BSP 380-UNIT 1

INTERNATIONAL TRADE
INTERNATIONAL TRADE
INTRODUCTION

International trade is the exchange of capital, goods, and

services across international borders or territories
In most countries, such trade represents a significant share of
gross domestic product (GDP)
International trade allows countries to have goods and services
that are not available in their own countries or are more
expensive domestically
Increasing international trade is crucial to the continuance of
globalization.
WAYS OF PENETRATING FOREIGN MARKETS

If a company wants to send its products internationally, it does not have to work
internationally itself.
It can sell its products ex-works or free-on-board, which means that customers
make all the arrangements for logistics.
Obviously, though, for such transactions to succeed, someone has to work
internationally – permits, etc.
If you imagine a manufacturer wanting to sell its products in a foreign country,
it has five basic alternatives. The following list shows these in increasing order
of investment and risk.
1. Licensing or franchising, where a local organisation makes the products to
designs supplied by a foreign company; depending on circumstances, the
foreign company might specify a range of procedures for operations, quality,
tests, suppliers, and so on
2. Exporting finished goods and using local distributors to market them; the
main risk here comes from increasing production to satisfy a demand that
depends on the marketing company
3. Setting up a local distribution network; products are still exported to meet
demand but the foreign company increases control of the supply chain by
replacing the local marketing company by an owned subsidiary
4. Exporting parts and using local assembly and finishing; this needs facilities
in the home market, but these can start very small, as seen in
‘postponement’
5. Full local production with new manufacturing facilities either built specially
or taken over from an existing company. This gives access to local
knowledge and is often the only way of getting a presence in a controlled
market.
FACTORS INFLUENCING
INTERNATIONAL TRADE
Industrialization
Innovation;
• Advanced Information and Communication Technologies
• Advanced transportation systems
Globalization
Multinational corporations
Outsourcing
Offshoring
 DIFFERENCE BETWEEN DOMESTIC AND
INTERNATIONAL TRADE
International trade is, in principle, not different from domestic trade as the motivation
and the behaviour of parties involved in a trade do not change fundamentally
regardless of whether trade is across a border or not.
International trade more costly than domestic trade due to additional border such as
tariffs, time costs due to border delays and costs associated with country differences
such as language, the legal system or culture.
Another difference is that factors of production such as capital and labour 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, labour or other factors of production. Trade in
goods and services can serve as a substitute for trade in factors of production.
RISK IN INTERNATIONAL TRADE
Buyer insolvency (purchaser cannot pay)
Non-acceptance (buyer rejects goods as different
from the agreed upon specifications)
Credit risk (allowing the buyer to take possession
of goods prior to payment)
Regulatory risk (e.g., a change in rules that
prevents the transaction)
Intervention (governmental action to prevent a transaction
being completed)
Political risk (change in leadership interfering with
transactions or prices)
War, piracy and civil unrest or turmoil
Natural catastrophes, freak weather and other
uncontrollable and unpredictable events
In addition, international trade also faces the risk of
unfavourable exchange rate movements (and, the potential
benefit of favourable movements)
METHODS OF PAYMENT IN
INTERNATIONAL TRADE
There are three main methods of payment depending upon the terms of
payment, and each method of payment involves varying degrees of risks
for the exporter. The methods are:
Payment in advance
Open Account
Letter of Credit (L/C)
Counter Trade
Documentary Bills
TRADE BARRIERS
• Trade barriers are government-induced restrictions
on international trade
• Measures introduced by governments or public
authorities to make imported goods or services less
competitive than locally produced goods and
services.
• Not everything that prevents or restricts trade can
be characterized as a trade barrier.
• Trade barriers are implemented for two clear economic
purposes.
• Provide revenue for the government
• Improve economic returns to firms and suppliers of resources
to domestic industry that face competition from foreign
imports.
• Tariffs are widely used to protect domestic producers’
incomes from foreign competition
• Tariff barriers are duties imposed on goods which effectively
create an obstacle to trade, although this is not necessarily the
purpose of putting tariffs in place.
Examples of Tariff Barriers
a) On the basis of Purpose: Revenue Tariff and
Protective Tariff
b) On the Basis of Origin and Destination: Ad
Valorem Duty, Specific Duty and Compound Duty
c) On the Basis of Country-wise Discrimination:
Single Column Tariff, Double Column Tariff and
Triple Column Tariff
NON-TARIFF BARRIERS TO TRADE
Non-tariff barriers to trade (NTBs) are trade barriers
that restrict imports but are not in the usual form of a
tariff.
a) Specific Limitations on Trade
b) Customs and Administrative Entry Procedures
c) Standards
d) Government Participation in Trade
CUSTOMS AND EXCISE
Customs is an authority or agency in a country responsible for
collecting and safeguarding customs duties and for controlling the flow
of goods including animals, transports, personal effects and hazardous
items in and out of a country.
A customs duty is a tariff or tax on the importation (usually) or
exportation (unusually) of goods.
Excise or excise tax (sometimes called a duty of excise special tax) is
commonly referred to as an inland tax on the sale, or production for sale,
of specific goods; or, more narrowly, as a tax on a good produced for
sale, or sold, within a country or licenses for specific activities
WHAT ARE INCOTERMS (INTERNATIONAL
COMMERCIAL TERMS)

