1 APPAREL EXPORT MANAGEMENT UNIT - I BASICS OF INTERNATIONAL TRADE International trade can be defined as either the buying (importing

) or selling (exporting) of goods or services on a global basis. International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (Silk Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. International trade is a major source of economic revenue for any nation that is considered a world power. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade does not change fundamentally depending on whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or a different culture. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing the factor of production a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with

forms the larger branch of international economics. with the Euro in strong demand as well. US dollar is the most sought-after currency. together with international finance. Competitiveness is an important determinant for the well-being of states in an international trade environment. Advantages and Disadvantages of International Trade Advantages: • • • • • • • • • • Enhances domestic competitiveness Increases sales and profits Gains global market share Reduces dependence on existing markets Exploits international trade technology Extends sales potential of existing products Stabilizes seasonal market fluctuations Enhances potential for expansion of existing business Sells excess production capacity Maintains cost competitiveness in domestic market Disadvantages : • • • • • • • • Need to wait for long-term gains Hiring staff to launch international trading Modifying product or packaging Developing new promotional material Incuring added administrative costs Dedicating personnel for traveling Waiting for long periods for payments Applying for additional financing – increased liablity . which.2 Chinese labor. International trade uses a variety of currencies. the most important of which are held as foreign reserves by governments and central banks. International trade is also a branch of economics.

Insufficient attention to marketing and advertising requirements. Insufficient commitment by top management to Determine Export Readiness exporting. Understand Licensing and Joint Ventures Understand Export Regulations . Pay Attention to Product Preparation Requirements 9. Solutions Obtain Export Counseling 2. 6. Failure to understand Intellectual Property Rights 7. Blindly chasing “E-orders” from around the world. 5. Failure to have a solid agent/distributor’s agreement 4. Understand Intellectual Property Rights (IPR) Pay Attention to Overseas Marketing and Advertising Understand Export Financing Understand Agent/Distributor Contracts Avoid Accidental Exporting 8. 10. Failure to understand the connection between country risk and securing export financing. Lack of attention to product preparation needs.3 • Dealing with special licenses and regulations which are not familiar Common Mistakes Made in International Trade Common Export Mistakes 1. 3. Failure to obtain qualified export counseling and to develop a master international marketing plan before starting an export business. Failure to consider legal aspects of going global. Failure to know the rules of trade.

Firms that intend to enter and to expand in exporting will likely need an agent or distributor at some point.4 1. preferably in consultation with a qualified trade lawyer. that legal documents are structured correctly. therefore they are instrumental in helping to make sure that recordkeeping system is planned correctly. 2. Distributors cannot contractually bind the company producing the goods. during the sale. Insufficient commitment to overcome the initial difficulties and financial requirements of exporting. Hire a lawyer to help structure export operations for the long run: lawyers are concerned with issues of compliance on both ends of the transaction. Understanding the Role of Distributors: The key legal distinctions between an agent and distributor are • A distributor takes title to the goods and accepts the risk of loss. 3. firms have to establish an export department to which they dedicate personnel and a budget. Distributors establish the price and sales terms of the goods. A distributor makes profits by reselling the goods. Failure to obtain export counseling and to develop master international marketing plan before starting an export business. and for which they develop appropriate procedures. • • . Failure to have a solid agent and or distributor’s agreement. As agents do not own the products they sell. Key considerations include: Understanding the Role of Agents: The agents receive commission on their sales rather than buying and selling for their own account. To be successful in exporting. the risk of loss remains with the company the agent represents (the principal). Utilize Government and Association Resources for Export Counseling: It is also important for new exporters to seek legal counsel. and after the sale. and to advise on broad range of compliance issues before the sale.

the contract to be assigned to another party (sub-agents or sub-distributors) to be used to fulfill obligations in the contract or the contract to be transferred with a change of ownership or control over the agent/distributor. Determine the currency in which payments are to be made and address currency fluctuation issues. Provide specific provisions regarding renewal of the agreement. Specify which geographic regions are to be covered.) • • • • • • Outline the termination process for the end of the agreement period. For example: • • • Determine whether the relationship is exclusive versus non-exclusive. • • Assure that your contract complies with both domestic and foreign laws.5 The first and most important consideration when drafting an agreement is to ensure that the agreement clearly states whether there is an agent or a distributor relationship. What do you do next? Make sure the order is not on the denied list. Make sure the opportunity is a . including specific parameters for performance. Provide for workable and acceptable dispute settlement clauses. Establish a specific provision for termination of the agreement and terms for such termination. 4. without seller’s consent. Blindly chasing orders from around the world You may be in your office when suddenly and unexpectedly someone from a foreign country contacts you electronically and wants to buy a line of your products. The agreement should also clarify the terms and conditions for selling the products. Do not allow. Outline issues of payment and payment schedules for the products (in the case of a distributor) and for payments of commissions (in the case of agents). (Some foreign countries restrict or prohibit termination without just cause or compensation. Assure that the agreement addresses whether or not intellectual property rights are being licensed or reserved. promotional activity and notice of desire to renew.

