Foreign trade is the exchange of goods and services between two or more countries.
Foreign trade is the purchase or sale of goods and services that are carried out outside the geographical borders of a country (abroad). That is, the parties interested in trading products are located in different countries or regions.
Foreign trade is generally subject to various regulations for both product control (health, safety, etc.), as well as procedures (bureaucratic procedures, records, etc.) and taxation (taxes, tariffs, etc.).
The main objective of foreign trade is to satisfy consumer demand by taking advantage of the comparative advantages that each country has. The concept that encompasses the foreign trade of all countries is that of international trade.
It is important to mention that the development of foreign trade occurs thanks to the existence of trade liberalization, in addition to the elimination of prohibitions and tariff barriers. In turn, customs and freight policy, as well as that of foreign trade taxes, must be rational and prudent. It should try to promote competition for the good or service abroad and allow the country to receive other different currencies. All this, so that it can import goods or services without any type of protectionist policy.
Foreign trade characteristics
Foreign trade has the following basic characteristics:
- By definition, it is a trade outside the country’s borders, which can trade with one or more nations.
- Countries that trade have open economies (they allow transactions with other countries) or at least have foreign trade agreements with a particular country.
- It is usually subject to special regulations (control, process, taxes, etc.)
- Countries interested in exchanging goods and services with others usually sign commercial agreements or conventions that seek to facilitate exchange processes. The schemes such as EPCG Scheme also help in importing any machinery that will be used in the production of any product or service that will be export to other countries, which will be free of import or custom duty.
- The entry or exit of products will generate a flow of foreign exchange. When the countries that trade have different currencies, the value of the currency relative to the local currency is reflected in the exchange rate.
- Exchange rate fluctuations can affect foreign trade flows between countries with different currencies.
- Usually, there is a public body in charge of controlling the entry and exit of goods from a country. This body is called Customs and it is in charge of controlling the entry and exit of goods through the border and the application of taxes (rates or tributes) that the law determines.
There are certain exemptions on the import duties levied on the import of products somehow related to the products that will be exported.
One such scheme is the Advance Authorisation Scheme (AAS) under which if you are the manufacturer of any export product and you require any input or raw material to be imported in its process of manufacturing then these goods will be duty-free import.