International trade 2005...
INTERNATIONAL TRADE UNIT ONE: Scope of International Marketing – International Marketing Vs Domestic Marketing – Motivation to Export – Special difficulties in International Marketing – International Marketing Environment – Features of Globalization – Essential Conditions – Pros and Cons. UNIT TWO: Marketing Selection and Entry Decision – Overseas Marketing Research – Competitive Intelligence – Standard Clauses of Sales Contract – International Trade policies – Tariffs, Subsidies and Quotas. UNIT THREE: Counter Trade – World Commodity Markets – World Trade in Services- GATT – WTO – Institutional Infrastructure for Export promotion in India – EXIM Bank – ECGC. UNIT FOUR: Procedure for execution of Export order – Export of Goods – Export by Air and Sea – Export Documents (Quality control and Preshipment Inspection) – Marine Insurance. UNIT FIVE; Terms of Payments – Letter of Credit types – process – advantages – overview of EXIM Policy. Foreign Exchange – Exchange Rate Determination – Exchange Rate System – Fixed and Flexible Exchange – Advantages and Dis advantages. REFERENCE BOOKS: INTERNATIONAL BUSINESS ENVIRONMENT – FRANCIS CHERUNILAM INTERNATIONAL BUSINESS – P. SUBBA RAO EXPORT MARKETING – RATHORE INTERNATIONAL MARKETING MANAGEMENT – RL. VARSHNEY AND MAHESWARI.
INTERNATIONAL TRADE UNIT ONE DEFINITION OF INTERNATIONAL MARKETING: Kotler defines marketing as 'human activity directed at satisfying needs and wants through exchange process.' International marketing can be defined as "marketing carried on across national boundaries". International marketing has also been defined as ' the performance of business activities that direct the flow of goods and services to consumers or users in more than in one nation'. It is different from domestic marketing in as much as the exchange takes place beyond the frontiers, thereby involving different markets and consumers who might have different needs, wants and behavioral attributes. Scope of International Marketing: Though international marketing is in essence export marketing, it has a broader connotation in marketing literature. It also means entry into international markets by: Opening a branch/ subsidiary abroad for processing, packaging, assembly or even complete manufacturing through direct investment. Negotiating licensing/ franching arrangements whereby foreign enterprises are granted the right to use the exporting company's know-how's, viz., patents, processes or trademarks with or without financial investment. Establishing joint ventures in foreign countries for manufacturing and or marketing and Offering consultancy services and undertaking turnkey projects broad. Depending upon the degree of firm’s involvement, there may be several variations of these arrangements. International Marketing vs. Domestic Marketing: There are a number of similarities and differences between international and domestic marketing. 1. Both in domestic marketing and international marketing success depend upon satisfying the basic requirements of consumers. This necessarily involves finding out what the buyers want and meeting their needs accordingly.
2. It is necessary to build goodwill both in the domestic market and international market. If a firm is able to develop goodwill of consumers or customers, its tasks will be simpler than the one, which has not been able to do so. 3. Research and development for product development and modification is necessary both for international marketing and domestic marketing. However, there are some salient features of difference between international marketing and domestic marketing. They are as follows: 1. Sovereign Political Entities: Each country has is a sovereign political entity and goods and services had to move across national boundaries. S a result, they may have to face a number of restrictions. This my fall in any of the following categories; Tariffs and customs duties Quantitative restrictions Exchange controls Local Taxes. 2. Different Legal Systems: Each country has its own legal system and it differs from country to country. The existence of different legal systems makes the task of businessmen more difficult as they are not sure as to which particular system will apply to their transactions. In the case of domestic marketing the buyers are aware of the legal systems in their country. 3. Cultural Differences: In domestic marketing there is only one nation, same language and culture where as at international marketing many languages and different cultures. 4. Different Monetary Systems: Each country has its own monetary system and the exchange value of each country's currency is different from that of the other. The exchange rates between currencies fluctuate every day. In case of domestic marketing there is only one currency prevailing in the country. 5. Differences in the Marketing infrastructure:
The availability of the marketing facilities available in
different countries may vary widely. For example, an advertisement medium very effective in one market may not be available or may be under developed in another market. 6. Trade Restrictions: Trade restrictions, particularly import controls are a very important problem which an international marketer faces.
7. Transport Cost: In International trade, transport cost is a major marketing expense where as in domestic trade transport cost influences only to certain extent. 8. Procedures and Documentations: Each country has its own procedures and documentary requirements and traders have to comply with these regulations if they want to export or import goods from foreign countries. 9. Degree of Risk: There is a greater degree of risk involved in international marketing than in domestic marketing due to Large volume of transactions Higher value of transaction Longer time period More time of transit Longer credit period Comparatively less knowledge Exchange fluctuations. 10. Stability in Business Environment:
In domestic marketing there is relatively stable business
environment. At international marketing multiple environments, many of which are likely instable.
TRANSITION FROM DOMESTIC TO INTERNATIONAL MARKET
The Decision to enter foreign markets must be based on strong economic factors. Temperamental decision to export is transient in character and totally unsuitable for export marketing. Success in exporting requires total involvement and determination, which can come only out of basic economic necessity as perceived by the corporate unit. They grouped as Pre-export behaviour and Motivation to Export. 1. Pre-Export Behaviour: Every firm at some point of time starts as a non-exporter. The point to be studied is what made some of these firms get involved in export business. This must give a clue to the question as to whether a present non-exporter will become an exporter and if so why and when. The factors, which influence a non-exporting firm's decision to go in for export business, can be classified under the following categories:
(a) Firm characteristics:
Firm characteristics include product characteristics; size and
growth of the domestic market, optimum scale of production, and potential export markets. If the firm is manufacturing a product, which is internationally marketable, and the present and future market prospects in the domestic market are not much encouraging, the motivation of the firm to get involved in export business will be considerable. (b) Perceived External Export Stimuli: This will include fortuitous order, market opportunity and government's stimulation in the form of incentives and assistance. (c) Perceived Internal Export Stimuli: This refer to the management's expectations about the effects of exports on the firm's business. This covers the level of capacity utilization, the higher level of profits and the growth objectives of the firm. (d) Level of Organizational commitment: The decision makers must agree on the level of commitment. This is crucial because it will determine whether adequate resources will be made available for embarking on international marketing. Resources will be required for hiring new staff specialized in international marketing, hiring of consultants for carrying out overseas market potential studies etc.,
2.Motivation to Export: (Economic reasons) There are some basic economic reasons which might influence a firm decision regarding export business: These are under: Relative Profitability: The rate of profit to be earned from export business may be higher than the corresponding rate on the domestic sales. Insufficiency of Domestic Demand: The level of domestic demand may be insufficient for utilizing the installed capacity in full. Export business offers a suitable mechanism for utilizing the unused capacity. This will reduce costs and improve the overall profitability of the firm. Recession in the domestic market often serves as a stimulus to export ventures. Reducing business risks: When a firm is selling in a number of markets, the downward fluctuations in sales in one market, which may be the domestic market, may be fully or partly counter balanced by a rise in the sales in other markets. Secondly, geographic diversification also provides the momentum to growth in as much as a single or few markets will have only limited absortive capacity. Legal restrictions:
Governments may impose certain restrictions on further growth and
capacity expansion of some firms within the domestic market in order to achieve certain
social objectives. But there may not be any such restrictions, if the additional capacity is utilized for exports. Then the firm may be tempted to export its products abroad. Obtaining imported inputs: Nations have to pay for imports of materials, technology or processes not available within their national boundaries. Governments, therefore, may be compelled to impose export obligations on the firms, especially those in need of imported inputs. In other words, in order to import, the firms will have to export. Social responsibility: Sometimes businessmen themselves feel a sense of responsibility and contribute towards the national exchequer by increasing their exports. They also build up their image in domestic marketing by their export activities. They also look at exporting to attain status and prestige. Increased productivity: Increased productivity is necessary for ultimate survival of a firm. This will lead the firm to increase production and then move to export business. To meet the increased costs of Research and Development, larger markets become a necessity and exports become unavoidable. Technological improvement: Entry to export market may enable a firm to pick up new produce ideas and to add to product line, improve its product, reduce costs and discover new applications for its product. SPECIAL DIFFICULTIES IN INTERNATIONAL MARKETING There are a number of difficulties in undertaking international business. Some of them the special difficulties are as follows: Quantitative restrictions to protect local industries. Government regulations restricting imports by way of import licenses, etc. Exchange controls. Local taxes like sales taxes on imported goods. Different monetary systems like Dollars in USA, Sterling in UK, YEN in Japan. Different legal system regarding import and export of goods. Differences in procedures and documentation. Differences in market characteristics. Lower mobility of factors of production. Cultural dimensions of international marketing. Economic Unions. Trade barriers - Tariff and non tariff barriers. Lack of export incentives to exporters. Lack of adequate export financing especially for small scale industries.
Complications of Exporting. Paper work is more in export business. Competition from local exporters, competition from exporters from other countries and competition from producers of goods in the importing countries. Shipping and freight problems. Non-availability of latest information about the market conditions, etc.
INTERNATIONAL MARKETING ENVIRONMENT It is necessary to know the concepts of "controllable" and "uncontrollable factors" in international marketing. There are some factors which can be controlled by the management may not be able to haves any control over them. Now let us discuss these factors as follows: Controllable Factors: Control will have to be defined with reference to a company's management. The company is in a position to control and design marketing mix elements i.e. product, price, export to any place by choosing any distribution channels and follow any promotional methods. Uncontrollable Factors: There are some factors on which the company can not have any control.
uncontrollable factors in international marketing are described here. SOCIAL FACTORS: The social/cultural environment of a nation/market may profoundly influence business in different ways and dimensions.
The attitude of workers, lab our-management relations,
government-business relations, entrepreneurial nature and attitude, political philosophies and systems, legal environment, business ethics, governance, government policies etc. could have a social influence of them Management may undergo a social transformation, for example , a number of family owned business groups in India have ushered in professional management. The need for good corporate governance is getting more and more recognition. In short, the type of products to be manufactured and marketed, the marketing strategies to be employed, the way the business should be organized and governed, the values and norms it should adhere to, are all influenced by social structure and the culture of a society. The tastes and preferences, purpose of consumption, method of consumption, occasion of consumption, quantity
of consumption, values associated with consumption, etc of a product may show wide variations between cultures. Because of cultural differences, a promotion strategy that is very effective in one market may utterly fail in another, or may even result in social or legal reprisals. Etiquettes differ from culture to culture.
The ways of meeting and greeting people, expression of appreciation or
disapproval, methods of showing respect, ways of conducting meetings and functions, table manners etc. vary quite widely between cultures. So familiarity with cultural is necessary for success. The other social factors which influences the international marketing inclusive of
National legal regime
Political and Financial system
Language, Religion and Climate
POLITICAL and GOVERNMENT FACTORS: The following political and government factors must be taken into consideration by an international marketer while planning to entry any market abroad: Consistency of government policies. The nature of political relationship between the target country and exporter's country. The presence or absence of controls on foreign exchange, imports, prices,etc., in the target country. Legal restrictions on foreign investments and the patent ability of the product in the target market. The company has no control over all the above factors mentioned and hence the exporter has to adjust him to these factors. ECONOMIC FACTORS: I. Commercial policy variables e.g. tariffs, quotas, licensing or any other non-tariff barriers. II. Currency restrictions - depending on the policy of the central bank of the country. III. Internal demand management policies and instruments followed by the country. The exporters have to be thorough with the above policies and adjust them accordingly.
DEMOGRAPHIC FACTORS: Demographic factors such as size of the population, population growth rates, age composition, ethic composition, family size, family life cycle, income levels, have very significant implications for business. The demographic environment differs from country to country and from place to place within the same country or region. Further, it may change significantly over time. Because of the diversity of the demographic environment companies are sometimes compelled to adopt different strategies within the same market COMPETITON: Competition will also influence the international marketing. As like domestic marketing the trader always aware of his competitors. But the quantum of competitors is more in international marketing than domestic marketing. Normally by the following ways the international merchant will face the competitors.
Competition vis-à-vis producers in the importing country.
Competition vis-à-vis exporter from the competing countries.
Competition vis-à-vis other exporters from one's own country.
The exporters have no control over these types of competition and hence they have to compete with all the three types of competitions. LOGISTICS: Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements. The concept of logistics play vital role in international marketing by the ways sense.
The merchant has to seek the availability of required type of transport such as sea, air freezer space, etc.
Cost of transportation.
Unless the exporters are in a position to meet the above requirements of transport facilities and costs they cannot export their products to the target markets.
RISKS: There is a greater degree of risk involved in international marketing than in domestic marketing due to Large volume of transactions Higher value of transaction Longer time period More time of transit Longer credit period Comparatively less knowledge Exchange fluctuations. Political risks Commercial risks Act of nature Act of enemies The exporters have to face these risks in the international markets. These risks can be covered by taking insurance policies from the ECGC and General Insurance.
CONCEPT OF GLOBALIZATION "Globalization means the production and distribution of products and services of a homogeneous type and quality on a world wide basis”. Globalization also means globalizing the marketing, production, investment, technology and other activities. How do these happen? Globalization does not take place in singly instance. It takes place gradually through and evolutionary approach. FEATURES OF GLOBALIZATION
Operating and planning to expand business throughout the world.
Erasing the differences between domestic market and foreign market.
Buying and selling goods and services from/to any country in the world.
Establishing manufacturing and distribution facilities in any part of the world based on the feasibility and viability rather than national consideration.
Product planning and development are based on market consideration of the entire world.
Sourcing of factors of production and inputs like raw materials, machinery, finance, technology, human resources, managerial skills from the entire globe.
Global orientation in strategies, organizational structure, organizational culture and managerial expertise.
Setting the mind and attitude to view the entire globe as a single market.
ESSENTIAL CONDITIONS FOR GLOBLAIZATION BUSINESS FREEDOM: There should not be unnecessary government restrictions which come in the way of globalization, like import restriction restrictions on sourcing finance or other factors fro broad foreign investments etc. FACILITIES: The extent to which an enterprise can develop globally from home country base depends on the facilities available like the infrastructural facilities. GOVERNMENT SUPPORT: Although unnecessary government interference is a hindrance to globalization, government support can encourage globalization. Government support may take the form of policy and procedural reforms, development of common facilities like infrastructural facilities, R and D support, financial market reforms and so on.
RESOURCES: Resources is one of the important factors which often decides the ability of a firm to globalize. Resourceful companies may find it easier to thrust ahead in the global market. COMPETITIVENESS: The competitive advantage of the company is a very important determinant of success in global business. A firm may derive competitive advantage from any one or more of the factors such as low costs and price, product quality product, product differentiation, technological superiority, after sales service, marketing strength etc.
ORIENTATION: A global orientation on the part of the business firms and suitable globalization strategies are essential for globalization. PROS AND CONS OF GLOBALIZATION ADVANTAGES: Free Flow of Capital: Globalization helps for free the flow of capital from one country to the other. It helps the investors to get a fair interest rate or dividend and the global companies to acquire finance at lower cost of capital. Further Globalization increases capital flows from surplus countries to the needy countries, which in turn increases the global investment. Free flow of Technology: Globalization helps for the flow of technology from advanced countries to the developing countries. It helps the developing countries to implement new technology. Increase in Industrialization: Free flow of capital along with the technology enables the developing countries to boost-up industrialization in their countries. Spread up Production facilities throughout the Globe: Globalization of production, leads to spread up manufacturing facilities in all the global countries depending upon the locational various favorable production factors. Balanced development of world economies: With the flow of capital, technology and locating manufacturing facilities in developing countries, the developing countries industrialize their economies. This in turn leads to the balanced development of all the countries. Increase in Production and Consumption: Increased industrialization in the globe leads increase in production and thus results in balanced industrial development along with increase in income which enhances the levels of consumption. Lower prices with high quality: Indian consumers have already been getting the products of high quality at lower prices. Increased industrialization spread up of technology, increased production and consumption level enable the companies to produce and sell the products of high quality t lower prices. Cultural exchange and demand for variety of products: Globalization reduces the physical distance among the countries and enables people of different countries to acquire the culture of other countries. The cultural exchange, in turn makes the people to demand for a variety of products
which are being consumed in other countries. For example, demand for American Pizza in India and Masala dosa and Hyderabad Briyani and Indian styled garments in USA and Europe. Increase in Employment and Income: Globalization results in shift of manufacturing facilities to the low wage developing countries. As such, it reduces job opportunities in advanced countries and alternatively creates job opportunities in developing countries. Higher Standards of Living: Further, globalization reduces prices and thereby enhances consumption and living standards of people in all the countries of the world. Balanced Human Development: Increase in industrialization on balanced lines in the globe, improves the skills of the people of developing countries. Further, the increased economic development of the country enables the government to provide welfare facilities like hospitals educational institutes etc. which in turn contributes for the balanced human development across the globe. Increase in the Welfare and Prosperity: The balanced industrial, social and economic development of the world nations consequent upon the globalization along with the welfare measures provided by the governments lead to increase in the welfare of the people and prosperity of the world countries.
