Learning Objectives
- Understand the meaning, basis, and benefits of international trade
- Learn the export and import procedures with documents involved
- Know about important trade documents: Bill of Lading, Letter of Credit, etc.
- Understand international trade organisations: WTO, UNCTAD, World Bank, IMF
- Learn about trade barriers and free trade agreements
Key Concepts
Meaning and Basis of International Trade
International trade (foreign trade) refers to the exchange of goods and services between two or more countries across national borders. It arises due to differences in natural resources, climate, technological capabilities, and cost of production among countries.
The basis of international trade lies in the principle of Comparative Advantage (David Ricardo) -- countries should specialise in producing goods where they have a lower opportunity cost and trade for other goods. This leads to higher global output, efficiency, and mutual benefit.
Benefits: access to goods not produced domestically, wider market for exports, foreign exchange earnings, transfer of technology, improved standard of living, and promotes international cooperation.
Export Procedure
The export process involves the following steps:
- Receipt of Enquiry and Sending Quotation (Proforma Invoice): The exporter receives an enquiry from the foreign buyer and sends a quotation with price, quality, quantity, and delivery terms.
- Receipt of Order (Indent): The foreign buyer places an order specifying terms and conditions.
- Obtaining Export Licence: The exporter obtains necessary licences from the DGFT (Directorate General of Foreign Trade).
- Obtaining Pre-shipment Finance: The exporter arranges working capital through pre-shipment credit (packing credit) from banks.
- Production/Procurement: Goods are manufactured or procured as per the order specifications.
- Quality Inspection: Goods are inspected by designated agencies (Export Inspection Council) to ensure quality standards.
- Customs Clearance: The exporter submits the Shipping Bill and other documents to Customs for clearance. After examination, the customs officer issues a "Let Export" order.
- Shipment of Goods: Goods are loaded onto the ship/aircraft. The shipping company issues a Bill of Lading (or Airway Bill for air cargo) as receipt and document of title.
- Payment Collection: The exporter submits documents to the bank for collection of payment from the importer's bank (through Letter of Credit or Documentary Collection).
Import Procedure
The import process involves: obtaining Import-Export Code (IEC) from DGFT, placing an order with the foreign supplier, obtaining letter of credit from the bank, receiving shipment advice, arranging customs clearance (submitting Bill of Entry), paying customs duty, and taking delivery of goods.
Important Documents
- Bill of Lading (B/L): A document issued by the shipping company acknowledging receipt of goods for shipment. It serves as a receipt, contract of carriage, and document of title to goods.
- Letter of Credit (L/C): A guarantee issued by the importer's bank to the exporter's bank that payment will be made upon presentation of specified documents. It reduces payment risk in international trade.
- Bill of Entry: A document submitted by the importer to Customs declaring the nature, quantity, and value of imported goods for assessment of customs duty.
- Shipping Bill: A document submitted by the exporter to Customs for obtaining permission to export goods.
- Certificate of Origin: A document certifying the country in which the goods were manufactured.
- Marine Insurance Policy: A contract covering the risk of loss or damage to goods during sea transit.
- Bill of Exchange: A written order by the exporter directing the importer to pay a specified sum.
International Trade Organisations
- World Trade Organisation (WTO): Established in 1995, headquartered in Geneva. It administers trade agreements, settles trade disputes, reviews national trade policies, and promotes free and fair trade. It replaced GATT (General Agreement on Tariffs and Trade).
- United Nations Conference on Trade and Development (UNCTAD): Established in 1964, focuses on trade, investment, and development issues of developing countries.
- International Monetary Fund (IMF): Promotes international monetary cooperation, exchange rate stability, and provides financial assistance to member countries facing balance of payment difficulties.
- World Bank: Provides long-term development loans to developing countries for infrastructure, education, healthcare, and poverty reduction projects.
Summary
International trade enables countries to specialise based on comparative advantage, leading to higher efficiency and mutual benefit. The export procedure involves steps from receiving the order to collecting payment, while the import procedure covers ordering to customs clearance. Key documents like the Bill of Lading, Letter of Credit, and Bill of Entry facilitate smooth transactions. International organisations like WTO, UNCTAD, IMF, and World Bank regulate, facilitate, and promote global trade and economic cooperation. Understanding trade procedures and documents is essential for businesses participating in the global marketplace.
Important Terms
- International Trade
- The exchange of goods and services between countries across national borders.
- Comparative Advantage
- The principle that countries should specialise in goods they can produce at a lower relative opportunity cost.
- Bill of Lading
- A document of title issued by the carrier acknowledging receipt of goods for shipment by sea.
- Letter of Credit
- A bank guarantee ensuring payment to the exporter upon presentation of specified shipping documents.
- Bill of Entry
- A customs document declaring imported goods for assessment and payment of customs duty.
- WTO
- World Trade Organisation -- the international body that regulates global trade rules and settles trade disputes.
- Balance of Trade
- The difference between the value of a country's exports and imports of goods over a period.
Quick Revision
- International trade is based on the principle of comparative advantage (David Ricardo).
- Export steps: Enquiry, Order, Licence, Finance, Production, Inspection, Customs, Shipment, Payment.
- Import steps: IEC, Order, L/C, Shipment Advice, Customs (Bill of Entry), Duty Payment, Delivery.
- Bill of Lading: receipt + contract of carriage + document of title.
- Letter of Credit: bank guarantee for payment, reduces risk in international trade.
- WTO (1995, Geneva) replaced GATT; promotes free trade, settles disputes.
- IMF: monetary cooperation and exchange rate stability. World Bank: development loans.
Practice Tips
- Memorise the export and import procedures step-by-step -- this is a very important long-answer question.
- Learn the functions of each trade document (B/L, L/C, Bill of Entry, Shipping Bill, Certificate of Origin).
- Create a comparison table of WTO, UNCTAD, IMF, and World Bank with their roles and headquarters.
- Understand the difference between balance of trade and balance of payments for theory questions.