Foreign trade

Also called: International trade · Topic: Globalisation and MNCs · NCERT: Class 10, Ch 4 "Globalisation and the Indian Economy"

Meaning

Foreign trade (also called international trade) is the buying and selling of goods and services across country borders.

• Exports are goods and services a country sells abroad.
• Imports are goods and services a country buys from abroad.
• Trade balance = Exports − Imports. When imports are bigger than exports, the gap is a trade deficit.

Foreign trade matters for two reasons:

• It lets producers sell beyond their home market.
• It gives buyers more choice than home production alone can give.

When trade is open, markets in different countries become joined. NCERT calls this integration of markets.

Explanation

How foreign trade works: who gains

• Producers gain a bigger market
• They can sell outside their home country.
• A bigger market means more sales.

• They also have to compete with producers abroad.

• Buyers gain choice and lower prices

• They can pick goods that are not made at home.

• Imports compete with home-made goods, and this keeps prices low.

• Not everyone gains equally. NCERT's example is Chinese toys in India:

• Chinese makers saw that toys sold at high prices in India. They sent cheap plastic toys with new designs.
• Within a year, 70-80% of Indian toy shops had replaced Indian toys with Chinese ones.
• Winners: Indian buyers got more choice at lower prices. Chinese toy makers got a bigger market.
• Losers: Indian toy makers saw their sales fall and made losses.

Integration of markets: the three results

Integration of markets means that markets in different countries become joined through open trade, so goods move easily between them. Open trade has three results:

• More choice of goods in every market.
• Prices of similar goods in the two markets tend to become equal.
• Cheap goods move to the market where prices are high.

• This continues until the price gap closes.

• Producers thousands of miles apart compete closely.

Example: India–China steel. Suppose China imports Indian steel:

• Chinese steel makers face competition.
• Indian steel makers gain a market.
• Chinese industries that use steel, such as cars and construction, get cheaper inputs.
• Steel prices in the two countries move closer together.

Trade barriers: what slows trade down

A trade barrier is any limit the government puts on foreign trade. It lets the government decide what comes in and how much.

• Tariff (import tax): a tax on imported goods.
• Quota: a fixed limit on the quantity that can come in.
• Quantitative restriction (QR): a cap on the amount, or a rule that an importer needs a licence.

Worked example: a tariff works like a wall

• An Indian toy sells for ₹500. A similar Chinese toy costs ₹300 when it lands in India, before any duty.
• With a 20% duty: 300 × 1.20 = ₹360.
• ₹360 is less than ₹500, so imports flood in.

• Indian sellers must cut their prices towards ₹360, and the two prices move closer.

• With a 70% duty: 300 × 1.70 = ₹510.

• ₹510 is more than ₹500, so the import is no longer cheaper.

• The flow of imports stops, and the two markets separate again.

• Rule: the price gap that trade can close = the price difference − transport and duty costs.

Types: bilateral and multilateral trade

• Bilateral trade: trade, and trade agreements, between two countries. Example: a free trade agreement (FTA) between India and one partner.
• Multilateral trade: trade and rules among many countries at once, under GATT (General Agreement on Tariffs and Trade, 1948) and its successor, the WTO (World Trade Organization, 1995).
• WTO agreements try to make both kinds of trade easier by cutting tariffs and non-tariff barriers.
• Most-Favoured-Nation (MFN) principle: a WTO member must give every other WTO member the same tariff treatment. Bilateral FTAs are an allowed exception.

In India

1950s–1980s: protection

• After Independence, India put barriers on both foreign trade and foreign investment.
• The aim was import substitution, which means making at home the goods that India used to import.
• The idea was to protect young ("infant") Indian industries from foreign competition until they grew strong.
• As a result, Indian markets were only weakly integrated with world markets.

1991: opening up (liberalisation)

• India faced a balance-of-payments crisis in 1991. Balance of payments is the record of all money flowing into and out of a country.
• India then removed many barriers to trade and investment. This is called liberalisation, which means removing government barriers and restrictions.
• The belief was that competition would push Indian producers to improve quality.
• Peak import tariff: it was over 300%. The July 1991 budget cut it to 150%. It then fell to 110% in 1992-93, 85% in 1993-94 and 65% in 1994-95 [8].
• The average (import-weighted) tariff fell from about 87% to 27%. The share of goods under QRs fell from 87% in 1987 to 45% in 1994 [9].
• By March 2001, India had removed all the QRs it had kept earlier on balance-of-payments grounds [10].

