Notes - Trade

5. Trade

 

Trade

 

It refers to buying and selling of goods and services with the object of earning profit. It involves the efforts of mankind in some way or the other. It bridges the gap between the producer and the consumer. The importance of trade in modern times has increased as new products are being developed everyday and are being made available for consumption throughout the world. Trade can broadly be classified into two categories: internal trade and external trade. Trade which takes place within a country is called internal trade and the trade which is taken place between two or more countries is called external trade.

 

5.1 internal Trade

 

Internal trade means movement of goods within the boundaries of the nation or country. In such trade all payments are received and made in the national currency. Internal trade aims at equitable distribution of goods within a nations speedily and at reasonable cost.

 

Documents Used in Internal Trade

Important documents of internal trade are listed below

• Proforma Invoice: It is a confirmed purchase order containing the terms and conditions on which buyer and seller agree on the product detail and cost.

 

• Commercial Invoice: This document is an evidence of contract between buyer and seller. This document contains detailed description of goods, quantity, price, total value etc.

 

• Lorry Receipt: When goods are sent by roadways then this receipt is issued by the transporter and it is treated as document of title.

   

• Railway Receipt: When goods are despatched through railways then railway authorities issue this receipt which is also a document of title.

 

• Debit Note: It is a form or letter issued by seller to advice the amount owned by buyer. An invoice is a kind of debit note.

 

• Credit Note: It is a monetary instrument issued by seller that allows a buyer to purchase any item or service on a future date.  

                                              

Classification of Internal Trade

Internal trade can be classified into two broad categories viz. wholesale and retail trade.

(i) Wholesale Trade: It refers to purchasing goods and services in large quantity from manufacturers and reselling them to retailers, who then sells them to the ultimate consumers.

Chain of Wholesale Trade

\[Manufacturers\to Wholesalers\to Retailers\to Consumers.\]

 

• A wholesaler is an intermediary between manufacturer and retailer.

 

(ii) Retail Trade: It refers to purchasing relatively small quantity of goods from wholesalers and selling them to ultimate consumers.

Chain of Retail Trade

\[Wholesalers\to Retailers\to Consumers\]

 

• A retailer is an intermediary between wholesaler and consumer.

 

5.1.1 Wholesaler

 

Wholesale trade is performed by wholesalers. They serve as an important link between manufacturers and retailers. They purchase goods in large quantity from manufactures and resale them to retailers.

Wholesalers provide various services to the manufacturers as well as to the retailers, that are mentioned below

 

Services to Manufacturers

Major services offered by wholesalers to the manufactures are as follow

1. Facilitating Large Scale Production
2. Wholesalers Bears Risk
3. They provide financial assistance to the manufacturers.
4. Wholesalers advice the manufacturers about various aspects.
5. Help in the Marketing Function
6. The wholesalers facilitate continuity of production activity throughout the year by purchasing the goods as and when these are produced.
7. Wholesalers store the good in bulk.

 

Services to Retailers

Following services are offered to retailers by wholesalers

1. The wholesalers make the products of various manufacturers readily available to the retailers.
2. The wholesalers perform various marketing functions.
3. Grant of Credit
4. The wholesalers specialise in one line production and are aware about the pulse of the market.
5. Risk Sharing

 

5.1.2 Retailer

 

• Retail trade is performed by retailers. A retailer is engaged in the sale of goods and services directly to the ultimate consumers.

 

• Retailer represents the final stage in the distribution process.

 

• A retailer offers various services to manufacturers/wholesalers and consumers that are discussed below.

 

Services to Manufacturers and Wholesalers

            Following services are offered to manufacturers and wholesalers

1. Help in Distribution of Goods
2. Personal Selling
3. Enabling Large-scale Operations
4. Collecting Market Information
5. Help in Promotion

                        

Services to Consumers

Some of the important services of retailers from the point of view of consumers are as follow

1. Regular Availability of Products
2. New Products Information
3. Convenience in Buying   
4. Wide Selection
5. After-sales Services
6. Provide Credit Facilities

 

5.2 Emerging Modes of Business

 

• In the present global world, the technologies are changing rapidly. The way of doing business is also changing day-by-day. In a quest to meet competitive pressure and ever growing demands of consumers for better quality products, lower prices, speedier deliveries and better customer care and to benefit from emerging technologies, business as an activity keeps on evolving.

          

• The modes, methods and processes are being redesigned and have changed completely. These new trends of doing business are referred to the emerging modes of business. Three stronger trends of emerging modes of business are.

