Definition of International Trade

Learning Objectives

After studying this lesson you are able to

Comprehend the nature of International Trade

Introduction

The world economics are changing rapidly and most countries of the world including developing countries are gearing up to the challenges of competing in a highly integrated global market place. In such a situation, the issue of “international Trade” is attaining much attention of the government authorities, traders and policy makers in recent years.

For the developing countries, specifically a country like India, growth requires a steady in flow of imported capital and intermediate goods, and this, in turn necessitates foreign exchange to pay for them. To this end, this lesson explains in detail the framework of International Trade, its characteristics, limitations and international corporations in trade finance, practices and the international situations that assist the international trade operations.

Basis of International or Foreign Trade

Foreign trade is based on the theory of comparative cost advantage.It states that every nation exercises certain kinds of benefits from the production of a particular type of commodity whose resources are exclusively available in that nation or available in other nations in very less amounts. For example, Iraq and the similar nations have comparative advantage over th production of crude oil. Hence, it can export it to other nations and earn huge profits. Similarly, India specializes in the production of sugarcane and tobacco. No country is self-sufficient and it has to depend on other nations to obtain the required inputs be it machines, labor, raw materials or even finished products.

Thus, the need for foreign trade arises due to the following factors:

All nations of the world have to depend on the other nations as it cannot produce every things by itself in a lower cost.

A country may get the resources and manpower to produce all types of commodities but it may be able to get that commodity at a cheaper rate from the other nation who specializes in the production of that commodity.

Similarly, a country may produce some goods at a cheaper rate than the other nation and may try to export it to other nations at a higher rate if there is a surplus.

Difficulties in International Trade

Distance: Due to long geographical distances between the nations, goods are either sent through rail, road or sea or air. All these modes of transport are expensive and may face the dangers of sea or air perils such as explosions or accidents etc. There may be a delay in the delivery of goods that may lead to the spoilage of certain perishable goods. Distance creates higher transport costs as well as more risks.

Different languages; Different languages are spoken in different nations. Hence, the buyers and the sellers may not be able to communicate with each other effectively. They may have to depend on the translators that are not always reliable.

Risk in transit: Foreign trade involves high risks than the home trade. Many of the risks can be covered by insurance but still, the danger persists.

Lack of information about foreign businessman: A seller is always worried about the credit-worthiness and the financial standing of the prospective buyer as there is no strong proof of the buyers’ ability to pay. Thus, there is the risk of bad debt for the seller.

Import and export restrictions: Every country charges a high rate of custom taxes and duties on the import of the goods. Also, businessman are required to fill various documents and formalities to complete the transactions. Foreign trade policies and procedures vary from nation to nation and also from time to time.

Study of foreign markets: Every foreign market has its own features. There are different price interactions, demand supply interactions, government policies, marketing methods, customs laws, weights etc. It is very difficult to collect all the information accurately about the foreign markets.

Problems in payments: Every country has its own currency and exchange rates with which the transactions can completed. These exchange rates keep on changing. Remittance of money in foreign trade involves much time and expense. There are also huge risks of bad debt.

Intense competition: There is a huge competition between the sellers of the different nations involved in exporting the same commodity. The one who succeeds in influencing the buyers from the advertisements and other incentives stands out as the winner of the market. Thus, heavy and useless expenses are incurred in these activities.

Characteristics of International Trade

Territorial Specialization

International trade among the countries is possible only because each country has certain resources that can be well utilized for the production of certain type of commodity that is not available in other countries or available in very less quantities.Hence, each country has some sort off comparative cost advantage that means each country can produce a good at a lower price than the other country and hence, can export that.

International Competition

Producers from different nations are always in a race with one another to sell their products in as much quantity as possible. Thus, advertisements, sales promotion activities are very helpful in these types of selling techniques.

Separation of Sellers from Buyers

Each country is separated by a large geographical distance and hence, the buyers and the sellers are unable to meet each other physically. They contact each other through mass communication devices such as telephones, internet, video conferencing etc.

Long Chain of Middleman

Since the buyers and the sellers are unable to meet each other, they have to rely on long chain of middleman to complete their international transactions. It does increases the cost of the goods of the buyers and hence, the imported goods are much expensive.

