International Trade-II (Notes)
Category : 11th Class
Facts that Matter
- There is a lot of difference in selling goods locally and exporting them.
- There are many formalities like export and import license, insurance, shipment bills, insurance etc. which need to be fulfilled.
- Government also gives some incentives for export promotion like exemptions of taxes or duties, carrying out their import-export transactions in a less cumbersome environment.
- There are many institutions at international level like IMF, World Bank, WTO etc. for the development of trade amongst nations.
Objectives of Export Trade
- To sell surplus goods
- To make better use of resources
- To earn foreign exchange
- To increase national income to generate employment
- To increase government revenue
- To create international cooperation.
Procedure of Export Trade
The various steps involved in exporting goods are as follows:
- Receipt of enquiry and sending quotations: It is the first step in export wherein the perspective buyer sends an enquiry for the product and exporter sends reply in the form of a quotation.
- Receipt of order or indent: If the perspective buyer likes the quotations, he Sends indent which contains description of the goods to be ordered, prices to be paid, terms of delivery, packaging and marking details etc.
- Assessing importers credit-worthiness and securing a guarantee for payments: Many exporters demand a letter of credit from importer to minimize the risk of bad debts. A letter of credit is a guarantee issued by importer's bank that it will honour the payment upto the amount mentioned in letter of credit.
- Obtaining Exports License: A bank has to undergo following procedures to obtain export license.
Ø Exporter needs to open an account in any bank authorised by Reserve Bank of India and get an account number.
Ø Then he needs to obtain Import Export Code (IEC) number from the Directorate General Foreign Trade (DGFT) or Regional Export Import Authority of India.
Ø Then he needs to register with Appropriate Export Promotion council.
Ø Then he needs to register himself with Export Credit and Guarantee Corporation in order to protect himself against risks of non-payments.
- Obtaining pre-shipment Finance: As soon as order is confirmed and letter of credit is received, the exporter approaches the bank to receive pre-shipment finance which he needs to buy raw materials and other inputs to produce goods to be exported.
- Excise Clearance: Exporter needs to apply to the concerned officer who is Excise Commissioner in the region for a clearance. Many commodities are exempted from excise duty.
- Obtaining certificate of Origin: The Certificate of Origin acts as a proof that the goods are actually manufactured in the country from where they are being exported.
- Reservation of Shipping Space: After this the exporting company applies to the shipping company for provision of shipping space. On acceptance of this request, the shipping company issues a shipping order which is an instruction to the captain of the ship that the specified goods after their clearance at a designated port are to be received on board.
- Packing and Forwarding: Thereafter goods are properly packed and marked with necessary details like name and address of the importer, gross and net weight, port of shipment, country of origin etc. Then exporter makes necessary arrangements for transportation of goods to the port.
- Insurance of Goods: At this stage, he also needs to insure goods against the risks of loss or damage of the goods due to perils of the sea during the voyage.
- Customs Clearance: The goods need to get a clearance from customs before they are loaded on the ship.
- Obtaining Mate's Receipt: A mate receipt is a receipt issued by the commanding officer of the Ship when the cargo is loaded on the board. It contains information about the name of the vessel, the berth, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board, the ship etc.
- Payment of Freight and issuance of Bill of Lading: After receipt of the freight, the shipping company issues a bill of lading which serves as an evidence that the shipping company has accepted the goods for carrying to the designated destination.
- Preparation of Invoice: The invoice states the quantity of goods sent and the amount to be paid by the importer.
- Securing Payment: The importer needs many documents to claim the title of the goods on their arrival at his country and getting them customs cleared.
Procedure of Import Trade
- Trade Enquiry: The first thing that the important firm has to do is to gather information about the countries and firms which export the given product.
- Procurement of Import License: Some goods which can be imported freely, while others need licensing for the import of goods. If goods in question are subject to import license, then importer needs to obtain import license.