DISADVANTAGES: Globalization kills Domestic Business: The MNCs from advanced countries utilize the opportunities created by globalization, establish manufacturing and marketing facilities in developing countries. The domestic business of the developing countries fails to compete with the MNCs on the technology and quality front. Exploits Human Resources: The foreign companies which are located in developing countries invariably violate the labor and environmental laws in order to have the cost advantage. These companies employ child labor, pollute environment, and ignore workplace safety and health issues. However, it is viewed that, globalization enables the developing countries to become rich and enforce the labor and environmental regulations. Leads to Unemployment and Underemployment: MNCs produce the products in their home countries or in some other foreign countries and market in developing countries. Therefore, the domestic country’s operations are to be reduced. This in term leads to reduction in employment opportunities particularly in less developed countries.
Decline in demand for domestic products: Selling of high quality foreign products at low prices by MNCs reduces the demand for the domestic products. Decline in Income: Unemployment and decline in demand for domestic products of both industrial agricultural goods leads to reduction in income of the people. Widening gap between rich and poor: Globalization not only results in decline in income but widens the gap between rich and poor. This is because, competent people, people with innovative skills, efficiency etc., get abnormal income, while other average people have to strive for even a minimum wage. This results in widening the gap between have and the have-nots, Transfer of natural resources: MNCs establish their manufacturing facilities in developing countries exploit their natural resources and sell the products in other countries. Through these means, the natural resources of developing countries are transferred to other countries. UNIT TWO INTERNATIONAL MARKETING DECISION In developing a foreign operation, the marketer has to take four decisions. These are: Marketing Decision Marketing selection decision Market entry decision Marketing Mix Decision Marketing Decision: All the business involves risk. One of the risk element is sudden fall in demand.
circumstances the firm which concentrating only domestic market will find thread about its survival. At the same time if the company is doing international trade they can concentrate for international market to balance the fall in demand in domestic market. When a firm thinks of entering into an international market, it should develop a marketing strategy to be used for both domestic and foreign business. Before taking the marketing decision of entering into international market it should satisfy itself for the following questions. 1. Are there any opportunity open to firm and its product in abroad?. 2. Whether it can meet the demand in domestic as well as in international market? 3. Whether it can adapt the product according to the needs of the consumers?
4. Whether it can formulate and implement a policy and regulations pertaining to exports and imports? Even if the opportunities appear favorable, the firm must have the resources in men, money and materials to capitalize them. MARKET SELECTION DECISION To be successful in initial exports, the first step is to choose the right place for the initial export venture, so that the returns may be quicker and certain, and the risks may be minimum. No firm has unlimited resources. A proper selection of markets would ensure that time and efforts are not wasted. While selecting initial markets for exports, the trader should consider the following points carefully:
Select one or two markets initially so that is the activity may be within manageable units:
Smaller less obvious markets should not be overlooked. It would be unwise to sell in the more competitive European market, when a less competitive Arab or African market is available;
It is advisable to spend some time and money on visiting the overseas market. This will enable the marketer to solve many practical problems.
Enter the export business only when the marketer is sure of its profitability.
Do not enter those markets where there are a lot of import restrictions;
Take guidance from government and non-government institutions.
Collect the latest data on export surveys and commercial intelligence from India's Commercial Representatives abroad;
Collect the address of potential customers abroad and start correspondence with them; avoid any trade disputes; but if such disputes arise, settle them amicably.
Make certain at the start that your export business is going to be profitable.
Find a need and fill it, this will ensure success.
SELECTION OF MARKET: The company in this connection has to take the following steps so that it can ultimately choose one or two markets of its choice:1) The company should examine export statistics of the product from its country. The company can look into these statistics and find out where the products are exported. The concerned export promotion council also publishes such statistics. 2) It should examine import statistics of the product in the target markets. 3) The company can also visit some Government offices, libraries, trade associations to find out the policy, names of importers etc. 4) The company also has discussion with some successful exporters. 5) It can also have discussions with Commodity boards, ECGC, etc 6) It may also contact our Trade representative located in our Embassies and High commissions abroad. 7) It may also contact Foreign Embassies and High Commissions located in India. 8) The company can also send some officers to the target markets to find out the market conditions there. 9) It can take part in trade fairs and exhibitions conducted by ITPO and other agencies. 10) It must also find out economic, social and cultural factors in the target markets. 11) It must also decide whether it should choose one market or a few markets. After examining various details as above the exporters have to avoid a market in the following cases: 1) If shipping costs will be far too high 2) If the investment required is more 3) Those markets where there are a lot of import restrictions;
CRITERIA FOR SELECTION OF MARKET: The marketing firm should have a set of decision criteria for selecting the target markets. While the complete set will have to take into account the product and marketing characteristics of specific products, some of the common elements are: (i)Size of the Market:
The target territory should be one which is or has the potential to be a sizable market. It is easier to capture a 5 per cent of a big market than to capture a 25 per cent share of smaller market. (ii)Growth: It is enough that the market is existing but it should also be in the growth stage. Higher scales over time become easier when the overall demand is increasing. It is not enough if additional sales come at the cost of the competitions. (iii) Logistics: Dispatching the goods to the right place at the right time is the essence of all marketing, including international marketing. Inadequate logistic support can play havoc in the planning of export shipments, which will jeopardize any marketing efforts. Further , in the case f certain products, special types of logistic infrastructure is necessary.
(iv) Distance: The transport cost and distance are intimately correlated. For low-valued items, the incidence of higher transport cost may reduce export competitiveness quite appreciably. The selection process of the target market will have to take this factor into account. (v) Competition: The nature and extent of competition is a very crucial factor to reckon with. A thorough study will have to be made to determine how the firm's product profile compares with that of the competitive product line. The firm will have to evaluate whether it is in a position to match such competition onslaught. (vi) Distribution System: The availability of a capable agent or distributor is a very important consideration, especially for products requiring pre-selling, such as demonstration and post-selling, such as after- sales services. A good distributor is essential. Even if a market is otherwise promising, if no good distributor or agent is available, the company should think twice before deciding to enter that market, unless it is in position to set up its own office there.
THE MARKET ENRTY DECISION: Once the target market has been identified, the next step relates to the decisions regarding the alternative methods of entry. The various methods of market entry open to firm in a given country are: Indirect exporting Direct Exporting Licensing Franchising Joint Venture Foreign subsidiaries Special Modes INDIRECT EXPORTING: The indirect way of exporting is almost equivalent to domestic sales. The firm sells its products in its country to another party, who takes the responsibility of actual export. This can be done by: a) Selling to Merchant Exporter House in India and b) Selling to visiting/resident buyers Selling to Merchant Exporter or Export Houses in India: There are many merchant exporters and or recognized export houses in India, which are willing to buy goods from the Indian manufacturers and sell them abroad. Merchant exporters or export houses sell and buy on their account and thus assume the risks involved in exporting. A merchant exporter is free to decided what he will buy, where he will buy and at what price. Merchant exporters are usually well financed and maintain their branches at port towns and in important centers abroad. They usually have a system of gathering market information and keep a close watch on market trends. This method of exportation is useful when the company is small and, therefore, not in position to start an export department to like after exports sales. Selling to Visiting/Resident Buyers: Many big foreign companies have their resident buying representatives in India and other countries who are entrusted with the job of procurement. Some other companies regularly send buying teams for the same purpose. The amount of business that is conducted by such buying
operations is substantial. The advantage of selling in this way is similar to what had been mentioned for exporting through export houses. Advantages of Indirect Exporting: It involves little time or effort because the merchant exporter takes care of all the difficulties involved and assumes all the sales and credit risks; It requires less investment and the firm's capital is not tied up; It carries less risk, and the firm does not have to spend money on market research or on setting up branches abroad; It makes possible the utilization of the know-how and experience of middlemen; The manufacturing firm is free to concentrate on production. Disadvantages of Indirect Exporting: For practical purposes, the manufacturer cannot be called an exporter, and he cannot claim or avail of export incentives given on a fairly liberal scale; Indirect exporting provides little control over the operations of middlemen. Export merchants may concentrate on the products, which offer them the greatest profit. The small manufacturer's products may be ignored. The middleman, particularly the agent on commission basis, may not be aggressive, with the result that sales may suffer; Export merchants middlemen may not be available for all the markets.
DIRECT EXPORTING: In case the firm decides not to operate through any of the intermediaries described in the earlier paragraphs, and opts for direct exporting, it will have to choose most carefully between one and or the other kind of export sales organization to be created. If its export plans are ambitious and the prospects of selling in a number of markets are promising, it may make a modest startappoint an export manager plus a clerk. Depending upon the firm's export sales turnover, existing and potential, it may create/set up a separate export department or even a separate export company. Direct Exporting may also be undertaken by: Setting up a sales branch or a subsidiary sales organization in a foreign country, which may be a substitute for, or a supplement to the home organization; Appointing home-based sales representatives, who would travel abroad and book orders;
Selecting suitable distributors in a foreign country who would buy his product and sell it there, or suitable agents in that country who would sell it on commission basis without taking any title to it. Advantages of Direct Exporting:
The manufacturer will have better knowledge of customers' requirements and market conditions.
He will have direct control over the marketing operations.
He can enjoy the full returns on exports. His profits will be more than selling the goods through middlemen.
Direct exporting is the only choice for certain products and not alternative to get success, especially in the following cases: -
If the product is technically unique
If middlemen decline
If importers wants only direct export
If costs increase because of tariffs
If after sales service is a must
Disadvantages of Direct Exporting:
Large financial resources needed
Managerial ability is essential and more staff is required
Increased distribution cost
Greater initial outlay before profit begins to flow in.
LICENSING: Under this method, the manufacturer enters into an agreement with a licensee in the foreign country and this gives him the right to use the manufacturing process, a patent design or a trademark, technical information or some facility in return for some fee or royalty. It is often the quickest way of entering overseas markets - sometimes the only possible way as in centrally planned economies. It is clearly a method that involves little expense, and avoids all distribution costs. Advantages and Disadvantages of Licensing Advantages
Licensing mode carries low investment on the Licensing agreements reduce the market
part of the licensor.
opportunities for both licensor and licensee.
Licensing mode carries low financial risk to the Both the parties have the responsibilities to licensor.
maintain the product quality and promoting the product. Therefore one party can affect the other through their improper acts.
Licensor can investigate the foreign market Costly and tedious litigation may crop up and without much effort on his part. Licensing
hurt both the parties and the market. with
investment on research and development.
less There is scope for misunderstanding between the parties despite the effectiveness of the agreement.
License escapes himself from the risk of There is a problem of leakage of the trade product failure.
secrets of the licensor. The licensee may sell the product outside the agreed territory and after the expiry of the contract.
FRANCHISING: Franchising is also a form of licensing. The franchisor can exercise more control over the franchise compared to that in licensing. Under franchising, an independent organization called the franchise operates the business under the name of another company called franchisor. The franchisor provides the following services to the franchisee: Trade marks Operating system Product reputations Continuous support systems like advertising, employee training, reservation service, and quality assurance programme etc. Advantages and Disadvantages of Franchising Advantages
Franchisor can enter global markets with low International investment and low risks.
complicated than domestic marketing.
Franchisor can get the information regarding It is difficult to control the international the
environment of the host country. Franchisor learns more lessons from the Franchising
experiences of the franchisees, which he could opportunities for both the franchisor and not experience from the home country’s franchisee. market. Franchisee can early start a business with low Both the parties have the responsibilities to risk as he selects an established and proven maintain product and operating system.
Franchise gets the benefit of R & D with low There is a problem of leakage of trade secrets. cost. Franchise escapes from the risk of product failure.
JOINT VENTURE: A joint venture involves a capital partnership and may be arranged for manufacturing activities, marketing activities, or both. This takes place when: The domestic investor buys an interest in a manufacturing unit situated in a foreign country; Any investor of a foreign country buys an interest in a manufacturing unit of the domestic investor already existing in that country; or A domestic investor and an investor in a foreign country together start a new venture in that foreign country.
The marketer establishes a subsidiary manufacturing unit in a foreign country. He is its exclusive owner and controller, the monarch of all that it contains. This is the culmination of international marketing. It is international production-cum marketing. When a company engages in such production in a number of countries, it is called multinational company. SPECIAL MODES OF ENTRY: A. Contract Manufacturing: Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract of manufacturing or outsourcing. B. Management Contracts: The companies with low level technology and managerial expertise may seek the assistance of a foreign company.
Then the foreign company may agree to provide technical assistance and
managerial expertise. This agreement between these two companies is called the management contract. C. Turnkey projects: A turnkey project is a contract under which firms agrees to fully design, construct and equity a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operations for a remuneration. International turnkey projects include nuclear power plants, air ports, oil refinery, national highways, railway lines etc.
INTERNATIONAL MARKETING RESEARCH
MARKET RESEARCH & MARKETING RESEARCH Market research is a complete analysis of the market. Information regarding the nature, size, organization, profitability of different markets, changes in markets and various factors, such as economic, social and political, affecting those changes are studies vigorously. The main purpose of market research is to know about the consumers and markets of the exporter's products and services. The research is mainly concerned with details regarding consumers. The research is mainly concerned with details regarding consumers.
Marketing research covers all aspects of the marketing activities such s markets, products, consumers, advertisements, sales promotion techniques, channels of distribution, warehousing, transport, pacing problems etc relating to firm's product while on the other hand market research emphasis research on the market and market segments and consumers and their behaviour. Thus the market research is only a part of marketing.
NEED FOR OVERSEAS MARKET RESEARCH :( Uses)
Market research is required to identify which markets should be selected as the target, based on the market size, growth, accessibility and competitive factors.
Identification of suitable products is also dependent upon research. Detailed field research investigations are required to determine the extent of product adaptation required to make the product acceptable in a given market.
Research can help prevent the use of inappropriate market entry method.
Research can help to determine the positioning of the product, taking into account the socio-cultural factors.
Promotional campaigns should be decided only when proper research has been carried out regarding their acceptability in a given environment.
Research also helps in taking appropriate packaging decisions.
Considerable amount of data collection and analysis are required to arrive at pricing decisions. Pricing is crucial for success in international marketing and a blunder can mar all prospects.
It is useful in converting uncertainty into certainty. Marketing research by providing information on market information on market environment, reduces uncertainty in it and makes the environment known. The uncertainty is mitigated.
The research becomes inevitable when the income, fashion, habits and preferences are changing very fast.
The needs for research also arise when the sale of the product is showing a downward trend and the reason for the fall could not be established.
METHODOLOGY FOR MARKET RESEARCH: Market research in almost all cases is carried out into two phases: viz., Desk research and field research. Stepwise formulation of a research plan comprising both desk and field research will be as follows: Identify the problem. Identify the information requirements to find out a solution to the problem. Identify the sources (primary and secondary) from where such information can be obtained. Collect and analyse the secondary source materials. Identify the gaps in information still remaining. Prepare a research brief for field research to collect information on the gaps. Design a questionnaire. Prepare the sample of respondents. Interview the respondents. Analyse and evaluate the results. DESK RESEARCH: Desk research is the first phase of the marketing research. It involves collection of all relevant information from known published and unpublished documentations available within and outside the organization. Inside or Internal source of information: This information can be gathered from the following: -
past sales record
enquires received from abroad
reports from its branches and agents abroad and its officers dealing in export trade.
Complaints received from foreign customers etc.
External Source of Information: This information can be had from any published documents which may provide data on the problems to be analysed. However before relying on any published documents the researcher should consider the following points: o
Exactly what products are included in the statistical classification
Who originally collected the data for what purpose, and whether thee might any motive for misrepresentation;
From whom the data were collected, and how reliable the methodology might have been and
How consistent the data are with other local or international statistics.
The following table shows the agencies which can furnish the required information for desk research. INFORMATIONS
EXAMPLES OF SOURCES
UN,OECD, national trade statistics
UN, Official statistical sources
Tariffs and quotas
Embassies, Chamber of Commerce
Banks and Embassies
Embassies and chamber of commerce
Bank reports, press reports and IMF year book
Official statistics of chamber of commerce and commodity boards.
Identification of agents
Directories, Reports of embassies and Journals
Credit and payment terms
Freight forwarders and clearing agencies
Previous market survey reports, company catalogues, daily economic newspapers on commodity prices.