Mutually Acceptable Currency

All the nations, except countries of Europe, have their own currencies and other modes of payment. Hence, it is not possible to have a common currency for exchange between nations. Thus, dollars, pounds are selected for this purpose and hence, they are called “hard currencies”. These currencies are acceptable all over the world

International Rules and Regulations

Each buyer and seller involved in the international trade have to complete the guidelines and norms set up the custom authorities of the others country. They have to follow the restrictions of that nation.

Government Control

The government of every nation exercises effective control over the export and import trade of the nation. Hence, various types of formalities and documents have to be submitted to the government.

International Trade Theories

A number of theories have been developed by economists as basis of International Trade, some of these are as follows:

Theory of Comparative Cost Advantage: According to this theory, a country tends to specialize in the production of those goods for which it has got a comparative cost advantage, or where it costs are lower than in other countries.

Factor Proportions Theory: This theory is also known as Factor Endowment Theory; which was developed by Heckcher and Ohlin. This theory suggests that a country will specialize and export that product which is more intensive in that factor (a two-country, two commodity and two-factor model) which is more abundant. It will import those goods which, on the other hand, are more intensive in that factor of production which is scarce in that country.

Human Capital Approach Theory: This theory also known as Skills Theory of International Trade, advocated by Becker, Kennen and Kessing. According to this theory, labour can be classified into skilled and unskilled labour. A developing country which has more abundant supply of unskilled labour will specialize and export labour intensive products. Imports, on the other hand, will consist of goods which are more skill intensive.

Natural Resource Theory: This theory was proposed by Vanek, J. The basic hypothesis of this theory is that a county will export those products which are more intensive in that natural resource with which it is more relatively endowed.

Research and Development, and Product Life-Cycle Theories: A number of economists, especially Vernon have contributed the development of this theory. It suggests that industrial countries allocate more resources to R and D programme, to develop new products. These countries will enjoy monopoly benefits in the initial stages of production, and will access to foreign markets, leading to trade between the developed and developing countries as well as trade among the industrialized countries themselves.

Economies of Large–scale Theory: A company operating in a country where the domestic market is large; will be able to reach a high out-put level, by reaping the benefits of large-scale production. The lower cost of production will increase the competitiveness of the company enabling it to make an easy entry into the export markets.

International Cooperation in Trade Finance

The global financial crisis, which has resulted in slowdown in economic growth, has also impaired the access to trade finance. As a result cost of finance had increased by over 3-4% in international markets, last year, even for exporters considered to be good. Many Governments have quickly sought to mitigate the potential impact of the crisis on their domestic economy and export sector, through various measures, albeit in varying degrees and forms. The main actions taken by Governments can be grouped in two categories:

To increase banks’ liquidity to alleviate liquidity pressure including for trade finance;

To enhance the long-term competitiveness of the country’s exports by developing and expanding export promotion programs.

The commitment of G-20 leaders calling for collective fight against protectionism, and the action by Multilateral Agencies to counter the shortage in trade finance indicates the need for international cooperation in trade finance.

Export Credit Agencies (ECAs), particularly in developing countries, have assumed greater role to channel trade finance to firms. In some countries, Government has channeled the trade credit enhancement measures through the ECAs. Exchange of information and institutional cooperation are the two important strategies for enhancing trade finance and trade amongst the trading partners. During the recently concluded BRIC Summit, Exim Bank of India entered into a Memorandum of Cooperation with three major development banks of Brazil, Russia and China. One of the objectives of the Memorandum is to develop comprehensive long-term cooperation among the signatories to facilitate and support cross-border transactions and projects of common interest. Such institutional cooperation is pertinent in enhancing trade finance. Earlier, EXIM Bank of India mooted the idea of forming the Asian Exim Banks Forum, in 1996, in order to forge a stronger link among the member institutions. The forum facilitated signing of bilateral L/C confirmation facility among the members. The forum is also exploring the possibility of setting up a regional ECA with the support of multilateral funding institution like ADB. Extending the similar concept at global level, Bank took the initiative of setting up a Global Network of Exim Banks and Development Finance Institutions (G-NEXID), under the auspices of UNCTAD, with the objective of supporting rapidly increasing trade between developing countries with expanded financial services that can spur and stabilize economic growth. Such cooperation is expected to reduce the costs of trade for the developing countries, spurring investment across borders and making financing more readily available to new and innovative businesses and enabling the growth of “niche markets.”