- Obtaining Foreign Exchange: Payment in foreign currency involves exchange of Indian currency into foreign currency. For obtaining such a sanction, the importer has to make an application to a bank authorized by RBI to issue foreign exchange
- Placing Indent: After obtaining the import license, the importer places an import order or indent with the exporter.
- Obtaining Letter of Credit: The payment terms agreed between the importer and the overseas supplier are on the basis of Letter of Credit.
- Arranging for Finance: The importer should make arrangements in advance to pay to the exporter on arrival of goods at the port.
- Receipt of Shipment Advices: After loading the goods on the vessel, the overseas supplier dispatches the shipment advice to the importer. A shipment advice includes information about the shipment of goods.
- Retirement of Import Documents: The overseas supplier prepares a set of necessary documents as per the terms of contract and letter of credit and hand it over to his or her banker for their onward transmission and negotiation.
- Arrival of Goods: The person in charge of the ship or airway informs the officer in charge at the dock or the airport about the arrival of goods in the importing country.
- Customs Clearance and Release of Goods: All the goods imported into India have to pass through customs clearance.
Documents of Involved in International Trade
1. Mate's Receipt
(a) It is issued by the commanding officer of the ship to the exporter after the cargo is loaded on the ship.
(b) It contains details like name of the vessel, berth, date of shipment, description of packages, marks and numbers etc.
(c) It is very important receipt as shipping company issues the bill of lading only after getting this receipt.
2. Shipping Bill:
(a) it is the main document on the basis of which customs office grants permission for the export.
(b) It contains details regarding goods to be exported, exporter's name and address, etc.
3. Indent: An indent is an order placed abroad for importing good. An importer places an indent either on the foreign manufacturer or on the export agents. An indent should clearly mention the following information.
(a) Quantity of goods to be imported;
(b) Price and quality of the goods;
(c) Method of payment;
(d) Date of delivery;
(e) Method of packing, etc.
4. Letter of Credit: It is a document authorizing a bank to pay the bearer a specified sum of money. Through this document, the importer establishes a credit in favor of the exporter at a bank. The moment the exporter receives the letter of credit; he presents a sight documentary bill to the baker who pays him immediately the amount of the bill.
5. Shipping Order: issued by the Shipping (Conference) Line which intimates the exporter about the reservation of space of shipment of cargo through the specific vessel from a specified port and on a specified date.
World Trade Organization (WTO)
Probably the only issue in economics where economists have an unanimous approach that free trade will bring about greater specialization and through comparative advantage will increase productivity and the rate of economic growth. For a long time, an effort is being made to bring all countries under preview of multilateral trade agreements.
Setting up of GATT
GATT (General Agreements on Trade and Tariff) was established in 1947 on the recommendations ofBretton Woods Conference in 1944. It was expected to bring all countries together on multi-lateral trade agreements. But it proved to be biased in favour of developed countries. GATT was succeeded by WTO in 1995.
Establishment of WTO
WTO came into functioning from 1 January, 1995. The Uruguay round recommended the establishment of GATT. The intention behind setting up of WTO was to expand the scope of the Organization by including services, investment and Intellectual Property Rights.
Objectives of WTO
- Improving living standards of people, ensuring full employment of resources, increase in world trade and production, optimizing use of economic resources.
- Ensuring equitable division of the benefits of international trade
- Optimising the resources of world resources so as to attain sustainable development.
WTO and Developing Countries
WTO has served developing countries in many ways:
- It helped in introducing trade reforms.
- It provided a mechanism for settling disputes amongst nations.
- It made trade reforms more reliable.
- It brought about transparency in trade regimes.
- However, some economists also believe that WTO has done more harm than good.
- It increased the exploitation of natural resources.
- It accepted intellectual property regimes.
- It spread monoculture through its export policies.
- It increased pollution through increased industrialization.
Major WTO agreements are as follows:
- GATT: General Agreements on Trade and Tariff which preceded WTO is very much a part of WTO agreements.