FIELD RESEARCH: An analysis of data collected from desk research would reveal the gaps in information that still remain. Generally speaking product specific marketing in formations are not available from secondary (desk) sources. Going directly to the market may cover the gaps in information. There are
two specific important steps before field research can be undertaken viz., design and testing of a questionnaire and preparation of a sample of respondents. In order to secure the best possible return on the limited time that can be spent on export market research. Field research can be conducted through personal interviews, telephone interviews and stores checks. Of the three methods, personal interview is the most dependable if reliable data are to be required. Unfortunately, however, in many developing countries, the personal interview presents special problems for two main reasons. First the recruitment of interview is difficult and ins some cultures it is impossible to recruit female interviewers at all. Techniques of Field Research: Interview methods, Questionnaire and Observation method (Refer Research methodology book for further details for the above said techniques)
COMPETITIVE INTELLIGENCE: Modern marketing is very competitive. Modern business is a many sided game in which rivals and opponents continuously try to formulate strategies to gain advantage over one another. Predicting the behaviour of one's competitors and outguessing of the competitor will need the services of marketing intelligence. A marketer cannot survive under keen competitions without up to date market information particularly regarding the nature, character and size of competition to be met. It is therefore, necessary for the exporter to obtain competitive intelligence and make a study about competitions for his products. Regarding that the trader should have answer for the following questions about his competitors: Basic Factors: What are the competitive products are sold in that particular country? Who are the competitors? What facilities do they have and where are they located? Who are their local officers, and how good are they? What problems do the face, and how are they trying to solve them? Are they involved in litigation? What kind? What relation do they have with government?
Do they enjoy incentives or favours? Finance: What is the current financial position of the competitors? What are their investment programmes? What fees and royalties do they use? What are their financial resources and how do they finance expansion? What dividend policies do they pursue? Are they sacrificing long-term advantage for short term gains? Production: What plans do the competitors have? What production technologies are used? How efficient are the plants? What capacity of existing plant is being used? Do they have any labour problems? What's their source of manpower? What is their manufacturing cost? How's their product quality?
Marketing: What marketing channels they have? Their pricing strategy. Their promotional strategies. What's their market share?
How was it changed over the period of time? What are their advertising media? How much cost is incurred regarding that? Supplying the market: How do the competitive products get to the market? Who are the importers and how do they operate? What credit, pricing, and other terms are extended by foreign suppliers?
STANDARD CLAUSES OF INTRNATIONAL SALES CONTACT One of the distinctive features of international marketing is that exporters have to deal with different legal systems. An Indian exporter selling his product to an importer, say in the USA, must contend with the fact that US laws may well have some influence either on the contractual terms to be agreed upon between him and the importer, or on the settlement of disputes, if any arising out of the contract. The function of a sales contract is to set forth in writing what one party agrees to do for the other and what each may expect of the other. The elements or the clauses of an export contract vary depending upon the nature of product being exported. There are, however, some elements that are almost universal in their application. These elements are as follows:
Names and addresses of the parties - exporters and importers
The description of the product.
Quality of the product.
Price per unit.
Tax and charges
Mode of transport
Delivery: Place and schedule
Marking and labeling.
Mode of payment.
Credit period, if any
Warranties - assuring repairs over a period.
Passing of risk.
Passing of property.
Availability/ non-availability of export and import licenses.
Settlement of disputes.
Proper law of contract.
INTERNATIONAL TRADE POLICIES TRADE BARRIERS (METHODS OF PROTECTION) Managing any business strategically needs an understanding of the business policies. But in case of global companies, an understanding of trade policies is more essential. International trade policies deal with the policies of the national governments relating to exports of various goods and services to various countries either on equal terms and conditions or on discriminatory terms and conditions. Government announces their trade policies with regard to the following from time to time. They are also called the instruments of trade policy. They are: Tariffs, Subsidies and Import quotas.
TARIFFS Tariff refers to the tax imposed on imports. It is a duty or tax imposed on internationally traded commodities when they cross the national borders. The objectives of Tariffs are To protect domestic industries from foreign competition To guard against dumping To promote indigenous research and development To conserve foreign exchange resources of the country To make the balance of payments position more favorable and To discriminate against certain countries.
IMPACT OF TARIFFS Tariff affect on economy in different ways. An import duty generally has the following effects: Protective effect: An import duty is likely to increase the price of imported goods. This increase in the price of imports is likely to reduce imports and increase the demand for domestic goods. Import duties may also enable domestic industries to absorb higher production costs. Thus, as a result of the protection by tariffs, domestic industries are able to expand their output. Consumption Effect: The increase in prices resulting from the levy of import duty usually reduces the consumption capacity of the people. Redistribution Effect; If the import duty causes an increase in the price of domestically produced goods, it amounts to redistribution of income between the consumers and producers in favor of the producers. Further a part of the consumer income is transferred to the exchequer by means of the tariff. Revenue Effect: As mentioned above, a tariff means increased revenue for the government. Income and Employment Effect; The tariff may cause a switch over from spending on foreign goods to spending on domestic goods. This higher spending within the country ay cause an expansion in domestic income and employment.
Competitive Effect: The competitive effect on the tariff is, in fact, an anti-competitive effect in the sense that the protection of domestic industries against foreign competition may enable the domestic industries to obtain monopoly power with all its associated evils. Terms of trade effect:
In a bid to maintain the precious level of imports to the tariff imposing country, if the exporter reduces his prices, the tariff importing country is able to get imports to a lower price. QUOTAS Quota is direct restriction on the quantity of goods which are imported into a country. These restrictions are imposed by issuing import licenses to certain firms and individuals to import certain quantity of the goods. India had quotas of imports of various goods like cars, motor cycles, milk etc. up to 31st march 2001. Import quotas provide the protection to the domestic firms from the foreign countries.
IMPACT OF QUOTAS Balance of Payment Effect: As quotas enable a country to restrict the aggregate imports within specified limits, quotas are helpful in improving its balance of payments position. Price Effect: As quotas limit the total supply, they may cause an increase in domestic prices. Consumption Effect: If quotas lead to an increase in prices, people may be constrained to reduce their consumption of the commodity subject to quotas or some other commodities. Protective Effect: By guarding domestic industries against foreign competition to some extent, quotas encourage the expansion of domestic industries. Redistributive Effect: Quotas also have a redistributive effect if the fall in supply due to important restrictions enables the domestic producers to raise prices. The rise in prices will result in the redistribution of income between the producers and consumers in favour of the producers. Revenue Effect:
Quotas may also have a revenue effect. As quotas are administered by means of licences, the government may obtain some revenue by charging a licence fee. Terms of Trade Effect; Quotas may affect the terms of trade of the country imposing them. The effect of quotas on the terms of trade depends upon the elasticity of the foreign offer curves.
TARIFFS Vs QUOTAS The differences between tariffs and quotas will be clear by the following way of comparison:
Let us first examine the superiority of quotas to tariffs:
As a protective measure, a quota is more effective than the tariff.
A tariff seeks to
discourage imports by raising the price of imported articles. It however fails to restrict imports when the demand for imports is price inelastic.
When compared to tariffs, quotas are much precise and their effects much more certain. The reactions or responses to tariffs are not clear and accurately predictable; but the effect of quotas on imports is certain.
It has been argued that quotas tend to be more flexible; more easily imposed and more easily removed instruments of commercial policy than tariffs. Tariffs are often regarded as relatively permanent measures and rapidly build powerful vested interests, which make them all the more difficult to remove. Quotas have many characteristics of a more temporary measure, are designed to deal only with a current problem, and removable as soon as circumstances warrant.
Quotas, however, suffer from certain effects. Tariffs in some respects are superior to quotas.
The effects of quotas are more rigorous and arbitrary and they tend to distort international trade much more than the tariffs. That is why GATT condemns quotas and prefers tariffs to quotas for controlling imports.
Quotas tend to restrict competition much more than tariffs by helping importers and exporters to acquire monopoly power.
If import quotas are allocated only to a few
importers, they may enable them to amass fortunes by exploiting the market. Similarly, quotas tend to promote the concentration of economic power among foreign exporters.
Quotas may support inflationary pressures within the country by restricting supply. Tariffs also suffer from the same defect.
Quotas offer greater scope for corruption than tariffs.
SUBSIDIES In order to encourage domestic production or to protect the domestic producer from the foreign competitors, government pays to a domestic producers reducing operations cost. Such payments are called subsidies. Subsidies are in different forms. They are: Cash grants, loans and advances at low rate of interest, tax holidays, government procurement of out put at a higher rate, equity participation and supply of inputs at lower prices.
INTERNATIONAL TRADE - UNIT III
COUNTER TRADE Counter Trade refers to any one of several different arrangements by which goods and services re traded for each other, on either bilateral or multilateral basis. There are a variety of forms of counter trade. Basically it is a barter (exchange of one type of goods for another type of goods) or quasi-barter agreement, where cash may not involve but there is always a link between the imports and exports transactions. In other words imports are paid out of exports in counter trade. For example India exports iron and steel against import of heavy machinery under a contract it is called a counter trade transaction. FORMS OF COUNTER TRADE: There are a number of forms of counter trade. We may examine them in detail in detail as in the following paragraphs. Barter: In the barter agreement, the exporter sells specified goods to the importer in exchange for specified goods. In other words barter involves trading goods for goods. In this case no cash in involved. Pure barter of this type is rare in now a days. Compensation counter trade: Under compensation arrangement the exporter agrees to accept a part of consideration in cash and the balance in kinds, but the exporter transfers the purchasing commitment to a third party who may be an end user of products or a trading house. This type of counter trade is not very common as it takes considerable time to find a suitable third party to whom the exporter can transfers the purchasing agreement. Buy back arrangement: This type of arrangement sis the most popular arrangement involving a relatively large volume of trade. Under this arrangement, the exporter, usually an industrial firm, provide plant, equipment or technology to an importer and agrees to accept, in full or part considerations, the goods to be produced by the importer with the exporter s' equipment or technology. The contract period of buy back arrangements is, by necessity, considerably longer than that of counter purchase arrangements. Counter purchase arrangement: This type of counter trade arrangement is also common but it is complicated. Under this arrangement, the exporter sells the goods, services or technology to a foreign importer against the purchase of a specified total value of goods selected from a list that excludes those goods produced by the technology being exported, within a specified period. The goods purchased will not be used by the exporter himself and he will have to arrange for their sale with a third party who may market them.
Swap: In a swap contract two countries agree to trade, products from different locations with a view to save transportation cost. This is ideally suited for commodities such as sugar, chemicals and oils. In swap transactions differences in quality of the goods being substituted are worked out in swap contract. Switch: This method of counter trade is useful when international currency flow is sluggish or uneven. One country that is a party to a bilateral trade agreement will transfer its imbalance to a third party or nation. One example of switch is western firm that sold a plastic manufacturing plant to the then USSR which had no cash to pay. However, Russia had a clearing agreement with Australia which was buying natural gas to Russia, it paid to the western firm direct the amount equal to the price of the plant sold to Russia. Thus in a switch agreement, the amount is paid or accepted through a third country or party. This method of counter trade is useful when international currency flow is sluggish or uneven. Evidence Accounts: Under evidence accounts, the company sells its products or services to a local foreign trade organization and purchases goods and services of its requirements form another local foreign trade organization of the equal amount. These kinds of transactions are set to occur over a specified period, generally one year. Such accounts are monitored by the country's bank of foreign trade that deals in foreign exchange and where the company maintains its accounts. REASONS FOR THE GROWTH OF COUNTER TRADE The reasons to engage in counter trade include those basic to business; t o enter new markets, sell products and gain an edge over competition. Counter trade is considered a way of overcoming of uncertainty of domestic production plans and, at the same time, of achieving bilateral balancing of trade-an important objective of foreign trade policy in the centrally planned East European countries. shortage of foreign exchange and the desire to stimulate foreign technology inflows motivated East European countries to enter into counter trade arrangements.
developing countries, particularly those maintaining overvalued exchange rates, have resorted to counter trade for the reasons such as balance of payments difficulties, creation of overcapacity etc. Some other reasons for the growth of counter trade are as follows: - The desire to conceal from the domestic public the fact that the sale is being made below its costs. This motive for counter trade is important for many developing countries and also for a number of communist countries. - A counter trade transaction may provide some slight additional certainty in an uncertain world.
- A counter trade transaction permits concealed discounting in a period of weak markets. In other worlds counter trade permits price discrimination among customers. -Developing countries will have confident to export their products to other countries.
DRAWBACKS OF THE COUNTER TRADE Counter trade transactions are often extremely complex and difficult as compared with straightforward trade. This requires planning and commitment.
It becomes costly as the manufacturing firms will have to set up subsidiaries to handle counter trade arrangements or employ the services of trading companies specializing in such activities.
It is full of risks and uncertainties. Risks increase as counter trade arrangements extend over several years. It is time consuming to conclude the arrangements. For every 10 to 20 deals that are talked about, perhaps one gets done. COUNTER TRADE IN INDIA: The State Trading Corporation of India was involved since 1961 in one for or other of counter trade mechanism by way of trade promotion agreements, barter deals, special trading arrangements, etc.
India had long a longer history in the use of buy-back
arrangements. This technique is being increasingly applied for importing technology, especially for export-oriented projects.
GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) The General Agreement on Tariff and Trade is a multilateral treaty that lays down agreed rules for conducting international trade. It came into force in January 1948. 119 governments which together account for 90 per cent of the world merchandise trade subscribe it to. Its basic aim is to liberalize trade and for the last 45 years it has been concerned with negotiating the reduction of trade barriers and with international trade relations. The rapid and uninterrupted growth in the volume of international trade till 1992 provides a good testimony for the success of the GATT. Basic Principles of GATT: 1. Trade without discrimination: Trade must be conducted on the basis of non-discrimination. All contracting parties are bound to grant to each other treatment as favourable as they
would to any country (most favoured nation) in the application and administration of import and export duties and charges. Expectations to this basic rule are allowed only in the case of regional trading arrangements and the developing countries. 2. Protection only through tariff: Protection should be given to domestic industries only through customs tariffs and not through other commercial measures. The aim of this rule is to make the extent of protection clear and to Make competition possible. Exception is, however, made in the case of developing countries where the demand for imports by development may require them to maintain quantitative restrictions in order to prevent an excessive drain on their foreign exchange resources. 3. A Stable basis of trade: The binding of the tariff levels negotiated among the contracting countries provides a stable predictable basis for trade. Binding of tariffs means that these cannot be increased unilaterally. Although provision is made for the renegotiation of bound tariffs, a return tariffs is discouraged by the requirement that any increase be compensated for. 4. Consultation: A basic principle of GATT is that member-countries should consult one another on trade matters and problems. They can call on GATT for a fair settlement of cases in which they feel that their rights under the GATT are being withheld or compromised by other members. The agreement consists of four parts: Part I: Main obligations of the contracting parties; Part II: A code of fait trade practices to guide members in their commercial policies; Part III: Conditions for membership and withdrawal; and Part IV: Expansion of trade of developing countries through special concessions. Trade Negotiations under GATT: Eight major trade negotiations took place under the GATT auspice as follows: 1. The first round in 1947 (Geneva) saw creation of the GATT. 2. The second round in 1949 (Annecy, France) involved negotiation with nations that desired GATT membership. The principal emphasis was on tariff negotiations. 3. The third round in 1951 (Torquay, England) continued accession and tariff reduction negotiations. 4. The fourth round in 1956 (Geneva) proceeded along the same track as earlier rounds.
5. The fifth round in 1960-61 (Geneva, Dillon Round) involved further revision of the GATT and the addition of more countries. 6. The sixth round in 1964-67 (Geneva Kennedy Round) was hybrid of earlier product by product approach with across the board tariff reductions. 7. The seventh round in 1973-79 (Geneva, Tokya Round) centred on the negotiation of additional tariff cuts and developed a series of agreements governing the use of nontariff measures. 8. The eight round (Uruguary Round ) started in 1986 and was concluded in April 1994. As a result of these negotiations, the tariff rates for thousands of items entering into world trade were reduced or bound against increase. The average level of tariffs on manufactured goods in industrial countries was bout 3 per cent now as compared to about 40 percent in the immediate second world was years. Developing countries were disappointed with Kennedy round and the Tokyo Round. However, given its provisional nature and the limited field of action, the success of GATT in promotion and securing liberalisation of much of world trade over 47 years was incontestable. WEAKNESS OF GATT: The weakness of GATT is that its benefits have mainly gone to the industrialized countries. Under GATT, Most negotiations and tariff reductions have taken place in respect of manufactured goods. So the trade gap for the developing countries has become more unfavourable. A search for a new institutional arrangement, especially one which one would tackle the problems of the global trade of developing countries, led to the formation of united Nations Committee on Trade and Development in 1946.