Multilateral / regional development finance institutions should play a pivotal role in rebuilding confidence amongst member governments, banks and financial institutions in the region, through provision of well targeted credit enhancements, policy support, and capacity building initiatives. These may include technical assistance / advice on trade finance policy, loans for creation of finance-related infrastructure, and support in creation and strengthening of institutions that support trade finance transactions. The institutions from developed countries should also extend credit lines to Governments / institutions in developing countries with the objective of enhancing trade financing. Rules-setting organizations, like WTO, may have to provide necessary comfort to banks and financing institutions (that are providing finance and guarantees), especially from developing countries, and set flexible policies for developing countries that encourages concessional trade financing; it may be appreciated that the priority task would be to enhance the capacity in developing countries to mitigate the effects of increased perception of risks and to provide the market with earmarked liquidity for trade finance. It is also necessary to persuade the Bank for International Settlements (BIS) to build suitable models and treat trade finance differently under Basel - II. Greater level of institutional cooperation among the developing countries is required for closely monitoring payment delays and sharing of information on credit risks.

Such international cooperation would be collectively beneficial to enhance trade finance and thereby contribute to the growth in trade and economic development.

Trade Composition

Export Composition

There were substantial changes in the composition of exports in 2008-09 and 2009-10(April-September) with the fall in share of petroleum, crude and products and primary products resulting in corresponding rise in share of manufactured goods. The share of petroleum, crude and products fell from 17.8 per cent in 2007-08 to 14.9 per cent in 2008-09 and 14.2 per cent in the first half of 2009-10, while the share of primary products fell from 15.5 per cent in 2007-08 to 13.3 per cent in 2008-09 and further to 12.7 per cent in the first half of 2009-10. The share of manufactured exports increased by 2.3 percentage points to 66.4 per cent in 2008-09 and further to 69.2 per cent in the first half of 2009-10.

India’s moderate growth of 13.6 per cent in 2008-09 which was due to the high growth in the first half of the year prior to the setting in of global recession, was only due to manufactured exports as both primary products and petroleum, crude and products registered negative growths of (-)2.4 per cent and (-)4.6 per cent respectively. Among manufactured products, the major drivers were gems and jewellery, engineering goods and chemicals and related products with export growths of 42.1 per cent, 18.7 per cent and 7.2 per cent respectively.

The first half of 2009-10 when the global recession was in full swing, also saw an accentuation in the fall of India’s export growth resulting in negative growth of (-) 29.7 per cent compared to the positive 48.1 per cent in the corresponding period of the previous year. All the three sectors were badly affected during this period with petroleum, crude and products being the worst affected at (-)44 per cent export growth due to the low crude oil prices in the first half of 2009-10, which started declining from the high reached in the first half of 2008-09. Primary product exports also registered a decline of 32.4 per cent with fall in growth of both ores and minerals and agriculture and allied products. Manufactured goods registered negative export growth of (-) 24.9 per cent, with the worst affected sectors being engineering goods at (-)34.6 per cent, followed by handicrafts including carpets at (-) 33.7 per cent and leather and leather manufactures at (-) 24.2 per cent.

In the first half of 2009-10, India’s export growth of all items to almost all three destinations was negative with global recession in full swing. Among manufactured goods, textiles export growth was comparatively less negative mainly to ‘Others’, whose share also rose. India’s gems & jewellery exports and chemicals & related products exports were more affected in the EU market, while the worst affected sector was engineering goods, especially in the US and EU markets with negative export growths of (-)49.7 per cent and (-)42.5 per cent, respectively. The performance of handicrafts (including carpets) exports which were badly affected even in 2008-09, worsened in all the three markets with a negative growth above 30 per cent in all of them.