- Agreements on Textile and Clothing (ATC): Under the ATC, the developed countries agreed to remove quota restrictions in a phased manner during a period of 10 years starting from 1995. It is considered as a landmark achievement of WTO which made trade in clothing and textile as quota free.
- Agreement on Agriculture (AoA): It is a significant step in an orderly and fair trade in agricultural products. The developed countries have agreed to lower down the customs duties on their imports and subsidies to the exports of agricultural products. The developing countries have been exempted from making similar reciprocal offers.
- General Agreement on Trade in Services (GATS): Due to GATS the basic rules which govern trade in goods have become applicable to trade in services.
- Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS): The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO members.
- It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994. The TRIPS agreement introduced intellectual property law into the international trading system for the first time and remains the most comprehensive international agreement on Intellectual Property to date. In 2001, developing countries, concerned that developed countries were insisting on an overly narrow reading of TRIPS, initiated a round of talks that resulted in the Doha Declaration. The Doha Declaration is a WTO statement that clarifies the scope of TRIPS, stating for example that TRIPS can and should be interpreted in light of the goal "to promote access to medicines for all."
Words that Matter
- IEC Number: An 'IEC number5 refers to the 'Importer Exporter Code5 number. It is a 10-digit number granted by the Directorate General for Foreign Trade (DGFT) to an import/export firm depending upon the firm's credibility.
- Advance License Scheme: It is the scheme under which an exporter is allowed duty free supply of domestic as well as imported inputs required for the manufacture of exports goods.
- Airway Bill: When goods are sent by air, shipping bill is named as Airway Bill.
- Bill of Lading (B/L): A document that establishes the terms and conditions of a contract between a shipper and a shipping company under which freight is to be moved between specified points for a specified charge. The B/L is negotiable or non-negotiable forms.
- Bill of Entry: It is a form supplied by the customs office and filled by the importer once the goods are received. Bill of Entry is submitted at the Customs Office with information such as the name and address of the importer, name of the ship in which the goods were transported, number of packages, marks on the package, description of imported goods, quantity and value of the imported goods, name and address of the exporter, port of destination and customs duty payable.
- Bill of Exchange: It is an order to the importer to pay a certain amount of money to, or to the order of, a certain person or to the bearer of the instrument. It may be sight draft or usance draft.
- Certificate of Origin: Documents that may be asked for by the authorities of the importing country, as evidence of the country of manufacture of the goods.
- Clean Bill of Lading: A receipt for goods issued by a carrier that indicates that the goods were received in apparently good order and without damage.
- Clearing and Forwarding Agent: It means any person who is engaged in providing any service, either directly or indirectly, concerned with the clearing and forwarding operations in any manner to any other person and includes a consignment agent.
- Comparative Advantage: A comparative advantage exists when a nation or economic region is able to produce a product at a lower opportunity cost compared to another nation or region.
- Cost and Freight(C and F): A pricing term that indicates that the cost of the goods and freight charges are included in the quoted price.
- DGFT: Directorate General Foreign Trade.
- Duty Drawback Scheme: Goods meant for exports are not consumed domestically, these are not subjected to payment of various excise and customs duties. Therefore, excise duties paid on such goods are refunded on production of proof of export of these goods. It is called duty drawback.
- Export License: A general export license covers the exportation of goods not restricted under the terms of a validated export license. No formal application or written authorization is needed to ship exports under a general export license.
- EPZ: Export Processing Zones. These are industrial estates which firms enclaves from the domestic tariff area. They aim at providing an internationally competitive duty free environment for export production at low cost. Recently these have been converted into special economic zones.
- EOU: 100% export oriented units. This scheme was started in 1981. It is complementary to the scheme of EPZ.
- Excise Clearance: Excise duty is the amount payable on raw materials used in the manufacture of goods. Exporters are required to pay excise duty and get excise clearance.
- Free On Board (FOB): It indicates that the supplier pays the shipping costs that usually also include the insurance costs from the point of production to a specified destination, at which point the buyer takes responsibility.