WORLD TRADE ORGANISATION Established on January 1, 1995 WTO is the embodiment of the Uruguary Round results and the successor to GATT. T is not a simple extension of GATT; it completely replaces its predecessor and has a very different character. As on 6th November 2000, the membership of the WTO stood at 139. 76 Governments became members of the WTO on its first day. The present membership accounts for more than 90 per cent of world trade. Many more countries have requested to WTO. The WTO is based in Geneva, Switzerland. Its essential functions are as follows. 1. To administer the trade policy mechanism.
2. To achieve greater coherence in global economic-policy making in cooperation with World Bank and IMF. 3. To provide a forum for negotiations among its members concerning their multilateral trade relations in matters dealt with in the agreements. 4. To administer the understandings on Rules on Procedures governing the settlement of disputes. 5. To introduce the idea of 'sustainable development' in relation to the optimal use of the world resources and the need to protect and preserve the environment in a manner consistent with the various levels of national economic development. 6. To recognize that there is a need for positive efforts to ensure that the developing countries, especially, the least developed countries secure a better share of the growth of the international trade. HOW IS THE WTO DIFFERENT FROM THE GATT? (a) The GATT was a set of rules, a multilateral agreement with no institutional foundation with only a small associated secretariat. The WTO is a permanent institution with its own secretariat. (ii) The GATT was applied on a "Provisional basis" even if, after more than 40
governments chose to treat it as a permanent commitment. The WTO commitments are full and permanent. (iii)The GATT rules applied to trade in merchandise goods. In addition to goods, the WTO covers trade in services and trade related aspects of intellectual property. (iv)While GATT was multilateral instrument by the 1980s many new agreements had been added of plurilateral, and therefore selective, nature. The agreements which constitute the WTO are almost all multilateral and thus involve commitments for the entire membership. (v)The WTO dispute settlement system is faster, more automatic and thus much less susceptible to blockages than the old GATT system. (vi)The WTO is more global in its membership than the GATT. WTO is a watchdog of international trade, regularly examine the trade regimes of individual members. Trade disputes that cannot be solved through bilateral talks are adjudicated under the WTO dispute settlement 'court'. The WTO is also a management consultant for world trade. It economists keep a close watch on the pulse of the global economy and provide studies on the main
trade issues of the day. The mandate of the WTO includes trade in goods, trade in services, trade related in investment measures and trade related intellectual property rights. A number of simple and fundamental principles run throughout all of the instruments which, together, make up the multilateral trading system . They are: -
Trade without discrimination
Predictable and growing access to markets.
Promoting fair competition.
Encouraging development and economic reform.
WORLD TRADE IN SERVICES The industrial sector can be classified as production sector and service sector. Production sector refers the industries that are engaged in production and supply of goods. Service sector refers providing services and exchanging services to the public as well as society. The growing importance of services is reflected in the international trade also. The value of the international trade in services comes to about one fourth of the value of the value of the trade in goods. Services make up a major share of the invisible account in the Balance of payments of a country. The most important services in international trade include:
Engineering and constructions services
Banking Financial Services
Characteristics and Categories of Services: An important characteristics of services that has far reaching implications for marketing of services is their inseparability. That is services cannot be sepearated from their providers, whether they are persons or machines. This does not, however mean that all services require the physical proximity of the provider and user. CHARACTERISTICS:
(a)Those that necessarily require the physical proximity of the provider and the user; and (b) Those that do not, though such physical proximity may be useful. The services where physical proximity is essential fall into three categories: -The mobile provider and immobile user categorize the first category. In this case the provider goes into the place of user and doing services. For example the technical people of L & T Company in India goes to Srilanka and do the construction work. Similarly a technician may have to go a plant abroad to rectify a problem with the plant. - Mobile user and immosbile provider characterizes the second category. I.e. user goes towards the provider. For example a patient who wants an open-heart surgery will have to go to a hospital where the required facilities are available. -The third category consists of of mobile user and mobile provider. In this case either the provider going to the user or the user going to the provider may achieve proximity. For example drydocking facilities for ships.
OBSTACLES OR RESTRICTIONS IN SERVICE SECTOR: Due to the special characteristics and the socio economic and political implications of certain services, they are generally subject to various types of national restrictions. Protective measures include visa requirements, investment regulations, marketing regulations, restrictions on the employment of foreigners, compulsion to use local facilities etc. Heavily protected r restricted services in different countries include banking and insurance; transportation, television, radio, film and other forms of communications and so on.
INSTITUTIONAL INFRASTRUCTURE FOR EXPORT PROMOTION IN INDIA
The Government of India has set up a number of institutions whose main functions are to help an exporter in its export efforts. It is therefore, necessary for the exporters to acquaint themselves with these institutions and the nature of help they can render to them so that they can initially contact them to get whatever help they could get from these institutions in exporting their products.
1.DEPARTMENT OF COMMERCE: The Department of commerce in the Ministry of Commerce and Industry is the Primary Government agency responsible for evolving and directing foreign trade policy and programmes, including commercial relations with other countries. This department is headed by a Secretary and he is assisted in the discharge of duties by a Special Secretary , Additional secretaries and a number of other senior officers functioning as Divisional heads. The department consisting of the following Divisions concerning with various subjects connected with exports and imports. International Trade Policy Division Foreign Trade Territorial Division Export Products Division Export industries Division Export Service Division Economic Division
2.ADVISORY BOARDS Board of Trade : The Board of Trade is the highest advisory body under the Department of commerce to deliberate on policy matters. It has its members as follows: a. Presidents of FICCI, ASSOCHAM and FASSI b. Leading industries c. Secretaries of Commerce and industry, Finance, External Affairs and Textiles d. Chairman of ITPO/MD of ECGC Export Promotion Board: under the chairmanship of cabinet Secretary.
3.ATTACHED AND SUBORDINATE OFFICES a. Directorate General of Foreign Trade b. Director General of commercial Intelligence and Statistics
c. Export Processing Zones d. Indian Government Commercial Representatives Abroad
3.AUTONOMUS BODIES: (I) Export Promotion Councils: There are 20 export promotion councils covering the following products: Apparels, chemicals, pharmaceuticals and cosmetics, carpet, cashew, cotton textiles, electronics and computer software, gem and jewellery, handicrafts, handlooms, leather, poweerloom, construction, plastics, shellac, silk, synthetic , sports goods and wool and woolens. These councils are registered under the companies Act as non-profit making agencies. The department of commerce provides necessary financial assistance in relation to their export promotion work. These councils advise the Government regarding current developments in the export sector and measures the necessary to facilitate future growth in exports, assist manufacturers and exporters to overcome the various constrains and extend to them the full range of services for the development of market overseas. The councils also perform certain regulatory functions as they have the power to register and issue Registration cum-membership certificate under the Export and Import policy and also de-register errant or defaulting exporters. The councils also conduct market surveys, assist in product development,. Sponsor trade delegations and guide newcomers in the export trade. (II) Commodity Boards: There are 9 Statutory Boards for the following commodities: Handicrafts and Handloom, Silk, Power loom, coffee, coir, rubber, tea, tobacco and spices. The commodity boards del with the entire range of problems of production, development, marketing etc. In respect of commodities concerned, they act themselves as if they were the Export Promotion Councils. Some of these Boards have opened their branch in foreign countries in order to promote the consumption of the commodities under their jurisdiction. (III) Marine Products Export Development Authority: The main functions of the Authority are: 1. Development of off-shore and deep- sea fishing in all its aspects and conservation and management of off-shore and deep-sea fisheries;
2. Registration of fishing vessels, processing plants, storage premises and exports with a view to promote a healthy development. 3. Laying down standards and specifications for marine products for the purpose of export. 4. Rendering financial assistance. 5. Arranging for training in different aspects connected with export with special reference to fishing, processing and marketing. (IV) Agricultural and Processed Food Products Export Development Authority (V) Indian Institute of Foreign Trade The Indian Institute of Foreign Trade is functioning under the Ministry of commerce. This is registered under the Societies Act. (VI) India Trade Promotion Organization (VII) National Centre for Trade Information (NCTI): The main functions of NCTI inclusive of -
Create database at national and international levels for export promotion
Collect information on various aspects of trade and commerce on different countries.
Establish linkages with trade promotion bodies, regulatory bodies, chamber of commerce etc.
Organize training, seminars and conferences on matters related to trade and commerce.
Publish papers, periodicals and other literature having a bearing on trade and commerce.
(VIII) Export credit and Guarantee Corporation: The ECGC a Government of India undertaking has been established for minimizing the risk element in export business and to facilitate the flow of finance from the banks to exporters. In addition to the normal risk policies, the corporation assists the exporters through special schemes such as packing credit guarantee, post shipment credit guarantee and export production finance guarantee. To suit varying needs of exporters, the corporation provides different types of cover which may be divided into the following three broad groups: Standard polices
Financial guarantees Special policies Under its policies intended o protect the exporters against overseas credit risks, ECGC bears the main risks and pays the exporter 90% of his loss on account of commercial risks and Political risks. (IX) Export-Import Bank: The EXIM Bank was established on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of India. It extends finance to exporters of capital and manufactured goods, exporters of soft wares and consultancy services and overseas joint ventures and construction projects abroad. The bank is the principal financial institution in India for coordinating the work of institutions engaged in financing export and import trade. The EXIM bank concentrates mainly on medium and long term credit for export of goods and services on deferred payment terms. (X) Export Inspection Councils: Quality control and pre shipment inspection is one of the important factors in the export marketing. In order to ensure the quality of the products exported, a legislation entitled "Export (Quality control and Inspection) Act" was enacted by the Indian Parliament in 1963. As per this act The Government of India has established the Export Inspection Council. The functions of this council are generally to advise the central government regarding the measures for the enforcement of quality control and inspection in relation to commodities intended for export and draw up a programme therefore. (XI) Indian Institute of Packaging (XII) Indian Council of Arbitration (XIII) Federation of Indian Export Organization
Other Institutions concerned with export promotion: -
Office of the Textile Commissioner, Bombay
Office of the Jute Commissioner, Kolkatta
Indian Jute Mill Association, Kolkatta.
ROLE OF EXIM BANK OF INDIA Objectives: The Export-Import Bank of India was set up[ the Government of India in 1982 as a public sector financial institution under an Act passed in the parliament for the purpose of financing, facilititating and promoting foreign trade of India. The board of directors manages the EXIM BANK with representation from government financial institutions, banks and business community. FUNCTIONS: Lending Programmes to Indian Exporters: Suppliers credit: This enables the exporters to extend credit to overseas importers of eligible Indian goods. Finance for
consultancy and technology services; This enables Indian exporters of
consultancy and technology services to extend term credit to overseas importers. Pre-shipment credit: This enables Indian exporters to buy raw materials and other inputs for fulfilling export contracts involving cycle time exceeding six months. Finance for deemed exports. Finance for EOU and EPZ Units Software Training Institutes Export marketing finance Export-Product Development Finance: This Indian firms to undertake product development, R & D for exports. Services Offered to Indian Exporters: Underwriting: This enables the Indian exporters to raise finance from capital markets with the backing of EXIM Bank's underwriting commitment. Forfeiting: This Indian exporters to convert sale to cash on without recourse basis. Guarantee Facility: To execute export contracts and import transactions. Business Advisory and Technical assistance Cooperation arrangement with African Management Services.
For Commercial Banks: Refinance of Export credit Bulk import finance Guarantee cum Refinance supplier's credit Other activities: The bank helps Indian companies go global by setting up subsidiaries and joint ventures abroad. It provides information to potential exporters about projects abroad specially about multilaterally agencies. It also helps companies in preparing bids according to strict condition prescribed by the multilateral agencies. It also entertains proposals for various facilities under he European Community Investment Partners like feasibility studies for setting up export units. The bank introduced the "cluster of Excellence" programme for up gradation of quality standards and obtaining ISO certification.
100% EXPORT-ORIENTED UNITS The scheme of 100 EOU's were introduced in 1980 with a view to generating additional production capacity for exports by providing an appropriate policy frame work, flexibility of operations and incentives. In order to enable them to operate successfully in the international market such units are allowed to import machinery, raw material, components and consumable at free of custom duties. These units have to operate under custom bond and achieve the level of value addition fixed by the Board of Approval. At present more than 500 units are in operation under the EOU scheme.. Some of the modifications done to facilitate the exporting units in the EOUs are as follows:
Simplification of customs/excise procedures
Automatic approval under certain conditions to proposal for setting up units.
Leasing of capital goods from domestic companies by EPZ\EOU has been permitted.
Encouragement of agro and electronic units by providing higher domestic access.
The following privileges are enjoyed by the Export Oriented Units:
An EOU unit may export all goods and services except the items prohibited by the exim policy.
An EOU unit may import without payment of duty for all type of goods, including capital goods required by it for its activities provided they are not prohibited items of imports.
EOU units may import/procure from Domestic Tariff Area without payment of duty.
Second hand capital goods may also be imported duty free without any age limit.
EOU unit shall be positive net foreign exchange earner.
Only project having an investment of Rs.1 crore and above in building, plant and machinery shall be considered for establishment under EOU scheme. Application for setting up of units under EOU scheme may be approved by the units Approvals Committee within 15 days. The entire production of EOU units shall be exported subject to the following: Rejects may be sold in the domestic tariff area on payment of duties on prior intimation to the customs authorities. Scrap/waste arising out of production process or in connection therewith may be sold in the domestic tariff area on payment of duties within the overall ceiling of 50% FOB value of exports. By products may also be sold in the domestic tariff are subject to achievement of positive net foreign exchange on payment of applicable duties within the overall entitlement.
ROLE OF EXPORT CREDIT GUARANTEE CORPORATION (ECGC) The risk element in export business is greater than the risk involved in domestic tradebecause the two parties of the export contract (exporter and importer) belong to different countries. In the context of growing competition no exporter can manage without selling goods on credit. Giving credit poses two problems to an exporter: -
He should have enough money to offer credit to his overseas buyers and
He should be prepared to take the credit risks.
Exporting on credit is not without risk. The overseas buyer may default; he may go bankrupt; there may be earthquake or typhoon, a war in his country, which may wreck his fortunes. The ECGC, a Government of India undertaking, covers the exports against these risks. The ECGC also provides guarantees to the financing banks to enable them to provide adequate finance to the exporters.
COVERS ISSUED BY ECGC: The covers issued by ECGC may be divided broadly into four groups as follows: a) Standard policies issued to exporters to protect them against the risk of not receiving payments while trading with overseas buyers on short term credit. b) Specific policies designed to protect Indian Firms against the risk of not receiving payments in respect of -
Export on deferred payment terms
Services rendered to foreign parties and
Construction work-undertaken abroad.
c) Financial guarantees issued to banks against risks involved in providing credit to exporters; and d) Special schemes viz: Transfer Guarantee, Insurance cover for buyer's credit, Line of credit, Joint ventures and overseas investment. A. RISKS COVERED UNDER STANDARD POLICIES: Under its policies to protect the exporters against overseas credit risks, ECGC bears the main brunt of the risks and pays the exporter 90 per cent of his loss on account of commercial and political risks. Commercial Risk: a. The insolvency of the buyer b. The buyer's protracted default to pay c. In some special circumstances specified in the policy, buyer's failure to accept the goods, when non-acceptance is not due to the exporter's actions. Political Risk: a. Restriction on remittance in the buyer's country or any government action which may block or payment to the exporter; b.
War, revolution or civil disturbances in the buyer's country
Cancellation of export license or imposition of new export licensing restrictions in India (under contracts policy)
d. New import licensing restrictions or cancellation of a valid import license in the buyer's country: e. Additional handling transport or insurance charges due to interruption or diversion of voyage which cannot be recovered from the buyer: and
Any other cause of loss occurring outside India, not normally insured by commercial insurers. And beyond the control of both the exporter and the buyer.
RISKS NOT COVERED ECGC, however, does not cover risks of loss due to: a. Commercial disputes, including quality disputes raised by the buyer unless the exporter obtains a decree from a competent court of law in buyer's country in his favour. b. Causes inherent in the nature of goods: c.Buyer's failure to obtain import or exchange authorization from the appropriate authority: d.Insolvency or default of any agent of the exporter or of the collecting banks: .e.g. Loss or damage to goods which can be covered by general insurers: f.Flucturations in exchange rates (except under Exchange Fluctuation Risk over Schemes)and g.Failure of the exporter to fulfill the term of contract or negligence on his part.
