External trade means trade with foreign countries. It implies buying and selling of goods beyond the national boundary of a country.
The theory of comparative cost or comparative advantages give rise to trade between two different countries.
Every country tries to produce only those products which it can produce at a cost which is less than the import prices.
The country will purchase all those goods from other countries which it cannot produce at less than the import prices.
Foreign trade is generally carried on a wholesale basis. The movement of goods takes place usually by sea wherever possible.
In the adjoining area, rail and road transport may be used. Air transport is used for goods of small size and high value.
The external trade or foreign trade depends on government policies of trading countries and usually requires a number of formalities to be completed.
There are often restrictions imposed on the free entry of goods through various duties and taxes.
Besides, the foreign exchange received by an exporter has to be converted into their own currency.
The importer has to get foreign exchange or permission to get the foreign exchange from the central bank of the nation, i.e Reserve Bank of India in our case.
Foreign trade helps in the development of closer inter-relationship between different countries.
Different alternative sources of supply of the same goods are opened to a country.
Every country can obtain the goods which it cannot produce profitably at home. It also provides a wide market for the sale of surplus production of a country.
Foreign Trade is of three types:
A) Import Trade: It refers to the purchase of goods from a foreign country.
A country imports those goods which are not produced in that country at all or in sufficient quantity to meet the requirements of the nation.
Furthermore, the country may produce goods but at a higher cost than the import prices.
Purchasing goods by an Indian trader from a trader of the U.S.A., Russia, etc. is an example of import trade.
B) Export trade: It refers to sell or send goods to firms located outside the country.
Selling goods by Indian firms to other firms located in the USA, Russia, Japan, etc. is export trade.
C) Entrepot Trade: When goods are imported from one country with an objective or intention of exporting the same goods to some other countries, is called Entrepot trade.
For example, importing goods from Germany or Japan by Indian firms to re-export the same to Nepal or Bhutan, which do not have seaports.