are not distrib­uted equally among the nations of the world. Minerals, for example, such as coal, iron and gold are found only in certain areas. Similarly, the climatic conditions essential for the growth of particular commodities (such as cane sugar, rice and tropical fruit) are found only in certain regions of the world.

Thus countries are dependent upon one another for supplying their defi­ciencies in foods, raw materials and other products. But, countries cannot buy the products they need from each other without selling certain things in exchange. Thus, they are dependent upon one another for markets. But there are some points of distinctions between these two kinds of trade; these call for a separate theory for international trade.

Trading between countries differ from domestic trade, i.e., trade within a country is different.

The following points may be noted:

1. Language:

Different countries have different languages. This factor can and often does act as a barrier to trade. Traders who sell abroad may have to employ language specialists and incur additional expenses through the necessity of having special forms, labels, instructions, etc., printed.

2. Differences Regarding Mobility of Labour and Capital:

In the case of domestic trade there is a fair amount of mobility of labour and capital, but the immobility of labour and, to a smaller extent, of capital is found in the case of international trade. Labour and capital are fairly mobile within the country, but they cannot freely move between two countries.

As Adam Smith commented, “Of all sorts of luggage, man is the most difficult to be transported”. The differences in language/religion, custom, etc., patriotism, family ties or simply inertia stand in the way of free movement of labour from one country to another. The laws of a country also impose restriction on the free mobility of labour and capital.

3. Differences in Natural and Economic Conditions:

The natural and economic conditions are, so far as international trade is concerned, not the same in all countries. Some countries have greater natural advantages in producing jute or tea, and some in making machines or electronic goods.

It leads to the international specialisation or division of labour. International trade is based on this international specialisation. But, the natural and economic conditions do not, so far as domestic trade is concerned, very much in the different parts of a country.

4. Differences in Banking Systems and Economic Policies:

Monetary, banking and currency systems as also economic policies of different coun­tries also differ. International trade is governed by these differences in domestic economic policies and regulations. But, such restrictions (except minor restrictions like entry tax, restrictive inter-state movement of essential goods such as rice or wheat, etc.) do not, as a rule, exist between the different regions of a country and so do not affect, in a large measure, domestic trade.

5. Currency:

Each country has a different currency, that is a different type of money which is acceptable only within its own frontier. In India, the currency is the rupee, in France the franc, while in the United States it is dollar. If an Indian importer buys goods from a French manufacturer then payment must be made in francs which have to be purchased in the foreign exchange market.

Such a procedure is both time-consuming and cost-raising than any payment made in the home country. Furthermore, foreign ex­change rates often vary and an adverse movement in the conversion rate may involve a trader in a loss.

6. Systems of Payment:

As far as payment is concerned there may be more delay and less certain in foreign trade than in case of domestic trade. An exporter has to obtain payment from a debtor who may live on the other side of the world and about whom very little is known.

The exporter will be reluctant to ship the goods without being reasonably certain of payment, while the importer will not wish to pay without some guarantee for receipt of the goods. In domestic trade, a manufacturer may often get cash on delivery or quick payment from a wholesaler.

7. Distance:

The risks involved in transporting goods increase with the distance and the frequency with which the goods are handled. Hence, there is greater chance of loss, damage or delay when sending goods to countries abroad.

8. Customs Duties and Import Quotas:

Certain goods may be subject to heavy duties or tariffs. This often makes it almost impossible for exports to compete in price with home products. Furthermore, exports may be limited by quotas imposed by importing countries.

Even if exporters consider they can compete (in spite of customs duties) they have to ensure that the correct duty is paid. Duties vary according to the way that goods are classified and strict penalties apply to false declara­tions. Hence, a correct understanding of the classifications list is absolutely essential.

Finally, exporters run the risk that duties and quotas may be changed suddenly so that their market in a particular country may be suddenly lost, either partly or fully.

9. Competition:

At home, a manufacturer may be protected from foreign competition by duties or quotas imposed by the government. Hence, com­petition may be restricted to other home manufacturers. However, in for­eign markets, the manufacturer may have to face competition from producers in that market as also from other foreign exporters.

10. Local Conditions:

Exporters have to consider the customs and habits of the countries to which they sell goods. For example, foreigners may like their goods in different dimensions and in different kinds of packages from those found suitable in the home market. Similarly, attention has to be given to various methods of trading adopted in foreign markets.

For example, at home manufacturers may leave the provision of spare parts and after-sales service to others, but if no such facilities are available abroad importers must themselves contact other firms to get such facilities. Thus, international trade involves much greater risks and difficulties than domestic trade.

Conclusion:

Owing to these differences between domestic and interna­tional trade, the economists have built-up a separate theory for international trade known as the principle of comparative cost (advantage). It must, however, be noted that the distinction between these two kinds of trade is not absolute but one of degrees. After all, as all kinds of trade arise from specialisation (regional or international).