Unit 10: International Trade

 Learning Objective:
 To state the concept of international trade & Describe the scope of international
trade to the nation and business firms.
 To explain the meaning & important steps involved in executing export trade.
 To discuss the meaning & important steps involved in executing import trade.
 To examine various documents used in international trade.
 To State the meaning & objectives of World Trade Organization

 Meaning of International Business:

 International business involves the manufacturing and trading of goods, services,
capital, personnel, technology, and intellectual property (patents, trademarks,
know-how) across national borders. This encompasses all business activities that
occur beyond a country’s geographical boundaries.

Scope of
International
Trade

Merchandise Service
Exports and Licensing and Foreign
Exports and Franchising Investments
Imports Imports

 Scope of International Business

• Merchandise Exports and Imports: This refers to the trade of tangible goods
across borders. Merchandise exports and imports are often called trade in goods,
excluding services.

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• Service Exports and Imports: Also known as invisible trade, this includes the
international exchange of services such as transportation, communication,
banking, and tourism.
• Licensing and Franchising: Licensing involves granting rights to use a firm's
intellectual property, like patents or trademarks, in a foreign country for a fee.
Franchising is similar but typically relates to services, where a franchisor allows a
franchisee to operate a business using its brand and business model.
• Foreign Investments:
• Foreign Direct Investment (FDI): Involves investing in physical assets
like plants and machinery in foreign countries to produce and distribute
goods and services.
• Portfolio Investment: Refers to the acquisition of shares or loans in
foreign companies, earning income through dividends or interest.

Benefits of International
Business

Nations Firms

1.Foreign Exchange
2. Efficient Resource Use
1. Profitability
3. Economic Growth
2. Growth Opportunities
4. Price Stability
3. Competition
5.Improved Living
Standards 4. Self- Improvement

 Benefits of International Business

• To Nations:
• Foreign Exchange: Facilitates the flow of foreign currency into a country, helping
pay for imports and boosting economic stability.

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• Efficient Resource Use: Countries specialize in producing goods where they have
a comparative advantage, leading to more efficient resource utilization.
• Economic Growth: International trade drives economic growth by opening up
new markets, increasing production, and creating employment opportunities.
• Price Stability: Helps stabilize prices of domestic products by balancing supply
and demand through imports and exports.
• Improved Living Standards: Access to a wide variety of goods and services
from other countries enhances the standard of living.
 To Firms:
 Profitability: Firms can increase profits by accessing global markets where prices
may be higher.
 Growth Opportunities: When domestic markets are saturated, international
markets offer new growth avenues.
 Competition Handling: Competing globally helps firms enhance their
competitiveness and innovation.
 Self-Improvement: Expanding internationally drives firms to improve their
strategic capabilities and operational efficiency.
 Meaning and objectives of export trade
• Exporting refers to sending of goods and services from the home country to a
foreign country.
• As compared to other modes of entry, exporting/importing is the easiest way of
gaining entry into international markets.
 Export Procedure
1) Receipt of enquiry and sending quotations: The prospective buyer of a product
sends an enquiry to different exporters requesting them to send information
regarding price, quality and terms and conditions for export of goods. The exporter
sends a quotation known as pro forma invoice as reply.
2) Receipt of order or indent: In case the prospective buyer (i.e., importing firm)
finds the export price and other terms and conditions acceptable, it places an order
for the goods to be dispatched. This order, also known as indent.
3) Assessing the importer’s creditworthiness and securing a guarantee for
payments: After receipt of the indent, the exporter makes necessary enquiry about

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 the creditworthiness of the importer. To minimize such risks, most exporters
demand a letter of credit from the importer. A letter of credit is a guarantee issued
by the importer’s bank that it will make payment up to a certain amount of export
bills to the bank of the exporter.
4) Obtaining export license: According to custom laws the exporter or the export
firm must have export license before proceeding with exports. The exporter
obtains import export code (IEC) number from Directorate General foreign Trade
(DGFT) or Regional Import Export Licensing Authority (RIELA) & Register with
appropriate export promotion council.
5) Obtaining pre-shipment finance: Pre-shipment finance is the finance that the
exporter needs for procuring raw materials and other components, processing and
packing of goods and transportation of goods to the port of shipment. Having
obtained the pre-shipment finance from the bank, the exporter proceeds to get the
goods ready as per the specifications of the importer.
6) Excise clearance: As per the Central Excise Tariff Act, excise duty is payable on
the materials used in manufacturing goods. The exporter, therefore, has to apply to
the concerned Excise Commissioner in the region with an invoice. If the Excise
Commissioner is satisfied, he may issue the excise clearance.
7) Obtaining certificate of origin: Some importing countries provide tariff
concessions or other exemptions to the goods coming from a particular country.
For availing such benefits, the importer may ask the exporter to send a certificate
of origin.
8) Reservation of shipping space: The exporting firm applies to the shipping
company for provision of shipping space. It has to specify the types of goods to be
exported, probable date of shipment and the port of destination. On acceptance of
application for shipping, the shipping company issues a shipping order.
9) Packing & forwarding & Insurance: The goods are packed & marked with
necessary details like name & address of the importer, gross & net weight, port of
shipment & destination etc. After this the exporter makes arrangement for the
transportation of goods to the port. In order to protect the goods against the risk of
loss or damage due to the perils of the sea, Marine Insurance policy is taken for
this purpose.
10) Custom Clearance: Before loading the goods on the ship they have to be cleared
by the customer. For this purpose, the exporter prepares the shipping bill &
submits five copies of the shipping bill along with following documents at the
customs house.