- Free Trade Zone: An area designated by the Government to which goods may be imported for processing and subsequent export on duty-free basis. Merchandise may be stored, used or manufactured in the zone and re-exported without duties being paid.
- Indent: It is a document in which the import order for supply of requisite goods to the exporter and contains information on quantity and quality of goods, price to be charged, mode of forwarding the goods, type of packing and mode of payment etc.
- Inland Bill of Lading: A bill of lading used in transporting goods overland to the exporter's international carrier.
- Irrevocable Letter of Credit: A Letter of Credit in which the specified payment is guaranteed by the bank if all terms and conditions are met by the drawee.
- Letter of Credit (L/C): A letter issued by an importer's bank guaranteeing payment upon presentation of specified trade documents (invoice, bill of lading, inspection and insurance certificates, etc.).
- Letter of Indemnity: It is a letter signed by exporter and whereby the exporter undertakes to indemnify the bank in the event of non-receipt of payment from the importer along with accrued interest.
- Mate's Receipt: It is a receipt issued by the commanding officer of the Ship when the cargo is loaded on the board.
- Pre-shipment finance: As soon as order is confirmed and letter of credit is received, the exporter approaches the bank to receive pre-shipment finance which he needs to buy raw materials and other inputs to produce goods to be exported. Firms require finance for various activities such as purchase of raw material and manufacture of goods. In the case of exporters, this finance is obtained from banks in the form of advances known as pre-shipment finance.
- SEZ: Special Economic Zones.
- Shipping Bill: After receipt of the freight, the shipping company issues a bill which serves as an evidence that the shipping company has accepted the goods for carrying to the designated destination. It is called shipping bill or bill of lading.
- Pre - Shipment Finance: Pre-shipment inspection refers to the inspection of goods before their final shipment in order to ensure that only quality goods are exported. The Government has initiated measures such as compulsory inspection of certain goods by promulgating the Export Quality and Inspection Act, 1963, and designating various agencies to undertake inspection.
- Trade Enquiry: It is a written request by an importing firm to the exporter for supply of information regarding the price and various terms and conditions on which the exporter exports goods.
- World Trade Organization (WTO): The WTO is a multilateral organization that promotes free and fair trade among the nations of the world. It was created in 1994 by 121 nations at the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). The WTO is responsible for implementation.
- Import General Manifest: It is a document which contains the details of the imported goods. It is a document on the basis of which uploading of cargo takes place.
- Marine Insurance Policy: It is a certificate of insurance contract whereby the insurance company agrees in consideration of a payment called premium to indemnify the insurance against loss incurred by the latter in respect of goods exposed to perils of the sea.
- Cart Ticket: A cart ticket is also known as a cart chit, vehicle or gate pass. It is prepared by the exporter and includes details of the export cargo in terms of the shipper's name, number of packages, shipping bill number, port of destination and the number of the vehicle carrying the cargo.
- Bank Certificate of Payment: Bank certificate of payment is a certificate that the necessary documents (including bill of exchange) relating to the particular export consignment has been negotiated(i.e., presented to the importer for payment) and the payment has been received in accordance with the exchange control regulations.
- Sight Draft: It is a type of bill of exchange in which the drawer of bill of exchange instructs the bank to hand over the relevant documents to the importer only against payment.
- Shipping Advice: It is a document which exporter sends to the importer confirming that goods have been shipped giving details of name of the vessel with date.the port of export, description of goods and the quantity and the date of sailing etc.
- Usance Draft: It is a type of bill of exchange in which the drawer of bill of exchange instructs the bank to hand over the relevant documents to the importer only against acceptance of the bill of exchange.
- Dock Challan: When all formalities of customs are completed then dock charges are required to be paid. When he pays these charges, the importer or his clearing agent specifies the amount of dock dues in a challan or in any firm. It is called dock challan.
- Performa Invoice: A Performa Invoice is a document which contains details of quality, grade, design, size, weight and price of goods to be exported and the terms and conditions on which goods will be exported.