Import Composition

The composition of imports also underwent changes. Reflecting growing domestic concerns like inflation, the share of food and allied products imports which fell from 2.3 per cent in 2007-08 to 2.1 per cent in 2008-09 increased to 3.5 per cent in the first half of 2009-10 with the increase in imports of edible oils and pulses (Table). The share of fuel imports fell from 34.2 per cent in 2007-08 to 33.4 per cent in 2008-09 and 33.2 per cent in the first half of 2009-10. Among fuel items, the share of POL, the major item, fell to 30.1 per cent in the first half of 2009-10 from 34.2 per cent in the corresponding period of 2008-09 reflecting the relatively lower oil prices. The share of fertilizers increased suddenly from 2 per cent in 2007-08 to 4.3 per cent in 2008-09 with growth in imports of nearly 250 per cent, but fell to 2.5 per cent in the first half of 2009-10. The most notable change is the fall in share of capital goods imports from 18.7 per cent to 15.5 per cent in 2008-09 and to 14.3 per cent in the first half of 2009-10. The commodity group ‘Others’ saw increase in share from 38.9 per cent in 2007-08 to 40.0 per cent in 2008-09 and 43.4 per cent in the first half of 2009-10. Even gold and silver and electronic goods increased their import shares in the first half of 2009-10 over the corresponding period in the previous year, despite high negative growths, as other items in the import basket had still higher negative growths.

In 2008-09 there was high import growth of fertilizers reflecting the rise in fertilizer prices mirroring skyrocketing POL prices in the first half of the year, besides chemicals, pearls, precious and semi-precious stones and gold and silver. The high import growth of the last two items also contributed to the high export growth of gems and jewellery including diamond trading. In the first half of 2009-10, the only category showing positive and high import growth is food and allied products to meet the domestic needs.

Impact of the crisis on Trade Credit

The global economic crisis also impacted trade credit. A number of banks, global buyers and firms surveyed independently by the World Bank, International Monetary Fund (IMF) and Bankers Association for Finance and Trade (BAFT), have felt that lack of trade credit and other forms of finance, such as working capital and pre-export financing, has affected growth in world trade. In addition, the costs of trade credit have substantially gone up and are higher than they were in the pre-crisis period, raising the challenge of affordability of credit for exporters.

Higher funding costs and increased risk continue to put upward pressure on the price of trade credit. In 2008, as the financial crisis intensified, the spreads on trade finance increased by a factor of three to five in major emerging markets, like China, Brazil, India, Indonesia, Mexico, and Turkey. For example, the spread (over the six-month LIBOR) for Turkey jumped to 200 basis points in November 2008 from 70 basis points in the third quarter(Q3), while Brazil’s spread almost trebled in 2008 (from 60 bps to 175 bps); India’s spread increased from 50 bps to 150 bps during the same year. Similarly, spreads for several Sub-Saharan countries jumped from 100 basis points to 400 basis points.

Small and Medium Enterprises (SMEs) and exporters in emerging markets appear to have faced the greatest difficulties in accessing affordable credit. Increased uncertainty initially led exporters and importers to switch from less secure forms of trade finance to more formal arrangements. Exporters increasingly asked their banks for export credit insurance (ECI) or asked importers to provide Letters of Credit (LCs).

Importers were asked to pay for goods before shipment and exporters sought more liquidity to smooth their cash flow. Further, the realization of export proceeds was not taking place on the due date. This led firms to trim down inventories, and direct the funds so generated to meet their working capital requirements.

Trade Credit: Indian Scenario

As a result of difficult financing conditions prevailing in the international credit markets and increased risk aversion by the lending counterparties, gross inflows of short-term trade credit to India declined by 12.2 per cent to US$ 41.8 billion during 2008-09. Export credit as a percentage of net banking credit also fell from 5.5 per cent as on March 28, 2008 to 4.6 per cent as on March 27, 2009 and further to 4.1 per cent as on January 15, 2010 (Table).

                                                                                                             Export Credit

On the other hand, short-term trade credit repayments registered an increase of 37.9 per cent during 2008-09 to touch US$ 43.7 billion. Since the gap between the inflows and outflows of short-term trade credit to India were limited to a net outflow of US$ 1.9 billion during 2008-09, financing of short-term trade credit did not pose much of a problem.