Intellectual property rights refer to the legal system that protects patents. Export promotion councils and corporations also organize trade meets.globalsources. Trade Show Pavilions: Many trade fairs. Failure to understand Intellectual Property Rights (IPR). For information on upcoming trade shows visit the Internet Web site for Trade Show Central (www. firms can obtain useful data to assess the probability that they are investigating is real.com)or the Trade Show Center (tradeshow. journals. trade secrets. trademarks. Failure to understand the connection between country risk and the probability of getting export financing. trade catalogs etc. Insufficient attention to marketing and advertising requirements. 6. The best source of information about whether a country is in good standing with Guarantee Corporation. copyrights.com) Web site which lists trade shows around the world.tsnn. buyer – seller meet periodically. Competitive considerations in checking out the market for the product: By reviewing industry sector information. Advertising: Exporters can advertise products or services in appropriate magazines . 7. fabrics.6 reasonable one and involves something that can reasonably be handled by the firm. shows are organized all over the world for garments. . 5. accessories etc. without spending countless hours researching the requirement. It is important for exporters to understand how and whether intellectual property rights are protected in different countries. Key considerations include : Trade Shows and Trade Missions: Trade shows and missions may be in the virtual form or entail traveling to the foreign country.

such as product standards. other non-tariff barriers. Branding. labeling and package considerations. are proliferating. Key considerations include Product Adaptation to standards requirements: As tariff barriers (tariffs. Product Engineering and Redesign: The factors that may necessitate re-engineering or redesign of products may include differences in electrical and measurement systems. • • • • • Are certain colors used on labels and packages attractive or offensive? Do labels have to be in the local language? Must each item be labeled individually? Must each item be labeled individually? Are name brands important? Warranties: In order to compete with competitors in the market. duties. 9. but also knowledge of the unique characteristics of each market being targeted. firms may have to include warranties on their products. to know all of the laws that pertain to exporting as well as the relevant laws of importing countries. Failure to obtain legal advice While it is virtually impossible for any firm. internationally approved testing and inspecting agencies provide information on conformity assessment procedures and standards. Exporters must understand conformity requirements to operate on an international basis. customs departments of importing countries. and quotas) are eliminated around the world in accordance with the requirements of participation in the World Trade Organization (WTO). The Bureau of Indian Standards.7 8. Lack of attention to product adaptation and preparation needs The selection and preparation of a firm’s product for export requires not only knowledge of the product. Labeling and Packaging: Cultural considerations and customs may influence branding. no matter how big or small. .

In order to export an item that may be on the restricted list. 2. Make a list of potential competitors and make a tabulation of their principal products or services. 1. • • • • • What is the item intended to export or re-export? Where is it going? Who will receive it? What will they do with it? What are the recipient's other activities? Importance of a Business Plan for International Trade Once decision is made to export it is important that overall business plan includes provisions for international trade. This allows the federal government to control the export of the goods.. For centuries under the belief in mercantilism most nations had high tariffs and many restrictions on international trade. Evaluate own capabilities to compete with these products or services. i. zoning and other issues. with the federal requirements governing export licenses. an export license is required. Failure to understand export licensing requirements.e. The license is not required for every item exported. Determine the cost of each product or service. 10.8 there are measures that can be taken by firms in the planning process to minimize the probability that they will make unnecessary errors that have grave legal consequences. REGULATION OF INTERNATIONAL TRADE Traditionally trade was regulated through bilateral treaties between two nations. legal registrations. Determine the county of origin of each product or service. Controversial multilateral treaties like the General Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted . Businesses that are new to the export arena may confuse the local and state rules regarding business taxes.

In fact. agricultural lobbies. Australia and Japan are its greatest proponents. though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. However. Europe and Japan. are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. and the European Union between 27 independent states. the United Kingdom. many other countries (such as India. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial. the North American Free Trade Agreement (NAFTA) between the United States. Canada and Mexico. including foreign direct investment. Free trade is usually most strongly supported by the most economically powerful nations. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures. RISK IN INTERNATIONAL TRADE . China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. and through several other regional arrangements such as MERCOSUR in South America. This has changed somewhat in recent years. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely because of opposition from the populations of Latin American nations. During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. The latter looks at the transaction cost associated with meeting trade and customs procedures.9 to create a globally regulated trade structure. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant. Similar agreements such as the Multilateral Agreement on Investment (MAI) have also failed in recent years. The regulation of international trade is done through the World Trade Organization at the global level. however. particularly in the United States. procurement and trade facilitation. today the United States.

Investigate the potential opportunities and benefits of international trade. To begin. Do's and Don'ts DO'S 1. 8. Become personally familiar with all monetary transactions. 6.. 4. 9. a change in rules that prevents the transaction). Use a trade lawyer for agent and distributor agreements and licensing requirements. Non-acceptance (buyer rejects goods as different from the agreed upon specifications). In addition. DON'TS 1. Visit trade shows and trade missions. 7. • • • • Regulatory risk (e. Take advantage of online resources. War and Natural calamities.g. Personally visit offshore suppliers (or customers). 5. 3. For example. 2.10 Companies doing business across international borders face many of the same risks as would normally be evident in strictly domestic transactions. Intervention (governmental action to prevent a transaction being completed). Join an international trade association specializing in same business. Consider hiring an international trade consultant. Credit risk (allowing the buyer to take possession of goods prior to payment). Rely on a single source of supply (or customer). • • Buyer insolvency (purchaser cannot pay). Inspect and approve merchandise before it is shipped. . start on a very small scale. the potential benefit of favorable movements). 2. Political risk (change in leadership interfering with transactions or prices). international trade also faces the risk of unfavorable exchange rate movements (and.

8. 5. Rely solely on others including employees for importing/exporting expertise. 7. Check out suppliers/customers before establishing relationship. 9. 6. 10. 4. Learn how best competitors are handling international trade.11 3. Provide dispute settlement provisions. Have an understanding of intellectual property rights. Rely on handshake agreements. Have an understanding of import/export financing. Make assumptions as to vendor's compliance with specifications. .

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