Foreign trade: imports, exports and entrepôt trade: WASSCE Commerce

The rice in your pot may have come from Asia, the fuel in the bus from the Middle East and the phone in your pocket from China, while Sierra Leone's iron ore and cocoa travel the other way. Trade across borders brings goods no country could make alone, but it also brings extra difficulties. This lesson explains foreign trade and how traders overcome its problems.

Learning objectives

By the end of this lesson you should be able to:

define foreign trade and describe import, export and entrepôt trade
distinguish foreign trade from home trade
explain the reasons for and advantages of foreign trade
explain the difficulties of foreign trade and how they are overcome

What is foreign trade?

Definition

Foreign (international) trade is the buying and selling of goods and services between countries.

Sierra Leone importing goods from Country A and exporting to Country B; in entrepôt trade, goods from Country D pass through Sierra Leone and are re-exported to Country C

Figure 1. Import, export and entrepôt trade. WASSCE Tutor diagram.

Type	Meaning	Examples for Sierra Leone
Import trade	Buying goods and services from other countries	Rice, fuel, vehicles, machinery, medicines, cement
Export trade	Selling goods and services to other countries	Iron ore, rutile, bauxite, diamonds, gold, cocoa, coffee, cashew
Entrepôt (re-export) trade	Importing goods and re-exporting them to other countries, often with little processing	Goods passing through a West African port to a landlocked neighbour

Visible trade is trade in goods; invisible trade is trade in services (shipping, insurance, banking, tourism).

Home trade and foreign trade

Home trade	Foreign trade
Within one country	Between countries
One currency	Different currencies must be exchanged
Same language, laws and customs	Different languages, laws and customs
Shorter distances; lower transport costs	Longer distances; higher transport and insurance costs
Few documents	Many documents (bill of lading, certificate of origin, customs forms)
No customs duties at borders	Import and export duties, quotas, licences
Less risk	Greater risks: delays, damage at sea, non-payment
Payment is simple	Payment needs foreign exchange, letters of credit or bills of exchange

Why countries trade

Unequal distribution of natural resources: Sierra Leone has iron ore and rutile; other countries have oil.
Differences in climate: tropical crops (cocoa, coffee) and temperate crops (wheat, apples).
Differences in skills, capital and technology: some countries make machinery and vehicles more cheaply.
Specialisation: countries gain by producing what they do best and trading for the rest.
Surplus production that cannot all be consumed at home.

Advantages of foreign trade

Countries obtain goods they cannot produce (or produce only at great cost).
Wider markets for producers, allowing large-scale production.
Earns foreign exchange to pay for imports.
Government revenue from import and export duties.
Higher living standards: variety of goods for consumers.
Spreads technology and ideas.
Creates jobs in ports, transport, banking, insurance and processing.
Promotes international cooperation (for example through ECOWAS).

Difficulties of foreign trade and their solutions

Difficulty	How it is overcome
Different currencies	Foreign exchange from banks; payment through banks
Different languages	Interpreters, translators, a common business language (English, French)
Distance and long delays	Air and sea transport, containerisation, courier services
Risk of loss or damage	Marine and transit insurance
Risk of non-payment	Letters of credit, bills of exchange, del credere agents
Many documents and procedures	Clearing and forwarding agents
Customs duties and trade restrictions	Customs agents; trade agreements (ECOWAS)
Different laws and customs	Legal advice; agents and chambers of commerce
Lack of information about foreign markets	Chambers of commerce, embassies, trade fairs, export promotion agencies

In Sierra Leone

Sierra Leone's exports are dominated by minerals (iron ore, rutile, bauxite, diamonds and gold), with cocoa, coffee and cashew as important farm exports. Its imports are mainly food (especially rice), fuel, machinery, vehicles and manufactured goods. The Sierra Leone Investment and Export Promotion Agency (SLIEPA) helps local firms find export markets.

Common mistake

Entrepôt trade is not the same as ordinary exporting. In entrepôt trade the goods were imported first and are then re-exported, often with little or no processing.

Key points

Foreign trade is trade between countries: import, export and entrepôt trade.
It differs from home trade in currency, language, distance, documents, duties and risk.
Countries trade because of differences in resources, climate, skills and technology.
Its difficulties are overcome by banks, insurance, agents, transport, documents and trade agreements.

WASSCE examination focus

WAEC tests this

Expect to distinguish home trade from foreign trade, to state the advantages of foreign trade, and to explain the problems of foreign trade and how they are solved. A two-column table for differences, and "difficulty → solution" pairs, are the clearest way to answer.

Quick check

What is entrepôt trade?
Give three differences between home trade and foreign trade.
Give two of Sierra Leone's main exports and two main imports.
How do traders overcome the risk of non-payment in foreign trade?

Answers: 1. Importing goods and re-exporting them to another country, often with little processing. 2. Any three: currency, language, distance, documents, customs duties, risk, laws, payment methods. 3. Exports: any two of iron ore, rutile, bauxite, diamonds, gold, cocoa, coffee, cashew. Imports: any two of rice, fuel, machinery, vehicles, manufactured goods. 4. By using letters of credit, bills of exchange or del credere agents.

Foreign trade: imports, exports and entrepôt trade