This trend also continued in 2009-10. During the first half of 2009-10, the gross inflow of short-term trade credit stood at US$ 21.7 billion, lower by 9.2 per cent than that in the corresponding period in 2008-09, while the outflows at US$ 22.3 billion were higher by 17.5 per cent, thereby resulting in a net outflow of US$ 0.6 billion (inclusive of suppliers’ credit up to 180 days) compared to a net inflow of US$ 4.9 billion during the corresponding period of the previous year. Although the higher net outflows during the second half of 2008-09 and in the first half (H1) of 2009-10 suggest some challenges in rolling over maturing trade credits, the continuing trend in inflows indicates no significant problem in servicing short-term debt. This is also indicative of the confidence enjoyed by Indian importers in the international financial markets. The various policy initiatives taken by the Government and RBI have also helped ease the pressure on trade financing. This is further corroborated by the increase in share of short-term trade credit (both inflows and outflows) in the overall gross capital flows with share in inflows increasing from 10.9 per cent in 2007-08 to 13.4 per cent in 2008-09 and share in outflows increasing from 9.6 per cent to 14.3 per cent, thereby indicating that the impact of global financial crisis on trade credit was less when compared to other forms of capital flows such as portfolio investment and external commercial borrowings (ECBs).

Export as an Engine of Growth

Countries have achieved rapid economic development through export led growth strategy. Export growth not only contributes directly to economic growth but, also permits more imports, and a rapid modernization of production. The result is efficient domestic industry that meets the market test of international competition. According to World Development Report, 1989:

“Global development experience of the past few decades shows that a policy regime with fewer barriers to trade, both tariff and non-tariff and which provides equal incentives for exports as well as production for the domestic market enable countries to achieve not only impressive export growth but also rapid and sustainable economic growth”.

The fact that high growth rates can be achieved via export route has been brought out by the experiences of great many countries across the world. The experiences of Japan and South Korea provide interesting examples. Historically speaking, Japan could not have been described as a developing country prior to World War II. After the World War II, however, its economy was in shambles and the development process had to commence afresh. The national goal, which reflected the aspirations of most Japanese, was to become an economic superpower. Japan proceeded to do this not on the strength of domestic consumption, which was low on account of paucity of incomes but on these

Impact of Exports in the Development Process

Export led growth is an appealing strategy for developing nations. In the early stages of development, a country needs to import real capital (machines), which often entails borrowing in a foreign currency. Export allows barrowing of nation to earn the foreign currency required to service its external debt. This strategy is often successful – the U.S.A is perhaps the best example that followed such a strategy in its early stages of development—at least over the short run.

An important consideration is an important for policy-makers when promoting development is to improve “Export Competitiveness”. While export competitiveness starts with increasing international market shares, it goes far beyond that it involves diversifying the export basket, sustaining higher rates of export growth over time, up grading the technological and skill content of export activity, and expanding the base of domestic firms able to complete internationally so that competitiveness becomes sustainable and is accompanied by rising incomes. Competitive exports allow countries to earn more foreign exchange and so to import the products, services and technologies they need to raise productivity and living standards. Greater competitiveness also allows countries to diversify away from dependence on a few primary commodity exports and move up the skills and technology ladder, which is essential for increasing local value added and sustaining rising wages. It permits a greater realization of economies of scale and scope by offering larger and more diverse markets. Exporting feed – back into the capacities; it exposes enterprises to higher standards, provides them to greater competitive pressures, thereby encouraging domestic enterprises to make more vigorous efforts to acquire new skills and capabilities.

However, these developmental impacts from improved export competitiveness cannot be taken for granted. For same product at the same time, most of them may well become worse off. Similarity, in the absence of adequate national capabilities and increase local value added and expansion in market shares may not produce the expected benefits. Export competitiveness is important and challenging, but it needs to be seen as a means to an end—namely development.

The above discussion focuses on the broader outlook of the overall impact of exports in development process. To have specific outlook, it would be note worthy to mention the benefits and risk associated with exporting.

Export Benefits

The Export benefits may vary by company and product\service. They are:

There is potential for greatly increased company turnover.

Economies of scale are achieved

Potential levels of profitability are much increased.