B. SPECIFIC POLICIES Contracts for export of capital goods or projects for construction works and for rendering services abroad are insured by ECGC on case to case basis under specific policies. Special mention may be made of the services policy to protect Indian firms against payment for their services policy to protect Indian firms against payment for their services policy o protect Indian firms against payment for their services and the construction works policy to cover all payments that fall due to a contractor under a composite contract for execution of services as well as supply of material. C.SMALL EXPORTER'S POLICY The small exporter's policy is basically the Standard Policy, incorporating certain improvements in terms of cover, in order to encourage small exporters to obtain and operate the policy. It will be issued to exporters whose anticipated export turnover for the next 12months does not exceed Rs.25 lakes. The premium payable for a small exporter's policy is less than the standard policy. D. FINANCIAL GUARANTEE TO BANKS
Timely and adequate credit facilities, at the pre-shipment as well as post-shipment stage. Are essential for exporters to realize their full export potential. Exporters my not, however, be able to obtain such facilities from their bankers for several reasons. The Export Credit Guarantee Corporation, (ECGC) has designed a scheme of Guarantees to Banks with a view to enhancing the credit worthiness of the exporter so that they would be able to secure better and large facilities from their bankers. To meet the varying needs of exporters. The Corporation has evolved the following types of Guarantees; 1. Packing Credit Guarantee: 2. Export Production Finance Guarantee; 3. Post-shipment Export Credit Guarantee: 4. Export Finance Guarantee 5. Export Performance Guarantee: 6. Export Finance (Overseas lending ) Guarantee 1. PACKING CREDIT GUARANTEE Any loan given to an exporter for the manufacture processing, purchasing or packing of goods meant for export against a firm order or letter of credit qualifies for packing Credit Guarantee. The Guarantee is issued for a period of 12 months against a proposal made for the purpose and covers all the advances that may be made by the banks during the period to a given exporter within an approved limit. To banks, which undertake to obtain cover for packing credit advances, granted to all its customers on an all India basis. 2. EXPORT PRODUCTION FINANCE GUARANTEE The purpose of this Guarantee is to enable banks to sanction advances at the preshipment stage to the full extent of cost of production when it exceeds the FOB value of the contract/order, the difference representing incentives receivable. The extent of cover and the premium rate are the same as packing Credit Guarantee. Banks having WTPCG are eligible for concessionary premium rate and higher percentage cover. 3. POST -SHIPMENT EXPORT CREDIT GUARANTEE Post-shipment finance given to exporters by banks through purchase, negotiations or discount of export bills or advances against such bills qualifies for the Guarantee. It is
necessary however, that the exporter concerned should hold suitable policy of ECGC to cover the overseas Credit risks. The Premium rate for this Guarantee is 7 paise per Rs. 100/-per month The percentage of loss covered under the individual post-shipment Guarantee is 75%
4. EXPORT FINANCE GUARANTEE This guarantee covers post-shipment advance granted by banks to exporters against export incentives receivable in the form of duty drawback, etc. The Premium rate for this Guarantee is 7paise per Rs. 100 per month and the cover is 75 percent. Banks having WTPSG are eligible for concessional rate of premium and higher percentage of cover. 5. EXPORT PERFORMANCE GUARANTEE Exporters are often called upon to execute bonds duly guaranteed by Indian banks at various stages of export business. An exporter who desires to quote for a foreign tender may have to furnish a bank guarantee for the bid bond. If he wins the contract, he may have to furnish bank guarantees to foreign buyers to ensure due performance or against advance payment or in lieu of retention money or to a foreign bank in case he has to raise overseas finance for his contract. 6. EXPORT FINANCE (OVERSEAS LENDING) GUARANTEE If a bank financing an overseas project provides a foreign currency loan to the contractor, it can protect itself from the risk of non-payment by the contractor by obtaining Export Finance Guarantee. Premium rate will be 0.09% per annum for 75% cover and 1.08% per annum for 90% cover. Premium is payable in Indian Rupees. Claims under the guarantee will also be in Indian rupees.
EXPORT ASSISTANCE AND EXPORT PROMOTION MEASURES Export assistance has become an important tool in any developing country to motivate the manufacturer and businessmen to enter the international market. Most developing countries have resorted to a number of export promotion measures. India has also been providing export
assistance for the past about forty years. From 1922, export incentive system in India has been made very simple. There are essentially three major incentives, available to exporters. These are (i)Market-based Exchange Rate:
Since March 1993 the exchange rate of the rupee is fully
determined by the demand and supply condition in the market as the rupee was made fully convertible for export-import transactions in March 1993. Under the Libralised Exchange Rate Management System (LERMS) exporters will get benefit when rupee depreciates while importers will lose. When rupee appreciates the balance of benefits will the just the reverse. (ii) Fiscal concession: The different types of fiscal concessions are as follows: In the computation of total income Sec.80. HHC of the Income Tax Act allows a deduction of the whole of the profit derived from the export of goods or merchandise. This benefit is also available to supporting manufacturers exporting through Export/ Trading Houses provided that the amount of deduction claimed is retained as a reserve for the purpose of the business of the assessee. However, the budget for the year 2000-2001 has reduced this exemption by 20% every year to be phased out in five years. - Exemption from taxation of the profits from over seas projects to the extent of 50 percent. -Exemption from taxation 50 per cent of royalty, commission, fees or any similar payment obtained from the exports of technical know-how and technical services. - A 10 year tax holiday for 100 per cent export oriented units and for units located in Free trade zone/Export processing zones. -Concessional rate of customs duty on imports of selected items of machinery for export production under EPCG scheme. (iii)Facilities available under the Export-Import Policy for Export: a.
Duty Exemption Scheme
Export Houses/Trading Houses
Export processing Zones
100 % Export oriented units
(iv)Other facilities available to exporters: In addition to the above mentioned incentives, the Central Government is offering the following facility to exporters.
(a)Duty Drawback: This is a refund of import duty or excise duty paid on the raw materials and components, which have gone into the production of exported products. (b)Rebate of excise duty: If the goods exported attract central excise duty either the duty is exempted or refunded if already paid ©Export Finance: Exporters are allowed to get export finance both pre-shipment and post shipment credit at concessional rate of interest. (d)Insurance of credit risk: The ECGC is willing to cover 90% of the political and commercial risks of export operations. The commercial banks which give credit to exporters can also get guarantee from ECGC. (e)Deemed exports; Certain transactions in which goods supplied do not leave the country and the payment for the goods which is received by the suppliers sin India have been treated as deemed exports and are entitled some benefits such as duty exemption in respect of deemed export categories, deemed export drawback, refund of terminal excise duty, special import license, etc EXPORT FINANCE Businessmen, industrialists and others require finance for their day-to-day activities. In export business also finance plays an important role. Export finance starts as soon as the exporter gets an order to export. An exporter needs finance for processing or manufacturing or assembling or procuring or packing the goods for export, Pre-shipment finance is provided to the exporter to meet such requirements. After the shipment is made exporter will have to give credit the exporter has to wait till the documents reach the importer and he makes the payment. It will take some more time before the advice of payment is finally, communicated to the exporter. Post-shipment finance is therefore provided to the exporter to meet his needs for funds during the intervening period between the shipment of the goods and the receipt of payment therefore. 1. PRE-SHIPMENT CREDIT OR PACKING CREDIT Export packing credit is a loan or any other credit given by a bank to an exporter for financing (a) procuring raw materials and components to manufacture the product or (b) processing or assembling or packing the goods for export. The banks on the basis of the following give the packing credit. A letter of Credit (L/C) opened in favour of the exporter by the importer's bank: A confirmed or irrevocable order for the export of goods from India having been placed on the exporter, or Any
other evidence of an order for exports of goods from India having been placed on the exporter or Relevant policy issued by the ECGC; or Personal bond in the case of party's already known to the exporter. COSTS COVERED BY PRE-SHIPMENT FINANCE Pre-shipment finance would normally cover the following costs; Cost of purchase or production Packing including any special packing for export Costs of special inspection or tests required by the importer Internal transport costs Port, customs and shipping agent's charges Freight and insurance charges if the contract is either CIF contract or C&F contract and Export duty or tax, if any. 2.POST SHIPMENT CREDIT Post-shipment finance is required by the exporters to bridge the gap between the time of shipment of goods and the actual payment for the goods exported. Post -shipment credits are given by commercial banks Against the security of approved shipping documents tendered against-letters of credit or otherwise. It is also provided at concessional rate of Interest. The banks normally finance the post-shipment credit in one the following ways: (i)
Negotiating export bills under letter of credit
Discounting of bills drawn against shipment of goods-discounting of usance bills (D/A Bills ) drawn against shipment of goods-discounting of bills is usually done under limits sanctioned to different customers, and
An advance against bills under collection.
Banks usually charge a commission according to the rates prescribed by the Foreign Exchange Dealer's Association of India. The rate of interest on post-shipment credit is also charged at concessional rate. TYPES OF POST -SHIPMENT CREDIT
Post shipment credit may be of three types: (i)
Short term: The short term credit is usually for 6 months and provided by banks.
Medium term: Medium term loans are offered for a period beyond 6 months and up to 5 years. These loans are also provided by commercial banks in collaboration with EXIM Bank of India. Medium term loans are provided for in the case of durable consumer goods and light capital goods.
Long term: Long term loans are provided in the case of sale of capital goods complete plants and turnkey jobs. The period of credit is usually more than 5 years. Banks enjoy certain benefits for advancing loans to exporters, They are as follows. (i)
Refinance by EXIM Bank of India.
Guarantees provided by ECGC where a substantial part of the risk is covered by the ECGC.
3. FORFAITING Forfaiting enable an exporter to convert an overseas credit sale into a cash sale through the process of discounting of export receivables. The bill of exchange accepted by the importer is surrendered to the forfeiting agency which pays him in cash after deducting a fee.
understanding is that the agency will collect the dues from the importer on expiry of the said period.
4.FINANCE FOR EXPORTS ON DEFERRED PAYMENT TERMS Our exchange control regulations stipulate that exporter should realize the foreign exchange for their exports within 180 days from the date of shipment. Contracts for export of goods against payment to be received fully or partly after the expiry of the stipulated period for the realization of export proceeds are treated as deferred payment export contract. Extension of long term export credit has become an accepted export market strategy and therefore, provision has been made for the extension of medium and long term credit to finance the sale of Indian capital goods and related services.
FREE TRADE ZONE (EXPORT PROCESSING ZONES) These are also referred to as Export Processing Zones, are set up with the intension of providing an internationally competitive duty free environment for export production, at low cost.
This enables the products of EPZ to be competitive, both quality wise and price wise, in the international market. India has seven EPZ at different parts of our country. EPZ operating units broadly under the product groups of electronics, engineering items, chemicals and allied products, gems and jewellery, textiles, garments, plastics and rubber products. The objectives of these units are: 1. To earn foreign exchange 2. To generate employment opportunities 3. To facilitate transfer of technology by foreign investment and other means. 4. To contribute to the overall development of the economy. Entitlement for EPZ Units: Each of the zones provides basic infrastructure such as developed land for construction of factory sheds, standard design factory buildings, roads, power, water supply and drainage. In addition customs clearance is arranged within the zone at no extra charge. Provision is made for locating banking\post office facilities and offices of clearing agents in the service centers located in each of the zones. Foreign equity up to 100% is permissible in the case of EPZ units Procurement of raw materials, components and consumables and export of finished products shall be exempt from central levies. Exemption from industrial licensing for manufacture of items reserved for SSI sector.
INTERNATIONAL TRADE – UNIT FOUR
PROCEDURE FOR EXECUTING AN EXPORT ORDER The following the parties and agencies involved in executing an export order:
1. Exporter 2. Importer. 3. The negotiating bank 4. Shipping company 5. Insurance company 6. Reserve Bank of India 7. ECGC 8. Directorate General of Foreign Trade 9. Customs House 10. Port Trust 11. Inspection Agency 12. Clearing Agents
Procedure for executing an export order: The exporter has to process the export order in the following manner: 1.The exporter should scrutinize the export order with reference to the terms and conditions of the contract. The order should specify the mode of payment such as letter of credit, document against acceptance or document against payment, and the terms of conditions as specified in the letter of credit. The following documents have to be prepared. Bill of Exchange (if D/A or D/P bill) Commercial invoice Bill of lading Marine insurance Packing list Certificate of orgin Export inspection certificate 2.A delivery note (in duplicate) is to sent to the works manager or factory manager giving the description of goods to be exported along with the copy of the instruction given by the importer. 3.As soon as the goods are manufactured and kept ready for shipment the following have to be done: Clearance of the excise authority has to be obtained.
Export inspection agency should be approached. Goods should be dispatched to the port of shipment. AR-4 form has to be prepared. 4.Thereafter the works manager sends a dispatch advice to the export department. They will obtain the marine insurance cover for the goods. Then the exports department sends the following documents to its clearing and forwarding agents along with detailed instructions: Commercial invoice Original export order Original L/C Packing list Certificate of inspection Endorsement regarding floor price 5. The clearing and forwarding agent takes delivery of the consignment and arranges its storage in the warehouse. Thereafter he prepares requisite copies of shipping bill and submits them to the Export Department of the Customs house along with necessary documents mentioned above. 6. After the shipping ill has been passed by the customs, the clearing and forwarding agents presents the Port Trust copy of the shipping bill to the respective authorities. Thereafter, in the case of shed cargo, the Dock challan is prepared. Where the ship loads overside, the dock charges are indicated in the shipping bill itself and therefore, no dock challan is prepared. 7.The passed Shipping Bill including dock challan will be submitted to the Port Commissioners. 8. In response to that the Ship's Export Clerk calls for cargo from shed or boat and after loading prepares the Mate Receipt. A mate receipt is a receipt issued by the commanding office of the ship when the cargo is loaded on the ship and contains information about the name of the vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship etc. The mate receipt is first handed over to the Port Trust authorities so that the exporter may pay all the port dues. After paying all the port dues, the clearing agent collect the mate receipt from the Port Trust Authorities.
9. The clearing and forwarding agent forwards the following documents to the exporter: Full set of bill of lading, export promotion copy of the bill, copies of customs invoice, original export order. 10. As soon as the exporter receives the above documents from the clearing and forwarding agent, he completes the remaining formalities. He will present the following documents to the negotiating bank.
GR Form, Customs invoice, Certificate of origin, Packing list, Marine insurance policy and Bank certificate
11. The negotiating bank transmits duplicate copy of the GR form to the exchange control department of the Reserve Bank of India after receipt of the export proceeds. 12.The original copy of the bank certificate along with attested copies of the commercial invoice are returned to the exporter. The duplicate copy of the bank certificate is forwarded to the office of the DGFT in the area. 13.Finally the exporter will get the value of the value of export consignment against the above-mentioned documents.
EXPORT PROCEDURE FOR SENDING GOODS An outline of the important steps in exporting the goods is as follows: IEC NUMBER: Every person importing or exporting goods require and Importer-Exporter Code number. The regional licensing authorities normally allot the IEC number. This code number is required to be incorporated in the various export documents submitted to the authorities for purposes of export. MEMBERSHIP CUM REGISTRATION: Membership of certain bodies will help the exporters in a number of ways. There are specified Export Promotion Councils , commodity boards and export development authorities for various products. Members of EPC will receive different kind of assistance and services in respect of the export business.