• “INCOTERMS define the mutual obligations of

seller and buyer arising from the movement of
goods under an international contract from the
standpoint of risks, costs and documents”
UNCTAD, 1990
WHAT ARE THEY?
Set of international rules for the
interpretation of the most commonly used
foreign trade terms
WHY ARE THEY IMPORTANT?

Reduce the uncertainty caused by trade practices in

different countries.
Simplify the negotiations involved in international
commerce.
Ensure common understanding of obligations
STEPS OF GLOBAL LOGISTICS
Customs Clearance
for Export
2 3 4
Handling
Loading Outbound
1 Preliminary
Transportation
5
Packing
6
Insurance
Main
Customs International
Clearance Transportation 7
Duties

11 10 9 8

Unloading Final Handling

Transportation Inbound
CONTRACT OF CARRIAGE

The Incoterm utilised in a transaction will dictate which party is responsible for each transportation segment

and its corresponding contract of carriage.

 Pre-Carriage- the transportation segment from the seller’s location to the point where the cargo would
leave from the seller’s side. i.e. to arrange for pre-carriage, you would contract with a inland carrier to make
delivery to a port or airport

 Main Carriage- the transportation segment from the seller’s side to the buyer’s side. i.e. to arrange for
main-carriage, you would contract for ocean or air carriage
On-Carriage- the transportation segment from the
point of arrival on the buyer’s side to the designated
ultimate receiver. i.e. to arrange for on-carriage, you
would contract with an inland carrier to make delivery
from the port of arrival to the ultimate receiver

Delivery- Delivery is the point where the risk transfers

from the seller to the buyer. Delivery is defined for each
Incoterm
CLASSIFICATION OF INCOTERMS

‘E’ Goods are made available to the buyer on departure at

the exporter’s premises
‘F’ Goods are made available to a carrier appointed by the
buyer. Main carriage is unpaid
‘C’ The seller pays for carriage but without assuming the risk
for loss or damage to the goods after shipment. Main
carriage is therefore paid
‘D’ The seller bears all costs and risks to bring the goods to
the country or premises of the buyer
 CLASSIFICATION OF INCOTERMS

Any mode of transport

1. EXW - Ex Works
Sea and inland waterways transport [only]
2. FCA - Free Carrier
3. CIP-Carriage and Insurance Paid 1. FAS-Free Alongside
4. CPT - Carriage Paid To Ship
5. DAP-Delivered At Place 2. FOB - Free On Board
6. DAT-Delivered At Terminal 3. CFR - Cost and Freight
7. DDP - Delivered Duty Paid 4. CIF - Cost, Insurance
and Freight
BASIC CONCEPTS OF INCOTERMS
Acronym (…named location)
Acronym dictates mode and where the lines are drawn

Export Import
SELLER Clearance Clearance BUYER

Goods

PRE -CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Seller’s Cost
E Terms-Departure

 EXW (named place)

Under E-terms, the seller minimizes his risk
by only making the goods available at his
own premises.
Export Import
SELLER Clearance Clearance BUYER

Goods

PRE -CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Seller’s Cost
 EXW = Ex Works
 Seller fulfills his obligation to deliver when he has
made the goods available at his premises to the
buyer.
 Seller is not responsible for loading the goods on the
vehicle provided by the buyer
 Seller is not responsible for clearing the goods for
export, unless agreed.
 Buyer bears all costs and risks involved in taking the
goods from the seller’s premises to the desired
destination.
 Group F-Main Carriage Not Paid
by Seller
 FAS - Free Alongside Ship
 FCA - Free Carrier
 FOB - Free On Board

Under F-terms, the seller arranges and pays for pre-

carriage in the country of export. Including export
clearance under FCA and FOB
FAS (…named port of shipment)
Seller
• delivers goods alongside ship
• evidence of delivery
Export Import
SELLER BUYER
Clearance Clearance