The product or service offered is more competitive it reflects overseas market needs and conforms to a wider legal environment.

Companies became much more integrated with market they serve and this encourages higher standards and the use of more high technology.        

Diversification of risk. Company risk and business risk is not confined to one market.

The company becomes more competitive in all areas of the business.

Export Risk

Repatriation of profits from the target country may be constrained or forbidden

Fluctuation in exchange rate may decrease or eliminate profits, or even in losses.

The export market evolves a longer time scale of payment. This may be 90 or 180 days or even some years.

Product launch in an overseas market is more costly and complex in comparison with a domestic launch.

Trade barriers are politically and economically manipulated.

Economic and political risk is much more.

Instability in the target market/country can lead to losses from war or civil strife or nationalization by the foreign government.

In case of non-payment other contractual problems, there may be questions of jurisdiction, i.e. Indian courts may not be able to enforce contracts between parties in different countries.

Export Promotion Measures

Advanced Licence Scheme

An advance licence is now granted for the duty free import of raw material, components, intermediaries, consumables, and parts, spares, including mandatory spares and packing materials. Such licences are subject to the fulfillment of a time bound export obligation and value addition as may be specified.

Advance licences may be based on either value or quantity. an exporter may apply for a value based or quantity based advanced licence.

International Price Disbursement Scheme (IPRS)

This was introduced to make available to exporters raw materials at international prices. In the case of raw materials, notified by the Government as coming under the IPRS, the difference between the international prices as notified by the government and the domestic price, is reimbursed to the exporters.

Cash Compensatory Support (CCS)

In existence till 1 July, 1991 this scheme provided cash payment to exporters at a predetermined percentage on the FOB value of exports. This incentive was removed when the rupee was devalued in the 15‘ week of July 1991.

Drawback of Duties

There is a substantial element of customs duty paid on imported components, as well as excise duty on the indigenous purchase. In the manufacture of many export products, these are evaluated on a yearly basis, and the exact quantum of this drawback duties is published by the Ministry of Finance. Accordingly, they are refunded to the exporter after the completion of the export.

Marketing Development Fund (MDF)

Founded in 1963-64, its nomenclature was changed to Marketing Development of Assistance (MDA) in 1975. It is administered bodies, also for special for providing grants/ assistance to Export Promotion Councils promotion efforts. As other export schemes approved for specific set export in recent years the fund sufficient amount has not been apart is on the decline.

Fiscal Benefit

The government has exempted export profit s from tax under 80Hl-lC provisions of the I.T. Act to promote exports and enable the exporters to plough back into the export trade, their profits for higher exports. For an exporter who is engaged in the sale of goods, both in the export and domestic market, the proportion of profits is now taken in the same ratio of the export turnover to total turnover items like petroleum products, fertilizers, news print, sulphur, nonferrous metal, etc., on the rupee payment basis. It has helped to diversify Indian exports to these countries and balance the trade by substantial exports from India on a rupee basis.

Legal Dimensions of Exports

The exports have to deal with different legal systems. an exporter selling his products to an overseas buyer of the USA, for example, may well have some influence either on the terms and conditions of the contract entered into between him and the importer. The conflicting laws can be settled in advance by incorporating specific provisions in the contract for the supply of goods and services.

The major laws or regulatory provisions which would be kept in mind while entering to export contracts are:

Foreign Trade Development and Regulation Act 1992

This act replaces the export-import (control) Act; 1947 under the provisions of this act, the central government is empowered to suspend or cancel a code no granted to an exporter if a person has made exports/imports in grave negligence of the trade relations of India with any foreign country.

Under the authority of this act the director general of foreign trade brings out the export-import policy and lays down the procedures thereof

Foreign Exchange Regulation Act, 1973

Sec.18 of FERA provides that for all cash exports, the foreign exchange proceeds must be brought back to India within a period of 180 days. The exporter, therefore, cannot enter into an export contract with an importer under which he extends credits for more than 180 days except where exports are made on deferred payment terms or on consignment basis. Under the provisions of FERA, an exporter normally cannot pay more than 12.5 percent to his agent abroad for the services rendered by him, unless he has obtained prior permission of the RBI to that effect.

