The classical economists held that there were certain fundamental differences between interregional trade and international trade.
Accordingly, they propounded a separate theory of international trade which is known as the theory of comparative costs.
But modern economists like Bertil Ohlin and Haberler contest this view and opine that the differences between interregional and international trade are of degree rather than of kind.
Nevertheless, there are several reasons to believe the classical view that international trade is fundamentally different from interregional trade.
1. Factor immobility:
The classical economists advocated a separate theory of international trade on the ground that factors of production are freely mobile within each region as between places and occupations and immobile between countries entering into international trade.
Thus, labour and capital are regarded as immobile between countries while they are perfectly mobile within a country.
There is complete adjustment to wage differences and factor-price disparities within a country with quick and easy movement of labour and other factors from low return to high return sectors.
But no such movements are possible internationally. Price changes lead to movement of goods between countries rather than factors.
The reasons for international immobility of labour are differences in languages, customs, occupational skills, unwillingness to leave familiar surroundings, and family ties, the high travelling expenses to the foreign country, and restrictions imposed by the foreign country on labour immigration.
The international mobility of capital is restricted not by transport costs but by the difficulties of legal redress, political uncertainty, ignorance of the prospects of investment in a foreign country, imperfections of the banking system, instability of foreign currencies, mistrust of the foreigner, etc.
Thus widespread legal and other restrictions exist in the movement of labour and capital between countries. But such problems do not arise in the case of interregional trade.
2. Differences in Natural Resources:
Different countries are endowed with different types of natural resources. Hence they tend to specialize in the production of those commodities in which they arc richly endowed and trade them with others where such resources are scarce.
In Australia, land is in abundance but labour and capital are relatively scarce. On the contrary, capital is relatively abundant and cheap in England while land is scarce and dear there.
Thus, commodities requiring more capital, such as manufactures, can be produced in England; while such commodities as wool, mutton; wheat, etc. requiring more land can be produced in Australia.
Thus, both countries can trade each other’s commodities on the basis of comparative cost differences in the production of different commodities.
3. Geographical and climatic differences:
Every country cannot produce all commodities due to geographical and climatic conditions, except at possibly prohibitive costs.
For instance, Brazil has favourable climate and geographical conditions for the production of coffee; Bangladesh for jute; Cuba for beet sugar; etc.
So countries having climatic and geographical advantages specialize in the production of particular commodities and trade them with others.
4. Different markets:
International markets are separated by differences in language, usage, habit, taste, etc. Even the systems of weights and measures and pattern and styles in machinery and equipment differ from country to country.
For instance, British railway enginese and freight cars are basically different from those in France or in the United States.
Thus, goods which may be traded within regions may not be sold in other countries. That is why, in great many cases products to be sold in foreign countries are especially designed to confirm to the national characteristics of that country.
Moreover, a significant difference between interregional and international markets is with regard to the manufacture and sale of goods for regional and international markets.
A big firm may be producing and selling a number of products in different countries. But it may not be able to standardize its products and realize the economies of large scale production.
On the other hand, a firm which specializes in the production of only one type of product for the interregional markets may enjoy the economies of large scale production.
5. Different currencies:
The principle difference between interregional and international trade lies in the use of different currencies in foreign trade but the same currency in domestic trade.
Rupee is accepted throughout India from the South to the North and from the East to the West. But if we cross over to Nepal or Pakistan, we must convert our rupee into their rupee to buy goods and services there.
6. Change in currency value:
It is not the differences in currencies alone that are important in international trade, but changes in their relative values.
Even time a change occurs in the value of one currency in terms of another, a number of economic problems arise.
“When monetary units of different currencies are not subject to gold conversation, exchange rates may vary by much greater amounts than those under gold standard.
Calculation and execution of monetary exchange transactions incident to international trading constitute costs and risks of a kind that are not ordinarily involved in domestic trade.”
Further currencies of some countries like the American dollar, the British pound, the German mark and the Japanese yen, are more widely used in international transactions, while others are almost inconvertible.
Such tendencies tend to create more economic problems at the international plane. Moreover, different countries follow different monetary and foreign exchange policies which affect the supply of exports or the demand for in ports.
“It is this difference in policies rather than the existence of different national moneys which distinguishes foreign from domestic trade,” according to Kindleberger.”
7. Problem of balance of payments:
Another important point which distinguishes international trade from interregional trade is the problem of balance of payments.
The problem of balance of payments is perpetual in international trade while regions within a country have no such problem.
This is because there is greater mobility of capital within regions than between countries. Further, the policies which a country chooses to correct its disequilibrium in the balance of payments may give rise to a number of other problems.
If it adopts deflation or devaluation or restrictions on imports or the movement of currency, they create further problems. But such problems do not arise in the case of interregional trade.
8. Different political groups:
A significant distinction between interregional and international trade is that all regions within a country belong to one political unit while different countries have different political units.
Interregional trade is among people belonging to the same country even though they may differ on the basis of castes, creeds, religions, tastes or customs.
They have a sense of belonging to one nation and their loyalty to the region is secondary. The government is also interested more in the welfare of its nationals belonging to different regions.
But in international trade there is no cohesion among nations and every country trades with other countries in its own interests and often to the detriment of others. As remarked by Friedrich List, “Domestic trade is among us, international is between us and them.”
9. Different national policies:
Another difference between interregional and international trade arises from the fact that policies relating to commerce, trade, taxation, etc. are the same within a country.
But in international trade there are artificial barriers in the form of quotas, import duties, tarrifs exchange controls, etc. on the movement of goods and services from one country to another.
Sometimes, restrictions are more subtle. They take the form of elaborate custom procedures, packing requirements, etc.
Such restrictions are not found in interregional trade to impede the flow of goods between regions.
Under the circumstances, the internal economic policies relating to taxation, commerce, money, incomes, etc. would be different from what they would be under a policy of free trade.