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 (i) Certificate of origin
(ii) Commercial Invoice
(iii) Export Order
(iv) Letter of credit
(v) Certificate of Inspection, where necessary.
(vi) Marine Insurance Policy.
11)Obtaining Mate’s receipt: After the goods have been loaded on board of the ship
the captain or the mate of the ship issues mate’s receipt which contains
information regarding vessel, berth, description of packages, date of shipments,
marks, condition of the cargo at the time of receipt on board the ship etc. The
clearing & forwarding agent (C&F agent) hands over the mates receipt to the
shipping company for calculating freight. On receiving the freight, the shipping
company issues a bill of lading.
12)Preparation of Invoice & securing payment: The exporter prepares an invoice
for the dispatched goods. Invoice contains information regarding the quantity of
goods sent & the amount to be paid by the importer. It is duly attested by the
customs. After shipment of goods the importer is informed about it by the exporter
& importer make the payment as per the invoice.

 Import Trade: Importing is purchase of foreign products and bringing them into
one’s home country.
• Import Procedure:
i. Trade enquiry: A trade enquiry 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 latter is ready to exports goods. After receiving a trade
enquiry, the exporter prepares a quotation and sends it to the importer.
ii. Procurement of import license: In case goods can be imported only against the
license, the importer needs to procure an import license. In India, it is obligatory
for every importer (and also for exporter) to get registered with the Directorate
General Foreign Trade (DGFT) or Regional Import Export Licensing Authority,
and obtain an Import Export Code (IEC) number.
iii. Obtaining foreign exchange: Payment in foreign currency involves exchange of
Indian currency into foreign currency. In India, all foreign exchange transactions

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 are regulated by the Exchange Control Department of the Reserve Bank of India
(RBI).
iv. Placing order or indent: After obtaining the import license, the importer places
an import order or indent with the exporter for supply of the specified products.
The import order contains information about the price, quantity size, grade and
quality of goods ordered and the instructions relating to packing, shipping, ports of
shipment and destination, delivery schedule, insurance and mode of payment.
v. Obtaining letter of credit: A letter of credit is a guarantee issued by the
importer’s bank that it will honour payment up to a certain amount of export bills
to the bank of the exporter. Letter of credit is the most appropriate and secured
method of payment adopted to settle international transactions. After that the
importer should make arrangements in advance to pay to the exporter on arrival of
goods at the port.
vi. Receipt of shipment advice: After loading the goods on the vessel, the overseas
supplier dispatches the shipment advice to the importer. A shipment advice
contains information about the shipment of goods.
vii. Retirement of import documents: After shipping the goods, the overseas
supplier hands over the various documents like commercial invoice, bill of lading,
insurance policy, certificate of origin to his banker for their onward transmission
to the importer when he accepts the bill of exchange drawn by the supplier. The
acceptance of bill of exchange by the importer to get delivery of the document is
known as retirement of import documents.
viii. Custom Clearance & release of goods: Imported goods are subjected to customs
clearance which is a very lengthy process & involves a lot of formalities. The
importer usually appoints a C&F agent for fulfilling these formalities. After the
formalities are cleared, the goods are released.
 DOCUMENTS USED IN INTERNATIONAL TRANSACTIONS
 Export Invoice: It is a seller’s bill information about goods like quantity, number
of packages, marks on packing, name of ship, port of destination, terms of
delivery, payments etc.
 Certificate of Origin: This certificate specifies the country in which the goods are
being manufactured. This certificate enables the importer to claim tariff
concessions or other exemptions. This certificate is also required in case when
there is a ban on imports of some goods from certain countries.

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  Shipping Bill: It is the main document on the basis of which permission is granted
for the export of goods by the custom office. It contains full details regarding the
goods being exported name of the vessel, exporters name & address, country of
final destination etc.
 Mate’s Receipt: This receipt is issued by the captain or mate of the ship to the
exporter after the goods are loaded on board of the ship. It contains name of the
vessel, description of packages, marks, conditions of the cargo at the time of
receipt onboard the ship etc.
 Bill of lading: It is a document issued by the shipping company. It acts as an
evidence regarding the acceptance of shipping company to carry the goods to the
port of destination. It is also referred to as document of title to the goods & is
freely transferable by endorsement & delivery.
 Marine Insurance Policy: It is a document containing contract between the
exporter & the Insurance Company to indemnify the insured against the loss
incurred by the insured in respect of goods exposed to the perils of the sea transit
in consideration of a payment called premium.
 World Trade Organization (WTO)
 WTO Came into existence on 1st January 1995. The headquarters of WTO is
situated at Geneva, Switzerland.
 It is a permanent organization created by an international treaty rectified by the
Governments and legislatures of member states.
 It is concerned with solving trade problems between countries and providing a
forum for multilateral trade negotiations.
Objectives of WTO
 To reduce the trade tariffs and barriers imported by different countries in the
smooth flow of international trade.
 To improve the standard of living, create employment, increase income and
effective demand and facilitate higher production and trade.
 To maintain sustainable development by optionally using world’s resources.
 To promote an integrated, more viable and durable trading system among nations.