Pre-Shipment Inspection and Quality Control Act 1963

Subject to the provisions of this act, the government of India has provided that items cannot be exported unless a designated agency certifies quality of the product as per the standard prescribed. This is to protect the country’s image among the importing countries. Even if the importer does not ask for quality certificate, it is obligatory on the part of the exporter to obtain such a certificate from the concerned policy.

Customs Act, 1962

The customs department is entrusted with the task of carrying out physical and documentary check of all the articles crossing Indian Territory. All export consignments are checked by the customs authorities at sea port or airport to ascertain whether the goods being shipped are those declared in the documents and that no over or under invoicing is involved. this authority is given to custom authority under customs Act, 1962.

International Commercial Practices

In addition to the Indian, laws, there are certain international commercial practices which have to be taken care of in export contact. Two documents: (1) Uniform customs practice for documentary. Credit (UCP), 1993 and (ii) INCO terms 1990; prepared by the international chamber of commerce, Paris are widely used. The UCP is the document used by the banks in the negotiation of export-import documents. INXO terms presents the various trade terms like F.O.B. & F.O.R. International Trade if etc., and codify the respective rights and obligations of the two parties under terms of contract.

Type of Legal Issues in International Trade

The basic legal issues can be classified as:

those relating to export-import contract:

those relating to relationships between: the exporter and his agent

those relating to products (trade mark, patents etc.)

those relating to letter of credit

Issues Relating to Export Import Contract

These issues are almost universal in their application: wiz. parties, description of products, quality price, currency, packaging, schedule of delivery, inspection, documents, passing of risk, settlement of dispute, etc.

Issue Relating To Relationships Between: The Exporter &His Agent

Agency contract is a legal documents establishing commercial relationship between the principal and the agent. Agency contract incorporate the conditions mutually agreed upon. While negotiating an agency agreement, the exporter should be careful on the following matters:

Parties to contract

Contractual products for which the agency is concluded.

The territory for which the sole agency is being granted. customers to be contracted

Acceptance of rejection of orders secured by the agent.

Payment of agents’ commissions (rate of commission, time when the commission becomes payable, etc)

Settlement of disputes- venue of the dispute and possibility of compromise etc.

Renewal and termination of agency and procedure c.

Issue Relating to Products

This is related to law dealing with trademarks, product liability, packaging and promotion requirements. Trademarks are used to differentiate a product and symbolize the quality, and stimulate the desire to buy.

Product liability of the world have laid down rules regarding the packaging of items, especially toiletries and pharmaceuticals, which generally include chemical composition of the product, net weight, date of manufacturing and the date of expiry. if any special precau-tions are to be taken while using the product, that also must be indicated on the package.

Most countries of the world have laid down rules regarding the packaging of items, especially toiletries and pharmaceuticals, which generally include chemical composition of the product, net weight, date of manufacturing and the date of expiry. If any special precautions are to be taken while using the product, that also must be indicated on the package.

Similarly, many countries have laid down laws regarding advertising of the products. the advertising industry associations have prescribed code of conduct for the industry members and an exporters who wants to promote his products must see the codes.

Issue Relating to Letter of Credit

If the export wants that he is paid for the goods exported before the title to the goods passes on the importer is sought to open a latten of credit on behalf of the exporter through the intermediary of the bank. a letter of credit creates a contractual relationship between the opening bank and the exporter. the bank would make payment of the sum indicated in the letter of credit subject to the bank and are found in order. Opening and negotiation of the letter of credit are governed by the international chamber of commerce brochure no 500 entitled uniform customs & practice for documentary credits commonly known as UCP

Methods of Settlement of Trade Dispute in International Trade

There are two well recognized method of disputes settlements in international trade; viz litigation and arbitration. Litigation is usually not followed for settlement of trade defaults as in involves undue delays and high costs; and uncertainty about the final decisions.

Moreover, the court proceedings are open to the public, and therefore, they have adverse impact on the image of the parties of the disputes. on the other hand, arbitration is the best suitable method of settlement of trade disputes. it has advantage of quicker and sound decisions, less expensive, and the arbitration proceedings are not open to the public and privacy can be maintained.