 

5.2.1 e-Business

 

Electronic business or e-business refers to conduct of industry, trade and commerce using the computer networks. It offers the convenience of \[24\text{ }hours\times 7\]days a week and 365 days a year business.

According to the European Union website, “e-business is a general concept covering any form of business transactions or information exchange that is made by using information and communication technology.”

 

Scope of e-Business

On the basis of the parties involved in firm’s electronic transactions, the scope of e-business extends to the transactions between two business firms transactions between a firm and its customers and the transactions carried within a firm itself.

 

1. B2B Transactions

These transactions take place between two business firms. Hence, the name B2B (business-to-business).

A business to interact with a number of other business firms which may be suppliers or vendors of diverse inputs or else they may be a part of the channel through which a firm distributes its products to the consumers.

 

2. B2C Transactions

• As the name implies, B2C (business-to-customers) transactions have business firms at one end and its customers on the other end. This category is related to electronic retailing. This variant of e-commerce enables a business to be in touch with its customers on round the clock basis. B2C transactions may include
• Selling and distribution of goods
• Conducting consumer surveys
• After sales service
• Promotional activities
• C2B-B2C business gives rise to its corollary, i.e. C2B business. C2B provides consumers with the freedom of shopping at will. Customers can make toll free calls to the call centres set-up by the companies to make queries and lodge complaints, at no extra costs, round the clock. These transactions are generally outsourced.

 

3. Intra-B Transactions

• Here, parties involved in the electronic transactions are from within a given business firm only. It enables the smooth flow of transaction within the different departments of a specific firm.
• In other words, it can be said that a computer-based interaction among the different departments makes it possible for the firm to reap advantages of efficient inventory, cash management, greater utilisation of plant and machinery, effective handling of customers’ orders, effective human resource management etc.
• Also, Intra-B transactions include firm’s interactions with employees, which is referred to B2B commerce.

 

Business to Employee (B2E) Commerce

Firms are resorting to personnel recruitment, interviewing and selection, training, development and education via e-commerce.

Also, employees can use electronic catalogues and ordering forms and access inventory information for better interaction with the customers.

 

Benefits of e-Business

            Following are the benefits of e-business

1. Ease of Formation and Lower Investment Requirements
2. Convenience
3. Speed
4. Global Reach/Access
5. Movement towards a Paperless Society

 

Limitations of e-Business

            Following are the limitations of e-business

1. Low Personal Touch.
2. Incongruence Between Order Taking/Giving and Order Fulfilment Speed.
3. Need for Technology Capability and Competence of Parties to e-business.
4. Increased Risk Due to Anonymity and Non-traceability of Parties.
5. People have a Tendency to Resist Change.
6. Many Companies Use an Electronic Eye on their Employees.

 

Some e-Business Applications e-procurement: It involves internet-based sales transactions between business firms, including both, ‘reverse auctions’ that facilitate online trade, between a single business purchaser and many sellers and digital marketplaces that facilitate online trading between multiple buyers and sellers.   e-bidding /e-auction: Most shopping sites have ‘Quote your price’ whereby you can bid for the goods and services (such as airline tickets!). It also includes e-tendering whereby one may submit tender quotations online.   e-communication /e-promotion: Right from e-mail, it includes publications of online catalogues displaying images of goods, advertisement through banners, pop-ups, opinion poles and customer surveys etc. Meeting and conferences may be held by the means of video conferencing.   e-delivery: It includes electronic delivery of computer software, photographs, videos, books (e-books) and journals (e-journals) and other multimedia content to the user’s computer. It also includes rendering of legal, accounting, medical and other consulting services electronically. In fact, internet provides the firms with the opportunities for outsourcing of a host of Information Technology Enabled Services (ITES) that we will be discussing under business process outsourcing. Now, it is even possible to print the airlines and railway tickets at home.   e-trading: It involves securities trading, that is online buying and selling of shares and other financial instruments.

 

5.2.2 Outsourcing

 

The term outsourcing means having an external vendor, who provides services on regular basis that would normally be performed within the organisation. It involves delegation of one or more business processes to an external provider who then manages the selected business process based on defined measures of performance.

 

Features of Outsourcing

            Following are the features of outsourcing

1. Outsourcing Involves Contracting Out
2. Generally Non-core Business Activities are Outsourced
3. Processes may be Outsourced to Third Party

 

5.2.3 Franchising

 

• Franchising is the practice of the right to use a firm’s business model and brand for a prescribed period of time. The word ‘franchise’ is of Anglo-french derivation—from franc, meaning free and is used both as a noun and as a (transitive) verb.

