Professional Documents
Culture Documents
EXPORTS
PAYMENTS
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:
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.,
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
Marketing infrastructure
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.
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. In such
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;
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 start- appoint 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
More risk
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 Disadvantages
Licensing mode carries low investment on Licensing agreements reduce the market
the part of the licensor. opportunities for both licensor and
licensee.
Licensing mode carries low financial risk Both the parties have the responsibilities to
to the 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
without much effort on his part. and hurt both the parties and the market.
Licensing gets the benefits with less There is scope for misunderstanding
investment on research and development. 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 Disadvantages
Franchisor can enter global markets with International franchising may be more
low investment and low risks. complicated than domestic marketing.
Franchisor can get the information It is difficult to control the international
regarding the markets, culture, customers franchisee.
and environment of the host country.
Franchisor learns more lessons from the Franchising agents reduce the market
experiences of the franchisees, which he opportunities for both the franchisor and
could not experience from the home franchisee.
country’s market.
Franchisee can early start a business with Both the parties have the responsibilities to
low risk as he selects an established and maintain product quality and product
proven product and operating system. promotion.
Franchise gets the benefit of R & D with There is a problem of leakage of trade
low cost. secrets.
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.
FOREIGN SUBSIDIARIES:
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.
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?
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:
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. The 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.
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.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
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 pre-shipment 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%
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.
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.
ii. That the generally accepted usages of trade applicable to the insured
subject-matter are followed; and
iii. 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.
o 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.
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.
SALES CONTRACT
BUYER SELLER
CONFIRMATI
ISSUING
OPENING ADVICE
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.
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.
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
CONCLUSION
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.
FOREIGN EXCHANGE
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
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.