Exporters are advised to become members of local chamber of commerce, productivity council or any other trade promotion organization recognized by the Ministry of Commerce. Membership of such bodies will help the exporters in different ways, including obtaining the certificate of orgin, which is necessary document required for export to certain countries. INQUIRY AND OFFER: An inquiry is a request from a perspective importer to be informed of the terms and conditions of sale. It may contain full details of the goods required, their description, catalogue numbers or grades, sizes, weights or other distinguishing features, time and method of delivery etc. As soon as the exporter receives a business inquiry from party abroad, it should be promptly attended to. The exporter should bear in mind that the foreign buyer have a large number of prospective suppliers in a number of countries and thus he is in a very competitive situation. Serious and sincere care should, therefore, be exercised in dealings with foreign country customers. As a starting point of the negotiations, the exporter would have to make an offer to the foreign customer. An offer is a proposal in which an exporter submits, may be in the form of a letter, his quotation and other relevant information. The offer, when accepted by the foreign buyer, becomes an order. CONFIRMATION OF ORDER: Once the negotiations are completed and the terms and conditions are acceptable to the buyer and seller, the buyer may place an order with the exporter. The exporter should immediately confirm the order by sending this acceptance. For the confirmation of the order, the proforma invoice is generally sent in triplicate to the buyer, and the buyer is asked to return two copies signed by him. The exporter should again send once copy to the importer with the exporter's signature to confirm the acceptance of the order. The confirmation of the order usually takes the form of a contract. EXPORT LICENSE: These exports of some items are banned and of some items controlled by means of licenses, though many items are permitted to be exported freely. Needless to say, the exporter should make sure that the item sought to be exported is not one, which falls in the banned list. If the item to be exported requires a license, it is necessary to obtain it before finalizing the contract. FINANCE:
If the exporter requires pre-shipment financial assistance, he should take the necessary steps to obtain it. PRODUCTION/PROCRUMENT OF GOODS: Once the order is confirmed, the exporter should take necessary steps to ensure the timely availability of the goods of the specifications required and execute the export order promptly. If the exporter is not a manufacturer, he should contract with his suppliers and ensure timely availability of the goods of the buyer's specifications. SHIPPING SPACE: As soon as the export order is confirmed, the exporter should contract the shipping companies which have sailings for the port to which goods have be sent and book the required shipping space. On the exporter's application or on the application of the freight broker on the exporter's behalf, the shipping company issues sits acceptance if the space applied for is given. PACKING AND MARKING: Once the goods re ready, they are marked and marked properly. If the buyer has given instructions about packing and marking, they should be followed accordingly. If there are no such instructions, it should be ensured that the packing and marking are of the standards recommended or specified. QUALITY CONTROL AND PRE-SHIPMENT INSPECTION: Thereafter get the goods inspected by the inspecting authorities under the compulsory quality control and pre-shipment inspection. They are as follows: Export Inspection Agency AGMARK Authorities Textile committee - for textile goods. Any other authorities authorized for this purpose. EXCISE CLEARANCE: As a matter of policy, the government has granted excise duty exemption for the export products. Excisable goods may be exported either under claim for rebate of excise duty or in bond. In the case of export under claim for refund of excise duty, the duty is first paid and its refund is claimed. Some times with specification the goods are allowed to export without payment of duty on execution of a bond with sufficient surety and security in the prescribed bond.
CUSTOMS FORMALITIES: Goods may be shipped out of India only after the customs clearance has been obtained. For this purpose, the exporter (or the clearing and forwarding agent on behalf of the exporter) should present the following documents to the customs authorities. -
Declaration regarding truth of statement made in the shipping bill
Export license (if required)
Letter of credit (if applicable)
Certificate from quality control authorities
Marine insurance policy
Certificate of orgin
Mate receipt or bill of lading
Any other documents
The customs authorities scrutinize the shipping bill and other requisite documents, and if, prima-facie, satisfied, they pass it for export, subject to a physical examination by the staff of the customs. The shipping bill passed by the exporter department has to presented to the cargo supervisor or the steamship company or the shed manager, who is the port official, for permission to bring in the cargo for export. SEND THE SHIPPING ADVICE TO THE IMPORTER: Once all the said above process are over and as and when goods are loaded into cargo or ship, the exporter will inform the importer about the dispatch of goods and departure of the ship. So that the importer get ready for his actions. NEGOTIATION OF DOCUMENTS: After shipping the goods, the exporter should arrange to obtain payment for the exports by negotiation with the relevant documents through the bank.
APPLYING FOR REFUND (if any) Then appropriate steps to be taken by way of applying to get the Duty Draw bank from customs and other assistance, if any from Government.
EXPORT BY AIR AND SEA EXPORTS BY AIR In international trade the use of air-freight is increasing day by day. Now-a-days all types of products like food, readymade garments, finished leather and leather products, gems and jewellery, electronic products etc., are sent by air freight. International Air Transport Association was set up in 1945. IATA has made rapid expansion because of three developments for which it has been responsible. They are as follows: -
A uniform system of documentation for air cargo.
A standard system of rate making and inter airline agreements on rates.
A clearing house.
ADVANTAGES: Basically, there are ten reasons which can make total distribution costs cheaper through the use of air transport, at least for certain categories of merchandise. The reasons are as follows.
Low inventory carrying costs
Decreased capital costs of goods in transit
Less packing lowers cost and reduces chargeable weight.
Related surface transport costs are reduced.
The loss due to rough handling and pilferage is reduced to the minimum.
Breakage is neglible.
Deterioration is avoided.
Obsolence is eliminated.
Insurance premium is reduced.
Costs related to administration, ordering etc. are minimized.
Thus the advantage of exports by air may be summarized as follows: 1. Speed of delivery 2. Savings in cost
3. Good service to customers without having any warehouse. 4. Greater security and protection during transit. 5. A satisfying customer.
EXPORT BY SEA If the goods are sent by sea the exporter has to obtain/submit the following documents: Bill of Lading Marine Insurance Policy
EXPORT DOCUMENTS DOCUMENTS RELATED TO GOODS INVOICE: An invoice is the seller's bill for merchandise and contains particulars of goods, such as the price per unit at a particular location, quantity, total value, packing specifications, terms of sale, identification marks of the package , bill of lading number, name and address of the importer, destination, name of the ship etc. Some importing countries insist that the importing country's consul located in the exporter's country should sign the invoice. Such invoices are known as consular invoice. The main purpose of a consular invoice is to enable the authorities of the importing country to collect accurate information about the volume, value, quality, grade, sources etc. of its imports for purpose of assessing importing duties and also for statistical purposes. PACKING NOTE AND LIST: The difference between packing note and a packing list is that the packing note refers to the particular of the contents of an individual pack, while the packing list is a consolidated statement of the contents of a number of cases or packs. A packing note should include the packing note number, the date of packing, the name and address of the exporter, the name and address of the importer, the order number, date, shipment per bi, bill of lading number and date, marking numbers, case number to which the note relates, and
the contents of the goods is in terms of quantity and weight. Apart from the details in the packing note, a packing list should also include item wise details. CERTIFICATE OF ORGIN: A certificate of orgin, as the name indicates, is a certificate, which specifies the country of the production of the goods. This certificate has also to be produced before clearance of goods and assessment of duty, for the customs law of the country may require this procedure. This certificate is a necessity where a country offers a preferential tariff to India and the former is to ensure that only goods of Indian Orgin benefit from such concession, A certificate of orgin may be required when goods of a particular type from certain countries are banned. A certificate of orgin from may be obtained from chambers of commerce, export promotion councils, and various trade associations that have been authorized by the government.
DOCUMENTS RELATED TO SHIPMENT MATE RECEIPT A mate receipt is a receipt issued by the commanding office of the ship when the cargo is loaded on the ship, and contains information about the vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo at that time of receipt on board the ship, etc. The mate receipt is first handed over to the Port Trust authorities so that all the port dues may be paid by the exporter,. After paying all the port dues, the merchant or the gent may collect the mate receipt from the Port Trust authorities. The bill of lading prepared by the shipping agent after the mate receipt has been obtained. SHIPPING BILL The shipping bill is the main document on the basis of which the customs' permission for export is given. The shipping bill contains particulars of the goods exported, the name of the vessel, master or agents, flag, the port at which goods are to be discharges, the country of final destination, the exporter's name and address, etc. It also contains details of the packages and the goods, such as
number and description, marks and numbers, quantity details about each case, real value as defined in the sea customs act, whether Indian or foreign merchandise to be re-exported, total number of packages, their total weight and value etc. CART TICKET A cart ticket also known as a cart chit, vehicle and gate pass, is prepared by the exporter and includes details of the export in terms of the shipper's name, the number of packages, the shipping bill number, the port of destination and the number of the vehicle carrying the cargo. The driver of the vehicle carrying cargo should posses the ticket, and when the vehicle is brought at the port gate, it should be presented to the gate warden/inspector along with other shipping and port documents. The inspector, after satisfying himself that the vehicle is carrying the cargo as mentioned in the document, allows it to pass the gate. CERTIFICATE OF MEASUREMENT Freight is charged either on the basis of weight or measurement. When it is charged on the basis of weight, the weight declared by the shipper may be accepted. However, a certificate of measurement from the Indian chamber of commerce or other approved organization may be obtained by the shipper and given to the shipping company for calculation of the necessary freight. BILL OF LADING The Bill of lading is a document where in the shipping company gives its official receipts of the goods shipped in its vessel and at the same time contracts to carry them to the port of destination. It is also an document of title to the goods, and, as such, is freely transferable by endorsement and delivery. A Bill of lading serves three main purposes: I) As a document of title to the goods' (ii) as a receipt from the shipping company'; and (iii) as a contract for the transportation of goods. Each shipping company has its own Bill of lading. The exporter prepares the Bill of lading in the forms obtained from the shipping company or from the agents of the shipping company. The information contained in the Bill of lading includes the date and place of shipment; the name of the consignor; the name and destination of the vessel; the description, quality and destination of the goods; the marks and numbers; the invoice number and the date of export; the gross eight and net weight; the number of packages; the amount of freight etc.
A Bill of lading acknowledging receipt of the goods apparently in good order and condition and without any qualification is termed as a clean bill of lading; if a Bill of lading is qualified with certain adverse remarks such as 'goods insufficiency packed in accordance with carriage of goods by Sea Act", "one box damaged" etc., it is termed as a claused bill of lading. AIRWAY BILL An airway bill, also called an air consignment note, is a receipt issued by an airline for the carriage of goods. As each shipping company has its own bill of lading, each has its own airway bill.
QUALITY CONTROL AND PRESHIPMENT INSPECTION The Export Inspection council of India was set up by the Government f India in 1963 to provide for sound development of export trade through quality control and pre-shipment inspection. The Export Inspection Council (EIC) consists of a Chairman appointed by the Central Government, 4 ex-officio members and 15 members nominated by the central government. The main functions of EIC as assigned are:
To advise the central government regarding measures for enforcement of quality control and inspection in relation to commodities intended for export and to draw up programmes therefore; and
To arrange pre-shipment inspection of notified commodities for export.
About 1000items under produce group heads of engineering, chemicals and allied products, food and agricultural products, jute and jute products, footwear and footwear components, cashew, fish and fishery products etc., are under the compulsory quality control inspection system.
MACHINERY FOR QUALITY CONTROL AND INSPECTION: (i) EXPORT INSPECTION AGENCIES: For carrying out pre-shipment inspection of export of goods, the Government of India has established five export inspection agencies one each at Calcutta, chennai, cochin, Delhi and Mumbai under the technical and administrative control of the EIC. The Export inspection agencies have also
been authorized by the Government of India to issue certificates of orgin under the Generalised system of preferences for export to Japan, EEC, USA and East European countries. (ii) OTHER AGENCIES: Government has also recognized 21 private inspection agencies and 7 government inspection agencies to supplement the work of quality certification. SYSTEM OF INSPECTION Three Systems of inspection are in operation at present. They are: 1. Consignment-Wise Inspection 2. In-Process Quality Control 3. Self-certification CONSIGNMENT-WISE INSPECTION: Under consignment-wise inspection, each export consignment is inspected and tested by the recognized inspection agencies by selecting consignments on the basis of statistical sampling plan to satisfy conformity of the products with the prescribed standards. IN-PROCESS QUALITY CONTROL: This system lays emphasis on the responsibility of the manufacturers and processors in ensuring consistent quality during each stage of production by exercising checks on materials, components through inspecting process centers. The certifications of inspection in favour of units approved under the scheme are issued by the Export Inspecting Agencies. These units are under the supervision by the Export Inspection Agencies through random spot checks. SELF-CERTIFICATION: Under this system the manufacturing units fulfilling the norms prescribed are authorized by the central government to issue certificates of inspection under the Act by themselves for their products.
DOCEMENTS RELATED TO PAYMENTS LETTER OF CREDIT
A letter of credit is a document containing the guarantee of a bank to honour drafts drawn on it by an exporter, under certain conditions and up to certain amounts , provided that the beneficiary fulfils the stipulated conditions BILL OF EXCHANGE The Negotiable Instruments Act, 1881, defines the bill of exchange as " an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or t the order of, a certain person or the bearer of the instrument. There are five important parties to a bill of exchange: The Drawer The Drawee The Payee The Endorser The Endorsee TRUST RECEIPT If the importer is unable to take possession of the documents by making the payment on the D/P bill following the arrival of the goods, the merchandise may be made available to the importer by his bank under an arrangement whereby the importer signs a trust receipt. Under this arrangement, the importer is allowed to sell the imported goods by acting as an agent of the bank; but the retains ownership of the merchandise until the importer has made full settlement; all sums received from the sale of goods must be credited to the bank until such settlement is made. LETTER OF HYPOTHECATION A letter of hypothecation is a document signed by the customer conveying to a banker the full ownership of goods at the port of destination in respect of which he has made advances either by loan or by acceptance or negotiation of bills of exchange. This is a sort of blanket document which shipping documents, demands from a customer to give him recourse son the bills and control of the documents. BANK CERTIFICATE OF PAYMENT
It is a certificate issued by the negotiating bank of the exporter certifying that the bill covering particular consignments has been negotiated and that the proceeds received in accordance with exchange control regulation in the approved manner.
MARINE INSURANCE Insurance granted to cover loss or damage to ships or goods in transit either by sea, air or land is called Marine Insurance. Insurance of ships is called " Hull Insurance" while cover provided in respect of goods sis termed as cargo insurance. The fundamental principles of marine insurance are explained below:: Insurance Interest: A person has an insurable interest in a thing if he will be benefited by its safety or due arrival or be prejudicial by its loss, damage or detention or incur in respect thereof. Utmost Good Faith: It is the duty of the proposer to disclose clearly and accurately all material facts related to the risk. Indemnity: Marine insurance is a contract of indemnity whereby the underwriter or assurer or the insurance company agrees for a stated consideration known as premium, to protect and indemnity the shipper or the owner of the goods against loss or damage or expense in connection with the goods at the risk, if the damage is caused by perils specified in the contract known of policy of the insurance. Subrogation: The insurer upon payment of loss is entitled to the benefits of any rights against third parties that may be held by the assured himself. Contribution: If there are more than one insurer it is desirable not only to ensure that the insured does not receive more than indemnity but that any loss is fairly spread between all the insurers involved. Proximate Cause: Proximate cause means the active efficient cause that sets in motion a train of events, which brings about a result, without the intervention of any force started and working actively from a new and independent source. How to Insure:
Under marine insurance the policy will be taken by two ways. One is open policy and another one is specific policy. In open policy the insurance will be made for all the shipments made in a period. Whereas in specific policy the insurance will be made by shipment wise. RISKS COVERED: Perils of the Sea: It includes out-of-the ordinary wind and wave action, lightning, collision and damage by sea water when caused by perils such as opening of the seams of the vessel by collision. Fire: Fire includes both direct fire damage and also consequential damage as by smoke or stream, and loss resulting from efforts to extinguish a fire. Assailing thieves: This refers to a forcible taking rather than clandestine theft or mere pilferage. Jettison: Jettison is the throwing of articles over board, usually to lighten the ship in times of emergency. Barratry: Barratry is the willful misconduct of master or crew and would include theft, wrongful conversion, intentional casting a way of vessel or any breach of trust with dishonest intent. All other perils: This clause does not mean all the perils that be fall a shipment, but sea perils of the sort listed in the clause. RISKS NOT COVERED: Marine insurance does not cover the losses or damages expected to occur in the following cases: Under Normal Conditions: Because of the nature of goods themselves their inherent vice such as breakage of fragile glasses packaged inadequately. Damage caused by original packing is excluded no matter when the damage itself may occur. Leakages or hook losses on goods packed in bags, solidification of palm and coconut oil unless heated storage is provided. Delay: This means that loss of market and loss, damage or deterioration arising out of delay in transit are not covered. Ordinary unavoidable Trade Losses: These losses such as shrinkage and evaporation in bulk shipment are also not covered unless specially insured.
Wars, Strikes and Commotions: Such as these perils are commonly excluded unless endorsed. Dangerous Drugs Clause: The dangerous drugs clause stipulates that losses connected with the shipment of optimum and other dangerous drugs will not be paid for unless certain specified conditions are met. IMPLIED CONDITIONS: In a contract of marine insurance the following conditions are implied: i.
that the assured will exercise utmost good faith in disclosing the actual facts.
That the generally accepted usages of trade applicable to the insured subject-matter are followed; and
That the assured shall not contribute to the loss through willful fault or negligence.
HOW MUCH TO INSURE FOR? In a marine insurance the polices are normally 'valued'. That is insurance is done at the agreed value, i.e. Cost of the price of the cargo plus freight and all charges plus an allowance for normal expected profit. Normally, the expected profit is calculated at 10% of CIF value, but this figure may be increased upon the consignee's specific request.In the case of total loss, the agreed price is paid and in the case of partial loss, a percentage of the total insured value is recoverable. HOW TO MAKE A CLAIM WHEN LOSS ARISES: Duties of Assured: Before making a claim the assured must perform certain duties. They are:The assured must make reasonable effort to minimize the loss. o
He must immediately inform the nearest agent of his underwriter, arrange for a survey of the damage and supply the necessary commercial documents.
