International Trade and Foreign Exchange
– By Anwarul Haque Qureshi
The importance of international trade in the economy of a country is too well known to need emphasis. A number of advantages flow from international trade. Many developing nations of the world owe their hopes of development on it. A common man, who is not keenly interested in these developments, is still reaping its fruits when he is using many items of common use. A large number of these items are either imported or some components of them are imported. Even if an item is indigenously produced, it may be found that it is made on a machine, which is Imported.
FOREIGN TRADE & FOREIGN EXCHANGE
International trade refers to trade between the residents of two different countries. Each country functions as a sovereign State with its own set of regulations and currency. The difference in the nationality of the exporter and the importer presents certain peculiar problems in the conduct of international trade and settlement of the transactions arising there from. Important among such problems are:
- Different countries have different monetary units;
- Restrictions imposed by countries on import and export of goods;
- Restrictions imposed by nations on payments from and into their countries; and
- Differences in legal practices in different countries.
The existence of national monetary units poses a problem in the settlement of international transactions. The exporter would like to get the payment in the currency of his own country. For instance, if Amerexport of New York exports machinery to X Co. Dhaka, the former would like to get the payment in US dollars. Payment in Bangladeshi
Taka will not serve their purpose because Bangaldeshi taka cannot be used as currency in the USA. On the other hand, the importers in Bangladesh have their savings and borrowings in Bangladesh in taka. Thus the exporter requires payment in the currency of the exporter’s country whereas the importer can pay only in the currency of the importer’s country. A need, therefore, arises for conversion of the currency of the importer’s country into that of the exporter’s country.
Foreign Exchange is the mechanism by which the currency of one country gets converted into the currency of another country. The conversion of currencies is done by banks who deal in foreign exchange. These banks maintain stocks of foreign currencies in the form of balances with banks abroad. For instance, Bangladesh Bank may maintain an account with Bank of America, New York, in which dollar balances are held. In the earlier example, if X Co. pay the equivalent Tk. To Bangladesh Bank, it would arrange to pay Amerexport at New York in dollars from the dollar balances held by it with Bank of America.
The rate at which one currency is converted into another currency is the rate of exchange between the currencies concerned. In our illustration, if Bangladesh Bank exchanged US dollars for Bangladeshi Taka at Tk. 80 a dollar, the exchange rate between taka and dollar can be expressed as USD1= Tk.80.20/-
The rate of exchange for a currency is known from the quotation in the foreign exchange market. The banks operating at a financial center, and dealing in foreign exchange, constitute the foreign exchange market. As in any commodity or stock market, the rates in the foreign exchange market are determined by the interaction of the forces of demand for and supply of the commodity dealt in, viz, foreign exchange. Since the demand and supply are affected by a number of factors, both fundamental and transitory, the rates keep on changing frequently, and violently too.
FOREIGN EXCHANGE STOCK:
In another sense, the term foreign exchange is used to refer to the very balance held abroad. Used in this sense, the term foreign exchange refers to stock of foreign currencies and other foreign assets. The Foreign Exchange Regulation Act, defines:
“Foreign Exchange means foreign currency and includes-
- All deposits, credits and balances payable in any foreign currency and any drafts, travelers cheques, letters of credit and bills of exchange, expressed or drawn in Bangladeshi currency but payable in any foreign currency; and
- Any instrument payable, at the option of the drawee or holder thereof or any other party thereto, either in Bangladeshi currency or in foreign currency or party in one and party in the other.”
Thus, foreign exchange includes foreign currency balances kept abroad and instruments payable in foreign currency.
BALANCE OF PAYMENTS:
Balance of Payments is a record of the value of all transactions between residents of a country with outsiders. It constitutes the result of demand for and supply of foreign exchange for various purposes. Since the rate of exchange between currencies is determined factor in determining the exchange rates. A change in the balance of payments of a country will affect the exchange rate of its currency. It is useful to make a distinction between balance of trade and balance of payments.
BALANCE OF TRADE:
Balance of trade refers to the net difference between the value of export and import of commodities from/into a country. The movement of goods or commodities between countries is known as the ‘visible trade’. Therefore, balance of trade refers to the net balance of the visible trade of the country. When a country exports commodities it gains foreign exchange. When it imports it has to pay in foreign exchange, or it loses foreign exchange. Therefore, it is traditional to indicate exports as plus(+) and imports as minus (-) in the balance of trade.
When the exports of goods exceed imports there is a net gain of foreign exchange to the country and the balance of trade is said to be ‘favourable’ or ‘surplus’ or ‘positive’. If the imports of goods exceed exports, it results in net payment by the country of foreign exchange to other countries from its reserves. The balance of trade in such a case is said to be ‘unfavourable’ or ‘deficit’ or ‘negative’. Since imports and exports of a country seldom equal, the balance of trade will not ordinarily balance. During any given period, the balance of trade will show either a favourable or an unfavourable balance.
BALANCE OF PAYMENTS:
Foreign trade, in its broad sense, includes not only visible trade involving import and export of commodities, but invisible items also. These ‘invisible’ items include shipping, banking, tourist traffic, insurance, gifts, interest on investments etc. The shipping, banking and insurance companies of the country render service to other countries for which they receive remuneration. Entrepreneurs setting up business enterprises abroad and supplying services earn profits and salaries. Tourism is another source of foreign exchange when tourists from abroad spend money in the country. Similarly, when all these facilities and services are enjoyed by the resident of the county, it entails outflow of foreign exchange from the country.
The balance arrives at taking into account both the visible and invisible items in foreign trade is known as the ‘balance of payments’. In other words, balance of payments refers to all payments that take place into and from the country. Thus, balance of payments is more comprehensive than balance of trade. Balance of payments includes balance of trade and other invisible items of foreign trade.
As in the case of balance of trade, the total amounts payable and receivable do not equal and the balance of payments for a given period ends up in favourable (surplus) or unfavourable (deficit) balance.
It may be noted that a country with a deficit in balance of trade need not necessarily have deficit in balance of payments or vice versa. The deficit in balance of trade may be more than offset by surplus in the invisible trade, resulting in surplus of balance of payments.