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk
Buyer
• export documents
Seller’s Cost • nominates carrier,
• contracts carriage
• pays freight
Seller
FCA (…named place)
• clears export customs,
• delivers goods to carrier
• evidence of delivery
Export Import
SELLER BUYER
Clearance Clearance

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Buyer
Seller’s Cost • nominates carrier,
• contracts carriage
• pays freight
 FOB (…named port of shipment)
Seller
• clears export customs,
• delivers and loads goods on ship
• evidence of delivery

Export Import
SELLER BUYER
Clearance Clearance

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Buyer
Seller’s Cost
• nominates carrier,
• contracts carriage
• pays freight
Group C-Main Carriage Paid
by Seller

 CFR - Cost & Freight

 CIF - Cost, Insurance & Freight
 CPT - Carriage Paid To
 CIP - Carriage & Insurance Paid to

Under C-terms, the seller arranges and pays

for the main carriage but without assuming
the risk of the main carriage.
CFR (…named port of
destination)

SELLER Export Import BUYER

Clearance Clearance

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Seller’s Cost
CFR - Cost and Freight
Seller pays the costs and freight necessary to
bring the goods to the named port of destination
Risk of loss of or damage to the goods, as well
as any additional costs due to events occurring
after the time the goods have been delivered on
board the vessel is transferred from the seller to
the buyer when the goods pass the ship's rail in
the port of shipment.
Seller must clear the goods for export. 
Only used for sea and inland waterway
transport.
CIF (…named port of destination)

SELLER Export Import BUYER

Clearance Clearance

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Seller’s Cost + Insurance

CIF - Cost, Insurance, Freight
Seller delivers the goods on board the vessel or procures the goods
already so delivered.
Risk of loss or damage to the goods passes when the goods are on board
the vessel.
Seller must contract for and pay the costs and freight necessary to bring
the goods to the named port of destination.
Seller also contracts for insurance cover against the buyer’s risk of loss
of or damage to the goods during the carriage.
Seller obtains minimum insurance cover only. Should the buyer wish to
have more insurance protection, it will need either to agree as much
expressly with the seller or to make its own extra insurance arrangements
CIP - Carriage and Insurance Paid
Seller delivers the goods to the carrier or another person
nominated by the seller at an agreed place
Seller must contract for and pay the costs of carriage necessary
to bring the goods to the named place of destination.
Seller also contracts for insurance cover against the buyer’s
risk of loss of or damage to the goods during the carriage.
Seller obtains minimum insurance cover. Should the buyer
wish to have more insurance protection, it will need either to
agree as such expressly with the seller or to make its own extra
insurance arrangements.
CPT - Carriage Paid To
Seller pays the freight for the carriage of the goods to the named
destination.
Risk of loss of or damage to the goods, as well as any additional costs
due to events occurring after the time the goods have been delivered to
the carrier is transferred from the seller to the buyer when the goods have
been delivered into the custody of the carrier.
"Carrier" means any person who, in a contract of carriage, undertakes to
perform or to procure the performance of carriage, by rail, road, sea, air,
inland waterway or by a combination of such modes. 
Seller to clear the goods for export. 
 Group D: Arrival
 DAP - Delivered At Place
 DAT - Delivered At Terminal-
DPU(Delivered at Place Unloaded)
 DDP - Delivered Duty Paid
Under D-terms, the seller’s cost/risk is
maximized because he must make the
goods available at the agreed destination.
Including import clearance under DAP and
DDP
DAP: DELIVERED AT PLACE

Seller’s obligation ends when he has delivered

the goods to the disposal of the buyer at the
named destination place, cleared for export, but
not cleared for import.
Seller and the buyer should agree which party
will be responsible for unloading.
Buyer is responsible to take delivery of the
goods at the named place of destination
 Seller is required to arrange for the entire
contract of carriage [pre-carriage, main
carriage, on-carriage] to the named place of
destination
 Seller is responsible for the export clearance
of the goods
 DAT- DELIVERED AT TERMINAL
Seller’s obligation ends when he has delivered the goods to
the disposal of the buyer, unloaded from the arriving carrier
at the named destination terminal, cleared for export, but not
cleared for import
 Buyer is responsible for the import clearance of the
goods.
 Seller is also to be responsible for delivering the goods
past the terminal to another place, then DAP or DDP terms
should be used.
DDP - Delivered Duty Paid -Title and risk pass to buyer
when seller delivers goods to named destination point
cleared for import. Used for any mode of transportation.
END