Description

Trade tutorial -

Introduction To International Trade :
As natural resources are unevenly distributed in different countries, a country cannot produce everything it needs. Some countries are good at producing dairy products; some are specialized in iron and steel industries.
As a result, a country will buy what it needs from countries that are good at producing them and in return will sell its products to countries who require them. The products will be moved from one country to another by means of aircraft, railways, trucks, ships or a combination of two or more modes of transport.
This buying and selling of goods is international trade and is participated in by different parties.

The Parties Involved
• The Buyer, who places orders and imports goods (meaning to bring into the country).
• The Seller, who manufactures and exports goods (meaning to ship out of the country) and issues invoices.
• The Manufacturer, if the seller does not make his own goods.
• The Shipping Company, (or Airline Company) who transport the goods overseas and issue Bills of Lading (or Air Waybills) as receipt of goods.
• The Insurance Company which insures the goods against risk. An insurance policy or certificate is issued to this effect.
• Governments and Embassies who give permission to import or export specific types of goods by issuing Import and Export Licenses, and Consular Invoices respectively.
• The Customs and Excise, who levy import duty and issue Custom’s Invoices.
• Various professional bodies, who issue Inspection Certificates certifying that the goods have been inspected and meet certain quality standards.
• Lawyers, who draw up contracts of sale.
• Agents, who represent either the buyer or seller overseas.
• Shipping Registries, who ensure that the carrying ship is seaworthy.
• Chambers of Commerce, who issue Certificates of Origin.
Banks, who participate in most trade transactions to some extent, from full finance to the processing of simple remittances. Sometimes, alternative names are used instead of the ones we have listed.

Payment Methods
There are four main ways for importers to make payment to exporters in international trade:
• Advance payment
• Open account trading
• Documentary credits
• Documentary collections
Advance Payment
The buyer agrees a price for goods from an overseas exporter and sends his payment with the firm order i.e. before the goods are shipped:
The importer must be confident of:
• the reliability of the exporter
• the stability of the exporter’s country
The risk is borne by the importer.
In return the importer may be allowed a discount which is a deduction from the price of goods in consideration of its being paid in advance.
This method would be used when:
• an importer is unable or unwilling to open a documentary credit
• an importer has a good cash position and can negotiate a cash discount
• an individual is buying from a mail order company
Importers can arrange to make advance payment through a bank.

Open Account Trading
This is basically payment in arrears, the opposite of advance payment and usually covers a regular flow of shipments. The importer usually agrees with the exporter to pay at the end of each month or, say, one month after each shipment. There is usually a long-standing or regular business relationship between the two parties:



The exporter must be confident of:
• the reliability of the importer
• the stability of the importer’s country
The risk is borne by the exporter.
Governments sometimes support their exporters to protect them against these risks.

Documentary Credit
As mentioned in the previous two methods, there are problems of trust and risk for both the buyer and the seller. In fact, trade will be difficult between companies who do not know each other well.
Banks act as a trustworthy third party or intermediary between the buyer and the seller. The reasons are:
A bank is acceptable to both t