 

• Franchisor rules imposed by the franchising authority are becoming increasingly strict. Some franchisors are using minor rule violations to terminate contracts and seize the franchise without any reimbursement.

 

Salient Features of Franchise

Some salient features of franchise are as follow

1. A franchise is a readymade and well established business that needs expansion.
2. Franchise has large establishments around the world
3. Helps in diverting business risks.
4. Franchise results in large volume of sales.
5. Franchise results in division of labour and specialisation.
6. Needs limited investment.
7. Easy entry in new markets.
8. In franchise selling, the franchisor allows the franchisee to use his brand name, trademark.
9. Franchise business is based on mutual agreement or contract.
10. For the successful functioning of a franchise business, both franchisor and franchisee have to remain committed in their long-term relationship.
11. The franchiser is able to expand his business and gain wider acceptance of his brand name or trademark.
12. The franchiser receives a regular income by way of royalty from the franchisee.
13. Advertising, done by the franchiser benefits the franchisee also.
14. The franchiser gets market feedback about product.

 

5.3 International Trade

 

The exchange of goods or services along international borders is termed as international trade. This type of trade allows greater competition and more competitive pricing in the market. It results in giving more affordable products for the consumer. The procedure of exchange of goods also affects the economy of the world. It facilitates the products to the consumers globally. It is also known as foreign trade or external trade.

 

5.3.1 Characteristics of International Trade

 

Following are the characteristics of international trade

1. It takes place basically due to geographical specialisation in the production of goods and services.
2. There is intense competition in international trade.
3. In international trade, sellers and buyers belong to different countries.
4. The procedure of international trade is very long and complex therefore the services of expert middlemen is required.
5. To conduct international trade, a businessman requires knowledge of international laws and trade restrictions.
6. The government of every country exercises control over imports and exports for national interest.

 

5.3.2 Advantages of International Trade

 

Following are the advantages of international trade

1. Greater Variety of Goods
2. Better Utilisation of Resources
3. More Employment Generation
4. Increased Standard of Living.
5. Improving Growth Prospects and Employment Potential
6. Improved Business Vision
7. Increased Capacity Utilisation
8. Prospects for Higher Profit and Growth
9. Earnings of Foreign Exchange

 

5.3.3 Disadvantages of International Trade

 

Following are the disadvantages of international trade

1. Import of Harmful Goods
2. Exhaust Resources
3. Danger of Starvation
4. Lead to War
5. Delay in Delivery of Goods
6. Language Barrier
7. Problem of Transport
8. Different Currencies
9. Much Involvement of Time and Efforts

 

 

5.4 Types/scope of International Trade

 

International trade can be of the following types or the scope of international trade extends to the following.

 

5.4.1 Export Trade

 

It is a mode of international trade in which goods produced in the domestic country are sold to the residents of another country.

 

Following are the objectives of export trade

1. To Sell Surplus Goods
2. Better Utilisation of Resources
3. To Earn Foreign Exchange
4. To Increase National Income Export
5. To Generate Employment
6. To Create International Cooperation

 

Documents Used in Export Transactions

Following documents are used in export transactions

 

1. Documents Related to Goods
2. Export Invoice
3. Packing List
4. Certificate of Origin
5. Certificate of Inspection

 

2. Documents Related to Shipment
3. Mate’s Receipt
4. Shipping Bill
5. Bill of Lading
6. Airway Bill
7. Marine Insurance Policy
8. Cart Ticket

 

3. Documents Related to Payment
4. Letter of Credit
5. Bill of Exchange
6. Bank Certificate of Payment

 

Export Procedure

A number of steps are required to be taken to complete export transaction. These are

Step I Receipt of Enquiry and Sending Quotations

Step II Receipt of Order or Indent

Step III Assessing Importer’s Creditworthiness and Securing a Guarantee for Payments

Step IV Obtaining Export Licence

Step V Obtaining Pre-shipment Finance

Step VI Production or Procurement of Goods

Step VII Pre-shipment Inspection

Step VIII Excise Clearance

Step IX Obtaining Certificate of Origin

Step X Reservation of Shipping Space

Step XI Packing and Forwarding

Step XII Insurance of Goods             

Step XIII Customs Clearance

Step XIV Obtaining Mate’s Receipt

Step XV Payment of Freight and Issuance of Bill of Lading

Step XVI Preparation of Invoice

Step XVII Securing Payment

Step XVIII Bill of Exchange

 

5.4.2 Import Trade

 

It is a mode of international trade in which the residents of a domestic country purchases goods from a foreign country.

