International Trade Finance

How import and export works?

Imports
 are the goods and services that are purchased from the rest of the world by a
country’s residents, rather than buying domestically produced items. Imports
lead to an outflow of funds from the country since import transactions involve
payments to sellers residing in another country. (CFI Team, 2022)
Exports
 are goods and services that are produced domestically, but then sold to
customers residing in other countries. Exports lead to an inflow of funds to the
seller’s country since export transactions involve selling domestic goods and
services to foreign buyers. (CFI Team, 2022)

How Importing and Exporting Impacts the Economy?

 A country's importing and exporting activity can influence its GDP, its exchange
rate, and its level of inflation and interest rates.
 A rising level of imports and a growing trade deficit can have a negative effect on
a country's exchange rate.
 A weaker domestic currency stimulates exports and makes imports more
expensive; conversely, a strong domestic currency hampers exports and makes
imports cheaper.
 Higher inflation can also impact exports by having a direct impact on input costs
such as materials and labor.

How Imports And Exports Affect You?

- When a country is importing goods, this represents
an outflow of funds from that country. Local companies
are the importers and they make payments to overseas
entities, or the exporters. A high level of imports
indicates robust domestic demand and a growing
economy.
- A healthy economy is one where both exports and
imports are experiencing growth. This typically indicates
economic strength and a sustainable trade surplus or
deficit.
What Is a Letter of Credit?
 Letters of credit are often used
within the international trade
industry.
 There are many different letters
of credit including one called a
revolving letter of credit.
 Banks collect a fee for issuing a
letter of credit.
 A letter of credit, or a credit
letter, is a letter from a bank
guaranteeing that a buyer’s
payment to a seller will be
received on time and for the
correct amount. If the buyer is
unable to make a payment on
the purchase, the bank will be required to cover the full or remaining amount
of the purchase. It may be offered as a facility.

Samples of Letter Credit

Source: https://www.sampletemplates.com/letter-templates/letter-of-credit.html
BILL OF LADING
 A bill of lading (BL or BoL) is a legal document issued by a carrier (transportation
company) to a shipper that details the type, quantity, and destination of the
goods being carried.
 A bill of lading also serves as a shipment receipt when the carrier delivers the
goods at a predetermined destination. This document must accompany the
shipped products, no matter the form of transportation, and must be signed by
an authorized representative from the carrier, shipper, and receiver.
The bill of lading is a legally binding document that provides the carrier and the
shipper with all of the necessary details to accurately process a shipment.

Sample of Bill of Landing

 Source: https://optimoroute.com/bill-of-lading/
Why is a bill of lading important?
 The importance of a bill of lading lies in the fact that it’s a legally binding
document that provides the carrier and the shipper with all of the necessary
details to accurately process a shipment. This implies that it can be used in
litigation if the need should arise and that all parties involved will take great
pains to ensure the accuracy of the document.
 Essentially, a bill of lading works as undisputed proof of shipment. Furthermore,
a bill of lading allows for the segregation of duties that is a vital part of a firm’s
internal control structure to prevent theft.

What is the purpose of a bill of lading?

• It is a document of title to the goods described in the bill of lading.
• It is a receipt for the shipped products.
• It represents the agreed terms and conditions for the transportation of the
goods.

Source: https://www.linkedin.com/pulse/which-most-important-function-bill-lading-why-
hariesh-manaadiar
Samples of Bill of Lading

Source: https://www.wallstreetmojo.com/bill-of-lading/

What Is a Quota?

 A quota is a government-imposed
trade restriction that limits the
number or monetary value of goods
that a country can import or export
during a particular period. Countries
use quotas in international trade to
help regulate the volume of trade
between them and other countries.
(Barone, 2022)
  Countries sometimes impose quotas on specific products to reduce imports and
increase domestic production. In theory, quotas boost domestic production by
restricting foreign competition. (Barone, 2022)

 In theory, quotas boost domestic production by restricting foreign competition.

Government programs that implement quotas are often referred to as
protectionism policies. (Barone, 2022)

What Is a Tariff?
 A tariff is a tax imposed on the import or export of goods. In general parlance,
however, it refers to “import duties” charged at the time goods are imported.
Source:https://www.meti.go.jp/english/report/downloadfiles/gCT9904e.pdf
 Most countries are limited by their natural resources and ability to produce
certain goods and services. They trade with other countries to get what their
population needs and demands. However, trade isn't always conducted in an
amenable manner between trading partners. Policies, geopolitics, competition,
and many other factors can make trading partners unhappy.
 A tariff is a tax imposed by one country on the goods and services imported from
another country to influence it, raise revenues, or protect competitive
advantages.
 Governments impose tariffs to raise revenue, protect domestic industries, or
exert political leverage over another country.

Why Governments Impose Tariffs?

 Raise revenues
- Tariffs can be used to raise revenues for governments. This kind of tariff is
called a revenue tariff and is not designed to restrict imports.
- Governments may impose tariffs to raise revenue or protect domestic
industries—especially nascent ones—from foreign competition. By making
foreign-produced goods more expensive, tariffs can make domestically
produced alternatives seem more attractive. (Berstein, 2022)

 Protect Domestic Industries

- Governments can use tariffs to benefit particular industries, often doing so to
protect companies and jobs.
 - Tariffs is also a policy tool to protect domestic industries by changing the
conditions under which goods compete in such a way that competitive
imports are placed at a disadvantage.