Present: how big India's trade is

• In 2024-25, merchandise (goods) exports were US$ 437.42 billion and merchandise imports were US$ 720.24 billion [5].
• The merchandise trade deficit was US$ 282.83 billion in 2024-25, up from US$ 241.14 billion in 2023-24 [5].
• Total exports of goods and services were estimated at US$ 860.09 billion in 2025-26, compared with US$ 825.26 billion in 2024-25. This is a rise of 4.22% [6].
• In 2022, India rose to 7th place among the world's services traders, with 32% growth [7].

Policy has reversed NCERT's toy story

• Quality Control Order (QCO) on toys
• It was issued on 25 February 2020.
• It made BIS certification (a quality mark from the Bureau of Indian Standards) compulsory from 1 January 2021.
• It applies to Indian makers and to foreign makers who export toys to India [3].

• Handicraft and GI (Geographical Indication) toys made by registered artisans are exempt [4].

• Basic Customs Duty (BCD) on toys (HS Code 9503)

• It was raised from 20% to 60% in February 2020.

• It was raised again to 70% in February 2023 [3].

• Results

• Toy imports fell 52%, from US$ 332.55 million in 2014-15 to US$ 158.7 million in 2022-23 [2].
• Toy exports rose 239%, from US$ 96.17 million in 2014-15 to US$ 325.72 million in 2022-23 [2].
• On these figures, India was a net toy exporter in 2022-23: its toy exports were about double its toy imports [2]. Check the latest year before quoting this.

Don't confuse with

• Foreign investment: here capital moves into assets such as land, buildings and machines, and it is done mainly by MNCs (multinational corporations, which own or control production in more than one country). Foreign trade moves goods and services and integrates markets. Foreign investment integrates production.
• Intra-firm trade: this is foreign trade between units of the same company in different countries. Example: Ford India ships components to Ford factories abroad. It shows how foreign investment can create foreign trade.
• Globalisation of production: NCERT uses this phrase for MNC investment. It names the outcome of foreign trade as integration of markets.
• Multilateral vs bilateral: multilateral means many countries under common rules (GATT, WTO). Bilateral means only two countries, for example an FTA.

Prelims Hooks

• NCERT's outcome of foreign trade is integration of markets. One result is that prices of similar goods in two markets tend to become equal.
• Tariff = import tax. Quota = fixed limit on quantity. QR = a cap on amount, or a licence requirement. All three are trade barriers.
• GATT (1948) → WTO (1995). Under the MFN rule, a member gives all WTO members the same tariff treatment. Bilateral FTAs are an allowed exception.
• The July 1991 budget cut the peak import tariff from over 300% to 150% [8]. All balance-of-payments QRs were removed by March 2001 [10].
• Toys: the QCO was issued on 25 Feb 2020 and made BIS certification compulsory from 1 Jan 2021 (handicraft and GI toys are exempt) [3][4]. BCD on HS 9503 went 20% → 60% (Feb 2020) → 70% (Feb 2023) [3].
• India's merchandise trade deficit was US$ 282.83 billion in 2024-25 [5]. Toy trade from 2014-15 to 2022-23: imports −52%, exports +239% [2].

Mains Points

• Who gains and who loses from market integration
• Consumers and efficient firms gain choice and markets, as the Chinese toys case shows.
• Small producers who cannot compete lose sales.

• Good policy should help the losers adjust, for example through cluster support and skilling. It should not block all trade.

• Protection vs openness

• Protection from the 1950s to the 1980s built an industrial base, but it made firms inefficient.
• The 1991 cuts in tariffs and QRs forced firms to compete [8][9].
• The toys QCO and higher duties mark a return to targeted protection [2][3].

• The open questions are:

  • Is this real quality control, or protectionism in disguise?
  • Does it fit India's WTO commitments?
  • How much more will consumers pay?

• Trade policy, investment policy and the route India takes

• MNCs control a large share of world trade through intra-firm flows. So FDI (foreign direct investment) policy is also trade policy. PLI (Production Linked Incentive) schemes and "China+1" strategies try to bring in production and exports together.
• WTO talks have stalled, so countries are turning to bilateral and regional FTAs.
• For India, an FTA gives faster access to foreign markets. The costs are a move away from equal MFN treatment and the risk of more imports, which matters when the merchandise trade deficit was already US$ 282.83 billion in 2024-25 [5].

Related concepts

• Integration of markets
• Bilateral trade

Read more

• Foreign trade and the integration of markets