 

Following are the objectives of import trade

1. To Speed Up Industrialisation
2. To Meet Consumer Demand
3. To Overcome Famine
4. To Ensure National Defense

 

Documents Used in an Import Transaction

Following documents are used in import transaction

1. Proforma Invoice 2. Import Order or Indent
2. Shipment Advice 4. Bill of Lading
3. Bill of Entry 6. Letter of Credit
4. Trade Enquiry

 

Import Procedure

Step are to be following to import goods from a foreign country.

Step I Trade Enquiry

Step II Procurement of Import Licence

Step III Obtaining Foreign Exchange

Step IV Placing Order or Indent

Step V Obtaining Letter of Credit

Step VI Arranging for Finance

Step VII Receipt of Shipment Advice

Step VIII Retirement of Import Documents

Step IX Arrival of Goods

Step X Customs Clearance and Release of Goods

 

5.6 Export Processing Zone (EPZ)

 

• A Free Trade Zone (FTZ) or Export Processing Zone (EPZ), also called foreign-trade zone, formerly free port, is an area within which goods may be landed, handled, manufactured or reconfigured and re-exported without the intervention of the customs authorities.

 

• Free-trade zones are organised around major seaports, international airports and national frontiers-areas with many geographic advantages for trade. It is a region where a group of countries has agreed to reduce or eliminate trade barriers.

 

• Free trade zones can be defined as labour intensive manufacturing centres that involve the import of raw materials or components and the export of factory products.

 

5.7 Special Economic Zone (SEZ)

 

• Asia’s first Export Processing Zone (EPZ), was set-up in Kandla, India in 1965.
• The first SEZ policy was announced in April 2000, which inter-alia provided for to make SEZ an engine of growth supported by quality infrastructure backed up by attractive fiscal package.
• To import stability to the SEZ regime, SEZ Act, 2005 was enacted and which came into effect from 10th February, 2006.
• As per the provisions of the SEZ Act, 2005 100% FDI is allowed in SEZs through the automatic route.
• Incentives: The act offers a highly attractive fiscal incentive package, which ensures exemption from custom duties, central excise duties, service tax, central sales taxes and securities transaction tax to both the developers and the units.
• Tax holidays for 15 years (currently the units enjoy a 7 years tax holiday), i.e. 100% tax exemption for 5 years, 50% for the next 5 years and 50% for the ploughed back export profits for the next 5 years.
• 100% income tax exemption for 10 years in a block period of 15 years for SEZ developers.
• The establishment of free trade and warehousing zones to create world class trade-related infrastructure to facilitate import and export of goods aimed at making India a global trading hub.
• The setting up of offshore banking units and units in an International Financial Service Centre in SEZs.
• The public private participation in infrastructure development.
• The setting up of a ‘SEZ authority’ in each Central Government SEZ for developing new infrastructure and strengthening the existing one.

 

5.8 World Trade Organisation

 

WTO is one of the youngest global international organisation that deals with the rules and regulations of trade between different nations. It operates with the purpose of liberalising trade and flow of goods and services in the international     market. It provides a framework for negotiating and formalising trade agreements. At present, 159 countries are the members of WTO.

• The organisation officially commenced on 1st January, 1995 on the lines of IMF and the World Bank, it was first        decided at the Bretton Woods Conference to   set-up the International Trade Organisation (ITO).
• In the Bretton Woods Conference, members agreed upon having some arrangement to liberalise the world from high customs tariffs and other restrictions that were in vogue at that time. This arrangement was called general agreement for Tariffs and Trade (GATT).
• Further on GATT was transformed into World Trade Organisation (WTO) with effect from 1^st January, 1995 with its headquarters at Geneva, Switzerland.

 

5.8.1 Objectives of WTO

 

WTO has some basic objectives similar to GATT.

These are

• Raising standards of living and incomes.
• Ensuring full employment.
• Expanding production and trade.
• Optimal use of the resources with the idea of sustainable development.
• To ensure reduction of tariffs and other trade barriers.
• To engage in activities that improve the standards of living, create employment, increase income and effective demand, facilitate production etc.
• To promote an intergrated and durable trading system.
• To settle disputes among member nations and promote international peace.
• To accelerate economic growth of developing countries.

 

5.8.2 Functions of WTO

 

Following are the main functions of WTO.

(i)   Promoting an environment that encourages its members to come forward to WTO in mitigating their grievances.                           

(ii)   Laying down a commonly accepted code of conduct with a view to reduce trade barriers.

(iii)  Acting as a dispute settlement body.

(iv)  Ensuring that all the rules prescribed in the act are duly followed by the member countries for settlement of disputes.