 Protect Domestic Consumers

- By making foreign-produced goods more expensive, tariffs can make
domestically produced alternatives seem more attractive.

 Protect National Interests

- Tariffs can also be used as an extension of foreign policy as their imposition
on a trading partner's main exports may be used to exert economic leverage.
(Nevil, 2022).
The difference between Quotas and Tariffs

QUOTA TARIFF

Quotas and tariffs are both used to protect domestic industries by artificially raising
prices in the domestic market. Their administration and effects, however, differ in
specific ways.
- Quotas restrict the quantity of a good imported from another country. Tariffs
are a charge levied on the value of goods imported from another country.
- While tariffs generate revenue that is paid to the importing country’s
treasury, the value of a quota, also called “quota rents,” generally goes to the
foreign exporters who are able to sell goods subject to the quota at higher
prices and collect higher per unit revenue.
In both cases, domestic consumers in the importing country pay the costs of tariffs and
quota rents. But with quotas, the government of the importing country receives no
revenue. (Smith, 2019)
Key Differences Between Tariff and Quota (S, 2017)
 The tariff is a tax charged on imported goods. The quota is a limit defined by
the government on the quantity of goods produced in the foreign country and
sold domestically.
  Tariff results in generating revenue for the country and hence, increase the
GDP. As opposed to quota, is imposed on the numerical value of goods, not
the amount and so it has no effect.
 With the effect of the tariff, consumer surplus goes down while the
producer’s surplus goes up. On the other hand, quota results in the fall of
consumer surplus.
 Income generated from the collection of the tariff is the revenue of the
government. Conversely, in the case of quota, traders will get extra income
from the collection.
Examples of Organization

 Created in 1995, the World Trade Organization (WTO) is an international

institution that oversees the rules for global trade among nations. It superseded
the 1947 General Agreement on Tariffs and Trade (GATT) created in the wake of
World War II.
 The WTO has been a force for globalization, with both positive and negative
effects.
 The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO
agreements, negotiated and signed by the bulk of the world’s trading nations and
ratified in their parliaments.
 The goal is to help producers of goods and services, exporters, and
importers conduct their business.
 Its main function is to ensure that trade flows as smoothly, predictably and freely
as possible.
 Source: https://mfa.gov.by/en/export/wto/info_wto/

 The General Agreement on Tariffs and Trade (GATT) covers international

trade in goods. The workings of the GATT agreement are the responsibility of the
Council for Trade in Goods (Goods Council) which is made up of representatives
from all WTO member countries.
 The General Agreement on Tariffs and Trade was the first worldwide
multilateral free trade agreement. It was in effect from 1948 until 1995. It was
replaced by the World Trade Organization. The purpose of GATT was to
eliminate harmful trade protectionism, which had contributed to the Great
Depression.
 General Agreement on Tariffs and Trade (GATT), set of multilateral trade
agreements aimed at the abolition of quotas and the reduction of tariff
duties among the contracting nations.
The GATT is an international trade agreement whose objectives are:
(a) to help raise standards of living;
(b) to achieve full employment; >
 (c) to develop the world's resources;
(d) to expand production and exchange of goods;
(e) to promote economic development.
 The GATT was established in 1948 to regulate world trade. It was created to
boost economic recovery after the Second World War by reducing or
eliminating trade tariffs, quotas and subsidies.

Certificate of Origin of Goods (COO)

 A certificate of origin (CO) is a document declaring in which country a commodity
or good was manufactured. The certificate of origin contains information
regarding the product, its destination, and the country of export. For example, a
good may be marked "Made in the USA" or "Made in China".

 COs are requested by customs, banks, private stakeholders and importers for
several purposes. Almost every country in the world requires CO for customs
clearance procedures: when determining the duty that will be assessed on the
goods or, in some cases, whether the goods may be legally imported at all.

There are two categories of COO:

i. A preferential COO extends tariff concessions. Developed countries use it to give
tariff concessions to developing countries. For example, India’s trade agreement with
Singapore requires a COO to claim tariff concessions.
ii. A non-preferential COO does not give any tariff concessions, but merely provides
evidence of origin.
Sample of COO
 Source: https://www.tradefinanceglobal.com/customs/certificates-of-origin/

References
(n.d.). Retrieved from https://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm

Barone, A. (2022, November 28). Investopedia. Retrieved from

https://www.investopedia.com/terms/q/quota.asp

Berstein, J. (2022, November 22). What Are Tariffs, and How Do They Affect You? Retrieved from
https://www.investopedia.com/news/what-are-tariffs-and-how-do-they-affect-you/
#:~:text=Governments%20may%20impose%20tariffs%20to,produced%20alternatives%20seem
%20more%20attractive.

CFI Team. (2022, November 28). Imports and Exports. Retrieved from
https://corporatefinanceinstitute.com/resources/economics/imports-and-exports/

Nevil, S. (2022, August 10). What Is a Tariff and Why Are They Important? Retrieved from
https://www.investopedia.com/terms/t/tariff.asp
S, S. (2017, July 1). Difference Between Tariff and Quota. Retrieved from
https://keydifferences.com/difference-between-tariff-and-quota.html

Smith, H. (2019, October 19). Are quotas worse than tariffs? Retrieved from
https://www.hinrichfoundation.com/research/tradevistas/protectionism/quotas-tariffs/
#:~:text=The%20difference%20between%20quotas%20and%20tariffs&text=Their
%20administration%20and%20effects%2C%20however,goods%20imported%20from
%20another%20country.