He must make timely written claim upon the carrier for the loss or damage within a reasonable time with the necessary documents.
The following documents are usually sent with the claim application.
Original and duplicate copies of the marine insurance policy or the certificate.
Ocean bill of lading
Original shippers invoice
Packing list, weight certificate or other evidence of the nature and conditions of the goods at the time of shipment.
Survey report of the underwriter's re[representative .
Claim bill: This sets out the actual claim giving the details of the loss or damage of the cargo.
TOTAL LOSS: A total loss may be actual or constructive. An actual total loss may occur when the goods are destroyed or when they arrive so damaged as to cease to be a thing of the description insured. A constructive total loss occurs when the expenses of recovering or repairing the goods would exceed their value after the expenditure has been incurred. PARTIAL LOSS: If loss is less than total it is called average in insurance term. Average may be particular or general. PARTIAL: There are two types of particular average losses.i.e. Total loss of a part of the goods and goods arrived in a damaged condition. That means when a part of the total consignment is completely lost, the insured value of such goods shall be calculated proportionately. The second type is that the part goods are arrived with damaged condition.
INTERNATIONAL TRADE - UNIT FIVE
EXPORT TERMS OF PAYMENT AND LETTERS OF CREDIT
The exporter has to receive payment for the goods he supplied to the importer. How it is to be paid can be decided by the exporter and importer before the shipment is made. Generally there are five methods of export payment and they are explained below:
PAYMENT IN ADVANCE:
This type of payment is most uncommon. However, if thee is heavy demand for the goods and the goods are tailor-made for the customer, the exporter may get payment in advance. Under this method, the exporter receives a bank or a bank advice either on confirmation of the order or at any time before shipment. This is the most advantageous form of payment as the exporter does not have any risk but, as we have already observed, it is not very common. OPEN ACCOUNT: Under this method, the exporter sends the documents directly to the importer with a covering letter asking for the invoice value to be remitted to him. In this case the exporter does not draw any bill of exchange. Hence, there is no evidence of the obligation to pay. Though this method is simple and less expensive the exporter carries the burden of finance and it also involves real risk for the exporter. The exporter may accept this method of payment if there is keen competition and there is a long and established relationship between and the importer. DOCUMENTARY BILLS: This method of payment finances a large proportion of overseas trade. These bills act as a bridge between the exporter's willingness to part with his money unless he is paid for and importer's unwillingness to part with his money unless he is sure of receiving the goods. The commercial banks that deal in foreign exchange provide a via media by giving the necessary assurances to both the parties. Under this method of payment the exporter agrees to submit documents to his bank along with the bill of exchange. The documents include bill of lading, involve and a marine insurance policy. Under this method there are two types of payments viz: Documents against payment (D/P) and documents against Acceptance (D/A). Under D/P bills, the exporter's bank will send the documents to its correspondent bank in the importer's country, which will present the documents to the importer and ask him to pay the money for the goods exported. On payment of the bill of exchange the bank will deliver the documents to the importer so that he can take possession of the goods. In case of D/A bills, the correspondent bank will submit the bill of exchange to be signed by the importer t indicate his acceptance of the payment obligation. After the importer accepts the bill he will get possession of the documents for taking delivery of the goods. On the due date of payment, the bank will again present the bill to the importer who then makes the payment. The money received is remitted through usual banking channels to be credited to the exporter's account. LETTRS OF CREDIT
A letter of credit is a document containing the guarantee of a bank to honour drafts drawn on it by an exporter, under certain conditions and up to certain amounts, provided that the beneficiary fulfils the stipulated conditions (Detailed explanation for letter of credit was given separately). SHIPMENT ON CONSIGNMENT BASIS In this case, the exporter makes shipment to the overseas consignee/agent, but retains the title to the goods as also the risk attendant thereto; even though the overseas consignee will have the physical possession of the goods. The payment for the goods shipped is made only when the agent ultimately sells the goods to other parties. If the agent fails to sell the goods, he may return the goods at any time without any liability and at the seller's expense.
LETTER OF CREDIT A letter of credit is a document containing the guarantee of a bank to honour drafts drawn on it by an exporter, under certain conditions and up to certain amounts, provided that the beneficiary fulfils the stipulated conditions. The letter of credit offers advantages to both the seller and buyer. As far as the seller is concerned, a letter of credit ensures him payment for the goods he sells, provided, of course, that he follows the instructions. Though the buyer has to have the botheration of arranging for the letter of credit, it may enable him to obtain more liberal discounts and a lower price from the seller. Further, the buyer is assured that the shipment will be made by the date specified in the letter of credit, or else the credit will expire. PARTIES TO THE LETTER OF CREDIT: 1. The Opener: The opener is the buyer(importer). The letter of credit is opened at the initiative and request of the buyer. 2. The Issuer: The issuer, also called the opening or issuing bank, is the bank in the importer's country issuing the letter of credit at the request of the importer. 3. The Beneficiary: The beneficiary is the party in whose favour the credit is issued; that is the beneficiary is the seller or exporter.
4. The confirming Bank: The confirming bank is a bank in the exporter's country, which guarantees the credit at the request of the issuing bank.
The confirming bank
undertakes all the obligations of the issuing bank as a primary party to the credit, and even if the issuing bank fails during the currency of the credit, the confirming bank is obliged to honour its commitment. 5. The Notifying Bank: The notifying bank is the bank, which, at the request of the issuing bank, notifies the beneficiary that the credit has been opened in his favour. If the letter of credit is confirmed, the confirming the bank advises the beneficiary accordingly. 6. The Paying Bank: The paying bank is the bank on which the draft or bill of the exchange is to be drawn under the commercial credit. The paying bank may be the issuing bank, the confirming bank or the notifying bank. 7. The Negotiating Bank: The negotiating bank is the bank, which pays or accepts the drafts of the exporter. If no paying bank is specified in the credit, the beneficiary may go the any bank and present the draft and related documents under the credit; and if the bank agrees to negotiate the documents, it becomes the negotiating bank.
KINDS OF LETTER OF CREDIT 1. Clean Letter of Credit: This kind of letter of credit may be negotiated against a clean draft. A clean draft is a draft without any documents attached to it. 2. Documentary Letter of Credit: Under this, the draft must be accompanied by the documents specified in the letter of credit. 3. Assignable Credit; Under this kind of L/C, the beneficiary may assign his rights to another beneficiary, either within a stated period or before the expiry date of the credit. 4. Non-Assignable Credit: As opposed to the assignable credit, the named beneficiary of a nonassignable L/C cannot transfer his rights to another party. 5. Cash credit; under the cash credit, the exporter may draw a sight draft on the bank. The great advantage of this type of credit, therefore, is that the beneficiary will receive cash for his draft as soon as the goods are ready for shipment and the relevant documents in proper order are represented to the bank. 6. Acceptance Credit: Under this arrangement, the bank merely 'accepts' the drafts drawn by the exporter. After the bank has accepted it, the draft becomes a bank acceptance, which may be readily discounted or sold by the exporter to the accepting bank, to other banks or to exchange dealers.
7. Revocable credit: The revocable letter of credit may be revoked or cancelled at any time without the consent of, and without notice to, the beneficiary. As the revocable L/C does not adequately protect the beneficiary on the basis of this type of L/C are not common. 8. Irrevocable Credit: An irrevocable L/C is one, which cannot be revoked, amended or modified by the issuing bank without the express consent of all the parties concerned. 9. Confirmed Credit: If a bank in the beneficiary country confirms the L/C, it becomes a confirmed credit. In this case, the bank issuing the L/C sends it through its branch or correspondent bank located in the beneficiary's country with the request to add its confirmation to the credit. 10. Back-to-Back Credit: A back-to back credit is essentially a secondary credit, opened by a bank on behalf of the beneficiary of an original credit, in favour of a domestic supplier. The original credit backs another credit and facilitates the purchase of the goods from a local supplier by the beneficiary of the original L/C. 11. Revolving Credit: A revolving credit is designed to obviate the need for establishing new credit for each shipment when the transactions are more or less continuous. Under the revolving credit, provision may be made for making available the credit again as soon as the importer reimburses the issuing bank with the drafts already negotiated by the paying bank. 12. Red Clause Credit: The red clause L/C enables the beneficiary to draw a predetermined value of the L/C as its established. The red clause is an authority to the negotiating bank to make advances to the beneficiary for the purpose of purchasing the relevant merchandise. The conditions on which such advances may be made are incorporated in the L/C. STEPS IN THE OPERATION OF LETTER OF CREDIT: In Letter of credit, normally four parties are involved, viz, the applicant for the credit (importer), the beneficiary of the credit (exporter), the issuing bank and the advising bank incase of unconfirmed credit or the confirming bank in case of confirmed credit. The step-by-step procedure involved can be discussed by taking an example.
M/S Rainbow limited. Chennai has secured a contract for the supply of 200 ceiling fans to a Nigerian importer. It has been decided that the terms of payment will be a confirmed irrevocable letter of credit. The total value of the contract is Rs.2, 00,000. Once the contract is duly signed the Nigerian bank then sends instructions to its correspondent bank to the credit and the advice the Rainbow limited accordingly. On receipt of this advice from the local correspondent bank in India, the Rainbow limited., makes the shipment of he cling fns and gets the shipping documents and other related documents. He presents these to the
correspondent bank, which scrutinizes the documents. If these are in full conformity with the terms of the credit, it will accept the documents and make the payment to the exporter. The documents are then forwarded to the issuing bank, which reimburses the amount to the correspondent bank. The issuing bank in turn presents the documents to the importer and debits his account for the corresponding amount. The steps involved, therefore, relate to three distinct activities, viz., opening of credit, presentation of documents and the process of payment. The entire scheme of operation can be easily visualized with reference to the Flow chart given below.
SALES CONTRACT SELLER
OPENING ADVICE ISSUING
The straight lines show the flow of the credit. The dashed lines shows the flow of the documents and the dotted lines show the process of payment.
ADVANTAGES OF LETTER OF CREDIT: 1. Purchase without cash: The importer can purchase goods on credit from foreign merchants, who do not know him and may rely upon his standing, on the banker's credit issuing the letter of credit. 2. Payment after satisfying conditions: The importer is assured in case of documentary letter of credit that the exporter cannot obtain any benefit under the letter of credit without actually shipping the merchandise and handing over the documents to the bank. 3. Better terms of trade: The issuing banker lends the advantage of his own credit to the importer, who is able to secure terms of trade from the foreign supplier, which is otherwise not possible.
4. Release against trust receipt: When banks are willing to assume credit risk of the importer, shipping documents are surrendered to him in return for his trust receipt, and the goods released. 5. Certainty of Payment: Though the importer and the exporter are not known each other, the letter of credit provides an absolute assurance that the bills of exchange drawn under the letter of credit will be honoured. 6.Credit facilities: The exporter can secure loans from his bank to buy or manufacture the goods to be supplied on the strength of the letter of credit. 7. Discount facilities: The bills of exchange drawn under the letter of credit are readily discounted with the advising/confirming banker or any other banker, because of the firm undertaking given by the opening banker.
COMMODITY BOARDS The government of India has established a number of commodity boards to be responsible for the production, development and export of some commodities like tea, coffee, rubber, tobacco spices etc. These boards are statutory bodies. TEA BOARD: The Tea Boards head office is in Calcutta. The functions of these boards includes -
It looks after the production and marketing of tea in India.
In order to increase the production, the Tea Board runs various development schemes. Some of them are 1.Tea plantation finance scheme, New
tea unit finance scheme, Small growers development scheme,Special area
development scheme etc. -
Provide financial assistance and grants for tea research institutes
Promote research activities on the allied subjects like packaging of tea.
The export promotion activities are undertaken to popularize Indian tea and consumer level with special promotion programme to promote India teas in value added for like packet tea, tea bags and instant tea.
For promotion of tea as beverage the tea board also participates in the generic promotion programme conducted by tea council at U.K., Germany, US, and Canada and is also member of the International Tea committee.
COFFEE BOARD: The functions of coffee board includes -
The coffee board participates in selected international exhibitions and trade fairs for highlighting the high quality and excellent flavour of Indian coffee for the awareness of importers and roasters from different countries.
Special advertisements on the excellence of the Indian coffee were released in important coffee trade journals and magazines in countries, which have potential markets for Indian coffee.
Studies on diseases of coffee and their control were carried out.
For improving the productivity and quality of coffee, contact programme was launched in 4 regions covering a total number of 1018 growers.
Keeping view the production of quality coffee at estate level, training programme was conducted.
TOBACCO BOARD:The following are the functions rendered by tobacco board to promote export of tobacco: -
Allowing exports to countries facing foreign exchange crunch on long term credit terms.
Allowing exports of tobacco to Russia through debt repayment route.
Sponsoring delegations abroad and participation in international trade fairs.
Improving yield and quality of tobacco through control of diseases in tobacco nurseries, balanced fertilization, pest and disease control.
Improvement of curing and storing facilities by conservation of energy by roof insulation of tobacco barns, supply of tarpaulins and supply of coal for curing.
Improving tobacco grading through establishment of community grading centers.
SPICES BOARD: The Spices Board has number of schemes of assistance to spice exporters such as Brand promotion, Logo Promotion, grant of Spice House certificate etc. They are explained below: Brand Promotion: Under this scheme, interest free long-term loans up to a maximum of 50% of the promotion cost for a period of three years are provided to the exporters of spices in consumer packs for promoting their individual brands in overseas markets. Logo Promotion: In the exports of spices, quality is a key element. The spices board has a scheme to promote a "logo mark" as a mark of quality and Indian ness of spices. The logo mark is awarded to exporters of spices in consumer packs who fulfill certain stipulated conditions of
hygiene/processing/packaging and product quality. Logo is registered in six countries and would be registered in another 14 countries. Spice House Certificate: The Board has introduced a concept of 'Spice House' and it is awarded only to those exporters who fulfill the prescribed quality standards and have necessary processing infrastructure for production of clean quality process. Certificates have been awarded to many manufacturers/processors of spices. Apart from those schemes, spices board has been supplementing activities of Ministry of Agriculture with a number of schemes that include: 1. Production and supply of quality material and rooted cutting; 1. Replantation of old and diseased plants; 2. Providing assistance to marginal growers in non-traditional areas; 3. Organizing training programmes for growers for quality improvement and post-harvest techniques.
EXPORT PROMOTION COUNCILS The basic objective of Export Promotion Councils is to promote and develop the exports of the country. Each council is responsible for the promotion of a particular group of products, projects and services. There are 20 EPCs and a number of specified agencies/boards which shall be regarded as EPCs under the Export and Import Policy. They issue Registration cum membership certificate to exporters. The main role of EPC is to project India's image abroad as a reliable supplier of high quality goods and services. The major functions of the EPCs are as under: To provide commercially useful information and assistance to their members in developing and increasing their exports. To offer professional advice to their members in areas such as technology up gradation, quality and design improvement, standards and specifications, product development, innovation etc. To organize visits of delegations of its members abroad to explore overseas market opportunities. To organize participation in trade fairs, exhibition and buyer seller meets in India and abroad.
To promote interaction between the exporting community and the Government both at the Central and State levels. To build a statistical base and provide data on the exports and imports of the country, exports and imports of their members, as well as other relevant international trade data. The Export promotion councils are non-profit organizations registered under the Companies Act or the Societies Registration Act, as the case may be. 100% EXPORT-ORIENTED UNITS The scheme of 100 EOU's were introduced in 1980 with a view to generating additional production capacity for exports by providing an appropriate policy frame work, flexibility of operations and incentives. In order to enable them to operate successfully in the international market such units are allowed to import machinery, raw material, components and consumable at free of custom duties. These units have to operate under custom bond and achieve the level of value addition fixed by the Board of Approval. At present more than 500 units are in operation under the EOU scheme.. Some of the modifications done to facilitate the exporting units in the EOUs are as follows:
Simplification of customs/excise procedures
Automatic approval under certain conditions to proposal for setting up units.
Leasing of capital goods from domestic companies by EPZ\EOU has been permitted.
Encouragement of agro and electronic units by providing higher domestic access.
The following privileges are enjoyed by the Export Oriented Units:
An EOU unit may export all goods and services except the items prohibited by the exim policy.
An EOU unit may import without payment of duty for all type of goods, including capital goods required by it for its activities provided they are not prohibited items of imports.
EOU units may import/procure from Domestic Tariff Area without payment of duty.
Second hand capital goods may also be imported duty free without any age limit.
EOU unit shall be positive net foreign exchange earner.