(v)  Holding consultations with IMF and IBRD so as to bring better understanding and cooperation in global economic policy making.

 

5.8.3 WTO Agreements

 

Major WTO agreements are discussed below

 

1. Agreements Forming Part of GATT

• The erstwhile General Agreement on Tariffs and Trade (GATT) after its substantial modification in 1994 (effected as part of the Uruguay Round of negotiations) is very much part of the WTO agreements.

 

• Besides the general principles of trade liberalisation, GATT also includes certain special agreements evolved to deal with specific non-tariff barriers.

 

2. Agreement on Textile and Clothing (ATC)

This agreement was evolved under WTO to phase out the quota restrictions as imposed by the developed countries on exports of textiles and clothing from the developing countries.

 

3. Agreement on Agriculture (AoA)

It is an agreement to ensure free and fair trade in agriculture.

 

4. General Agreement on Trade in Services (GATS)

• Services means acts or performances that are essentially intangible and cannot be touched or smelt as goods.

GATS is regarded as a landmark achievement of the Uruguay Round as it extends the multilateral rules and disciplines to services.

• It is because of GATS that the basic rules governing ‘trade in goods’ have become applicable to ‘trade in services’.

 

5. Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)

The agreement sets out the minimum standards of protection to be adopted by the parties in respect of seven intellectual properties, viz copy rights and related rights, trade marks, geographical indication, industrial designs, patents, layout design of integrated circuits and undisclosed information (trade secrets).

 

5.9 International Monetary Fund

 

It came into existence in 1945 and its headquarters are located in Washington DC. The major idea of setting up of IMF is to evolve an orderly international monetary system.

 

5.9.1 Objectives of IMF

 

The major objectives of IMF are:

(i)   To facilitate expansion of balanced growth of international trade and to promote high levels of employment and real income.

(ii)   To promote exchange stability in order to maintain orderly exchange arrangements among member countries.

(iii)  To assist in the establishment of a multilateral system of payments in respect of current transactions between members.

 

5.9.2 Functions of IMF

 

Various functions performed by IMF are:

(i) Acting as a short-term credit institution.

(ii) Providing machinery for the orderly adjustment of exchange rates.

(iii) Acting as a lending institution of foreign currency and current transaction.

(iv) Providing machinery for international consultations.

 

5.10 World Bank

 

World Bank was set-up in 1944 under Bretton Woods Conference, along with IMF, hence these two are known as sister institutions or Bretton woods twins. Its headquarters are at Washington DC and has 188 members.

The World Bank focuses on making loans to government in order to rebuild railroads, highways, and other infrastructure i.e. the areas where private sector do not take interest.

 

5.10.1 Objectives of World Bank

 

The main objectives of World Bank are as follows:

(i) To help reconstruction of member countries damages after the Second World War.

(ii) To facilitate the investment of foreign capital for productive purpose.

(iii) To maintain balance growth of international trade and to attain equilibrium in BoP account.

(iv) Spur governments to act on preventing climate change, controlling communicable diseases, managing international financial crises and promoting free trade.

 

5.10.2 Functions of World Bank

 

World Bank performs the following functions:

(i)   Granting reconstruction loans to war devastated countries.

(ii)   Granting developmental loans to underdeveloped countries.

(iii)  Providing loans to governments for agriculture, irrigation, power, transport, water supply, educations, health, etc.

(iv)  Providing loans to private concerns for specified projects.

(v)  Promoting foreign investment by guaranteeing loans provided by other organisations.

(vi)  Providing technical, economic and monetary advice to member countries for specific projects.

(vii) Encouraging industrial development of underdeveloped by promoting economic reforms.

 

5.11 The United Nations Conference on Trade and Development (UNCTAD)

 

• The United Nations Conference on Trade and Development (UNCTAD) was established in 1964, as a permanent inter-governmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment and development issues.

 

• The organisation’s goals are to “Maximise the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis.”

 

5.11.1 Objectives of UNCTAD

 

The objective of UNCTAD is (a) to reduce and eventually eliminate the trade gap between the developed and developing countries, and (b) and to accelerate the rate of economic growth of the developing world.

 

5.11.2 Functions of UNCTAD

 

The main Functions of the UNCTAD are:

(i)   To promote international trade between developed and developing countries with a view to accelerate economic development.

(ii)   To formulate principles and policies on international trade and related problems of economic development.

(iii)  To make proposals for putting its principles and policies into effect, (iv) To negotiate trade agreements.

(iv)  To review and facilitate the coordination of activities of the other U.N. institutions in the field of international trade

(v)  To function as a centre for a harmonious trade and related documents in development policies of governments.