It is often asked – what is the basis for international trade? The general answer to this question is that differences in endowments create the basis or need for international trade. Therefore, countries enter into international trade because of the following reasons:
(i) Exchange of Comparative Advantage:
Countries engage in international trade to take advantage of those things they cannot produce or those things they can produce, but at a higher cost. Therefore, as countries tend to specialise due to comparative costs, they exchange the goods in which they have comparative advantage for those of other countries in which they have the least comparative advantage.
(ii) Differences in Climate and Soil:
The different types of climate and soil account for much of foreign trade. This is because many commodities or crops are produced
under different climatic conditions. They are crops which a country may not be able to grow due to her peculiar climate. Nigeria for instance, produces palm produce, cotton, cocoa, etc., because of its tropical climate. But Denmark, because of its temperate climate, produces a variety of dairy products. Hence, Nigeria and Denmark must enter into international trade to obtain such goods that their climate could not permit them to grow.
(iii) Differences in Natural Resource – Endowments:
Nature does not distribute its resources evenly. Different countries have different mineral resources endowment. Such mineral deposits include coal, tin ore, oil, lead, gold, copper and bauxite. For example, Nigeria is known for crude oil production, while Ghana produces bauxite which is not found in Nigeria. Therefore, it pays Nigeria to trade with Ghana that produces bauxite. Similarly, it pays Ghana to trade with Nigeria to obtain crude oil which it does not have. Hence, countries enter into international trade in order to obtain certain minerals they do not have from those countries which produce them.
(iv) Differences in Capital Stock:
International trade enables countries with limited capital to borrow from the capital rich countries to enable them to import manufactured goods into their countries.
(v) Diplomatic Reasons:
Countries enter into international trade to foster diplomatic relations with other nations. Indeed, international trade promotes international friendship among countries.
(vi) Manpower Development:
Most countries lack skilled labour for the development of their economy. Through international trade, a country could buy the much needed skilled labour to develop her economy.
(vii) The Need to Develop:
International trade helps to speed up economic and social development through specialisation. Hence, countries enter into international trade to speed up the development of their economies.