Only project having an investment of Rs.1 crore and above in building, plant and machinery shall be considered for establishment under EOU scheme. Application for setting up of units under EOU scheme may be approved by the units Approvals Committee within 15 days. The entire production of EOU units shall be exported subject to the following:
Rejects may be sold in the domestic tariff area on payment of duties on prior intimation to the customs authorities. Scrap/waste arising out of production process or in connection therewith may be sold in the domestic tariff area on payment of duties within the overall ceiling of 50% FOB value of exports. By products may also be sold in the domestic tariff are subject to achievement of positive net foreign exchange on payment of applicable duties within the overall entitlement.
OVERVIEW OF EXPORT AND IMPORT POLICY OF INDIA I POLICY AND ITS OBJECTIVES: Under the Foreign Trade (Development and Regulation) Act, 1992 the Central Government has notified the Export and Import Policy for the period 2002-2007 which came into force with effect from 1st April 2002 and shall remain in force up to 31st March 2007. The following are the salient features of the policy as amended up to 31st March 2003. The principles objectives of this policy are:
To facilitate sustained growth in exports to attain a share of at least 1% of
To stimulate sustained economic growth of providing access to essential raw materials, intermediates, components, consumables and capital goods required for augmenting production and providing services.
To enhance the technological strength and efficiency of Indian agriculture, industry and services, thereby improving their competitive strength while generating new employment opportunities, and to encourage the attainment of internationally accepted standards of quality.
To provide consumers with good quality goods and services at internationally competitive prices while at the same time creating a level playing field for the domestic producers.
II GENERAL PROVISIONS REGARDING IMPORTS AND EXPORTS a) Exports and Imports shall be free except in cases where they are regulated by provisions of this policy or any other law. The item wise export and import policy shall be, as specified in ITC, published and notified by DGFT.
b) Any person without an importer-exporter code number shall make no export or import unless specifically exempted. This number shall be issued by DGFT. c) The provisions given in Handbook shall govern import of samples. d) Import of gifts shall be permitted where such goods are otherwise freely importable under this policy. e) Export of samples and Free of charge goods shall be governed by the provisions given in the Hand Book. f)
All export contracts currency and invoices shall be denominated in freely convertible currency or Indian Rupees but the export proceeds shall be realized in freely convertible currency.
g) Goods including edible items of value not exceeding Rs.1,00,000/- in a licensing year, may be exported as a gift. h) Goods imported may be exported in the same or substantially the same form without a license/certificate/permission provided that the item to be imported or exported is not mentioned as restricted for Import or Export in the ITC. i)
A license shall contain such terms and conditions as may be specified by the licensing authority may include the quantity, description and value of goods, actual user, the value of addition to be achieved if any.
Every license shall be valid for the period of validity specified in the license.
III PROMOTIONAL MEASURES: 1.Central Assistance to States: State governments shall be encouraged to fully participate in encouraging exports from their respective states. For this purpose, suitable provisions shall be made in the Annual Plan of the Department of commerce for allocation of funds to the states on the twin criteria of gross exports and the rate of growth of exports from different states. The states shall utilize this amount for developing complementary and critical infrastructure such as rods connecting production centers and creation of new state level economic processing zones, industrial parks etc. 2.Market Access Initiative: Financial assistance shall be available under this scheme to the Economic Processing Zones, industry and trade associations etc., on the basis of the competitive merits of proposal received in this regard
for marketing studies on country product focus approach basis, participation in international trade fairs, seminars, buyer-seller meet etc. 3.Towns of Export Excellence: The industrial cluster towns that export substantial portion of their products, which are world class, should be granted recognition with a view to maximize their export profile. The common service providers in these towns should be entitled for facility under different schemes offered by the Govt. for export promotion. Selected towns producing goods of Rs.1000 crores or more will be notified as Towns of Export Excellence on the basis of Potential for growth in exports. 4.Special Focus on Cottage and Handicraft sector: The small-scale sector along with the cottage and Handicraft sector has been contributing to more than half of the total exports of the country. The cottage and handicraft sector, which mostly employs artisan and rural people, contributes significantly to this effort. In recognition of the export performance of this sector and to further increase its competitiveness, the following facilities shall be extended to this sector.
The units shall be eligible for funds from Market Access Imitative scheme.
Under EPCG scheme, these units will not be required to maintain average level of exports.
The units shall be entitled to the benefit of export house status on achieving lower total export/deemed export performance of Rs.15 crores during the preceding three licensing years.
They are also entitled to duty free imports of specified items upto 3% of FOB value of their exports.
5.Agri Export Zones: The services, rendered to Agri Export Zones which would be managed and coordinated by state government would include provision of pre/post harvest treatment and operations plant protection, processing,. Packing, storage and related R & D etc. Units Agri export zones would be entitled for all the facilities available for exports of goods in terms of provisions of the respective schemes. 6.Brand Promotion and Quality: The central government will extend support and assistance to trade and industry to launch a nationwide programme on quality awareness and to promote the concept of total quality
management. The Regional Sub-Committee on quality complaints shall investigate quality complaints received from foreign buyers.
7.Status Certificate: Merchant as well as manufacturer exporters, service providers, Export Oriented Units shall be eligible for such recognition. The status holders shall be eligible for the following new\special facilities:
License/certificate/Permissions and customs clearances for both imports and exports on self-declaration basis.
Fixation of input-output norms on priority, within 60 days.
Exemption from compulsory negotiation of documents through banks. The remittance, however, would continue to be received through banking channels.
Enhancement in normal repatriation period from 180 days to 360 days.
Duty free import entitlement for status subject to some conditions.
Alls status certificates shall be valid from 01-04-2002 to 31-03-2007. 8.Service Exports: The Service providers shall be entitled for all the facilities mentioned in the policy. 9.Electronic Data Interchange: Applications received electronically shall be cleared within 24 hours. Apart from the above provisions, benefits and facilities the new Export and Import Policy showed its emphasis through the following schemes:
Duty Exemption Scheme
Duty Remission Scheme
Duty Entitlement Pass Book Scheme
Export Promotion Capital Goods Scheme
In short, the EXIM policy since 1992 acknowledges that the trade can flourish in a regime of substantial freedom. It also recogninses the need for reasonable stability of the policy, by making the duration of the policy 5 years. The implication of the new policy is that survival of a firm will depend on its competitiveness in the globalising environment and the competitive firms will have plentiful opportunities. Indian firms will have to gear up themselves to survive and to become successful in the emerging borderless world.
The importing country pays money to the exporting country in return of goods either in its domestic currency or the hard currency. This currency which facilitates the payment to complete the transaction is called foreign exchange. This foreign exchange is the money in one country for money or credit or goods or services in another country.
Foreign exchange includes foreign
currency, cheques and foreign drafts.
Foreign exchange is bought and sold
in foreign exchange markets. The components of foreign exchange market rate include: the buyers, the sellers and the intermediaries. The market intermediaries of foreign exchange market include Exchange banks dealing in foreign exchange, bill brokers, acceptance houses and Central Bank of the country. Exchange rate determination: The transactions in the foreign exchange market, viz., buying and selling foreign currency take at a rate which is called exchange rate. Exchange rate is the price paid in the home currency for a unit of foreign currency. The exchange rate can be quoted in two ways namely One unit of foreign money to a number of units of domestic currency. A certain number of units of foreign currency to one unit of domestic country. For example, 1 US$ = Rs.48 or Rs. 1 = US$ 0.02
Exchange rate in a free market is determined by the demand and the supply of exchange of a particular country. The equilibrium exchange rate is the rate at which demand for foreign exchange and the supply of foreign exchange are equal. Equilibrium exchange rate can be determined by two methods: The Exchange rate between US dollars and Indian Rupees can be determined by demand for and supply of US dollars in India or by Indians. The price of US $ is fixed in Indian Rupees. The exchange rate between Indian Rupees and US $ dollars can also be determined by demand for and supply of Indian Rupees by Americans or in USA. The price of Indian Rupee is determined in US dollars. But the prices are same in both these methods.
Demand for Foreign Exchange: The demand for foreign exchange is determined by the country’s Import of goods and services Investment in foreign countries i.e. establishment of an industry by Indians in USA. Other payments involved in international transactions like payments of Indian Government to various foreign governments for settlement of their transactions. Other types of foreign capital like giving donations etc. Supply of Foreign Exchange: Supply of Foreign Exchange of a particular country indicates the availability of foreign currency of a particular country to the country concerned (i.e. India) in its foreign exchange market. The supply of foreign exchange includes: Country’s exports of goods and services to foreign countries. Inflow of foreign capital
Payments made by the foreign governments to Indian governments for settling their transactions. Other types of inflow of foreign capital like remittances by the Non-Resident Indians, donations received etc. EXCHANGE RATE SYSTEM: Fixed Exchange Rates: Under this system, the governments used to fix the exchange rate and the central bank to operate it by creating ‘exchange establishment fund’. The central bank of country purchases the foreign currency when the exchange rate falls and sells the foreign exchange when the exchange rate increases. The countries follow fixed exchange rates due to its advantages. They are:
Fixed exchange rates ensure certainty and confidence and thereby promoters international business. Fixed exchange rates promote long-term investments by various across the globe. Most of the world currency like US dollar areas and sterling pound areas prefer fixed exchange rates. Fixed exchange rates result in economic stabilization. Fixed exchange rates stabiles international business and avoid foreign exchange risks to a greater extent. As such the small but international business oriented countries like UK and Demark prefer fixed exchange rate system. Despite these advantages, most of the world countries at present are not in favour of this system because of the following reasons; Due to problems with the fixed exchange rate system, IMF permits occasional changes in the system. The system is changed into managed flexibility system. The managed flexibility system needs large foreign exchange reserves to buy or sell foreign exchange in order to manage the exchange rate. Maintenance of greater reserves aggravate the problem of international liquidity. Fixed exchange rates system may result in a large scale destabilizing speculation in foreign exchange markets. Long-term foreign capital may not be attracted as the exchange rates are not pegged permanently. The economic policies and foreign exchange policies of the countries are rarely coordinated. In such case, the exchange rate system does not work. Most of the economies in recent years are liberalized and globalize.
economies prefer flexible exchange rate system. Deficit of balance of payments of most of the countries increases under fixed exchange rate system as the elasticities in international markets are too low for exchange rate exchanges.
Flexible Exchange Rates: Flexible exchange rates are also called floating or fluctuating exchange rates. Flexible exchange rates are determined by market forces like demand for and supply of foreign exchange. Either the government or monetary authorities do not interfere or intervene in the process of exchange rate determination. Under this system, if the supply of foreign exchange is more than that
of demand for the same, the exchange rate is determined at a low rate and vice versa. Most of the countries in recent times are in favour of flexible exchange rates due to their advantages. This system is simple to operate. This system does not result in deficit or surplus of foreign exchange. The exchange rate moves automatically and freely. The adjustment of exchange rate under this system is a continuous process. The system helps for the promotion of foreign trade. Stability in exchange rate in the long-run is not possible even in fixed exchange rate system. Hence, this system provides the same benefit like fixed exchange rate system for long term investments. This system permits the existence of free trade and convertible currencies on a continuous basis. This system also confers more independence on the government regarding their domestic policies. This system eliminates the expenditure of maintenance of official foreign exchange reserves and operation of the fixed exchange rate system. Disadvantages: However this system is also not free from the disadvantages. The disadvantages of this system include:
Market mechanism may fail to bring about an appropriate exchange rate. The equilibrium exchange rate may fail to give correct signals to correct the balance of payments position.
It is rather difficult to define flexible exchange rate.
Under flexible exchange rate system, the exchange rate changes quite frequently. These frequent changes result in exchange risks, breed uncertainty and impede international trade and capital movements.
Under flexible rate system, speculation adversely influences fluctuations in supply and demand for foreign exchange.
Under this system a reduction in exchange rates leads to a vicious circle of inflation.
Despite the advantages of fixed exchange rate and the disadvantages of floating exchange rate system, it is viewed that the flexible rate system is suitable for the globalization process. In addition, the convert ability also helps the floating rate system and the globalization of foreign exchange process.
INTERNATIONAL TRADE - 41303
QUESTION BANK UNIT ONE 1. Narrate the scope of International Marketing. 2. Define International Marketing. How domestic marketing does differs from international marketing? 3. What are the advantages that a firm can derive by going into international? (Ans: motivation for exports and advantages of globalization) 4. Why the task of international marketing is is more difficult than that of domestic marketing? (Ans: Difficulties of international marketing) 5. How do controllable and uncontrollable factors affect the environment of international marketing? 6. Explain the concept of Globalization. 7. Write a note on Pros and Cons of Globalization. UNIT TWO 1. Why more and more Indian manufacturers taking recourse to direct marketing? (Advantages of direct exporting and limitations of indirect marketing) 2. Discuss the criteria involved in International Marketing in respect of market Selection decision. 3. Give a critical evaluation of various strategy alternatives for selection and entry in the international marketing.
4. List the importance of /uses of/need for international Marketing research. 5. What are the various aspects of International Marketing Research. 6. What is meant by competitive intelligence? How do firms acquire it? 7. What are the different methods of protection made our government for the sake of domestic merchants? (tariffs, subsidies and quotas) 8. Bring out the impact of Tariffs & Quotas. 9. List out the standard clauses of International Sales Contract. 10. Write a explanatory not on trade barriers. UNIT THREE 1. What do you mean by counter trade? Is it advantageous? 2. Write a note on world trade services. 3. List out the functions of GATT. What are its basic principles? 4. How would GATT agreements help in reducing trade barriers? 5. What are the different forms of counter trade? 6. How WTO differ from GATT? 7. Evaluate the institutional and infrastructure facilities available for export promotion in India. 8. Describe briefly the various measures taken by Government of India to help Indian Exporters.(export assistance and export promotion measures) 9. Critically examine the contributions by the commercial banks in Export promotional efforts in India.(post shipment credit and pre shipment credit). 10. Make a critical appraisal of working of the Export Credit and Guarantee Corporation. 11. Discuss the role of EXIM bank in International Trade context.
12. Write a note 100% Export Oriented Units (EOU) and its obligations. 13. Explain the role of FTZ. UNIT FOUR 1. Describe the stages of processing an export order. 2. Briefly discuss the functions of commodity boards. 3. Write short notes on Export by Air Export by sea 4. What are the advantages of export of goods by air? 5. Present a detailed account of the procedure for export of goods. 6. Explain the significance of documents used in export trade related to shipment of goods and payment. 7. What are the machineries available for quality control and inspection? 8. What are the risks that are covered under marine insurance? Explain the procedure and documents used when the loss occur 9. Explain the fundamental principles of marine insurance and discuss the extent of coverage available under different forms of marine insurance. UNIT FIVE 1. Explain how payments are settled in International Trade. 2. What are the uses of Letter of Credit? Briefly explain the various types of Letter of Credit. 3. State the steps involved in the operation of Letter of Credit. 4. Examine the salient features of India’s latest EXIM Policy. 5. How the foreign exchange rate will be determined?
6. Discuss the advantages and disadvantages of different exchange rate system. INTERNATIONAL TRADE GENERAL QUESTIONS 1. Trace the recent trends in Indian foreign trade. 2. Present
policy. 3. Explain the main features of India's foreign trade? 4. Write short note on IMF. 5. State in your opinion reasons for sluggishness in Indias Foreign Trade? 6. What
Exporters? 7. What are the major Exports of India? 8. Explain the advantages of Regional Economic groupings? 9. Explain the salient features of the EXIM policy of our country
competitiveness of Indian
10.Examine the extent to which the direct Export subsidies have prove
helped the Indian Exporters.what other methods could effective in encouraging more exports?
causes for the existing situation and give
12.Assess the impact of recent liberalisation measures on India's
13.Formulate a stategy to increase exports of India's SSI sector? 14."Quality
the validity of the statement in the
Indian context? 15.Explain the role of export subsidies in promoting Indian exports.What other methods do you suggest?
16.How does International Trade contribute to the countries economy? 17.Write a detailed note on Project exports of India? 18.What
India to boost Exports?
19.What are the main issues that should be considered while framing
the multinational marketing plan.
20.Examine the extent to which the direct export subsides have helped
the Indian exporters.What other methods could
prove effective in
encouraging more exports?
21.Formulate a strategy to increase exports of India's small scale
Indian context. 23.As
finding overseas market for a product of your
choice. 24.What do you mean by 'Marketing mix ,in the context of International Trade? 25.Distinguish between 'desk research and field research'. 26.Briefly
barriers. 27.What are the different market entry strategies available to MNC to
expand their international trade ?
29.Under FOBcontract ,what are the duties of the exporter and
30.What do you understand by Medical Transcription ?Briefly outline
it helps india in service exports.
31.What are the major export items of India ? Who are the major
competitiors of these items ?Discuss.