In the case of foreign trade transactions, arbitration becomes wildly accepted procedure and the law applicable to arbitration proceeding may be based on Indian law or of foreign law, depending on the terms of the contract. in the case of foreign trade transactions, arbitration can take place in the exporter’s or importer’s country.

India, which is a party to the 1927 Geneva and the 1958 New York convention, has enacted the arbitration (protocol and convention) act, 1961 respectively giving effect to these two convections. The Arbitration And Conciliation Act, 1996 passed by India has replaced the earlier acts wiz, the Arbitration Act, 1940, The Arbitration (Protocol And Convention ) Act 1937 and Foreign Awards (Recognition And Enforcement)Act 1961. The new act has classified the provisions relating to arbitration in depth.

Procedure of Arbitration

Any person interested in a foreign award for enforcement in India may apply to any court in writing having jurisdiction over the subject matter; it should be registered in the court as suet between the plaintiff and defendants. The court shall follow and no appeal should be made unless the award is not in accordance with the provision of arbitration and conciliation act 1996.

Arbitration awards made in India will be similarly enforceable in foreign countries according to the provisions of respective conventions.

Barriers to International Trade

Tariffs

A tariff is a tax imposed by the local government on goods and services coming into a country. They increase the price of the goods being imported. Tariffs were created by the government to protect local businesses from low-priced competitive products.

An example would be a shirt made in China now costs a department store $53.80. ($40.00+$8.80=$48.80, plus shipping and handling which costs $5.00 per shirt.) The shirt would now cost the Canadian consumer $108.00 making the Canadian shirt a better deal.

Canada can encourage trade with other countries by lowering their tariffs on their exports. Eventually this can lead to free trade with participating countries. Canada has already managed free trade with such countries as: USA, Mexico, Chile and Israel.

Currency Fluctuation

Every county has its own currency and its patrons know how to use it but everything you know about your own currency changes when you are dealing with another country.

The rate given by one country for another countries currency is called the currency exchange rate. The daily exchange rate for the rest of the world is made according to the rates used when two banks trade between different countries.

Rates of currency are always fluctuating and that can be a major barrier to trade because the buyer could end up paying way more than intended.

When a country’s currency is devalued in relation to another countries currency it means the country with the lower value can sell more because the other country saves money. However, it discourages the devalued country from buying the goods and services from the country with the higher currency value because they would pay more for less.

Investment Regulations

Investors are non Canadians who must comply with the provision of the investment Canada Act, which requires them to file a notification when they commence a new business activity in Canada or each time they acquire control of an existing Canadian business. The investment will be reviewed if both the investor and the vendor are from a country that is not a World Trade organization member and if the value of the business being acquired in Canada is over 5 million. If the investor’s country is a WTO any direct investment in excess of 223 million is reviewable.

If the investment involves the acquisition of a company which produces uranium and owns an interest in a uranium property, or engages in financial services, transportation, or culture and is worth over 5 million, a review must take place.

Environmental Restrictions

A large portion of Canada’s economy depends on its natural resources. Foreign insects and diseases could destroy entire industries and seriously harm the Canadian economy. Restrictions are now placed on imports to protect Canadian crops from contamination. The Canadian law requires that all food, plants, fish, animals, and their products that are brought into Canada must comply with Canadian standards.

Canada is a signatory to the convention on International trade in endangered species of wild fauna and flora. This agreement is against the trade on 30 000 wild animals and plant species.

In other words products that do not meet Canadian environmental standards are not allowed to enter Canada.

Foreign Relations and Trade Sanctions

Canada uses trade sanctions to influence polices or actions of other nations. Also at-tempts to stop human right violations by imposing sanctions instead of using force. Canada tends to join with other nations who share the same views to implement sanctions jointly.

The United Nations Act incorporates into Canadian law the decisions are passed by the United Nations Security Council. The United Nations Security Council imposes a legal obligation on Canada to uphold the decisions enacted by the United Nations Act.

Canada has authority which it can impose sanctions in relation to a foreign state, either as implementing a decision, resolution or recommendation of a international or organization of states or association of states.

Export and Import Permits Act allows goods to be traded with regulations ( area control list, export control list and the import control list ) Area control list is a list of restricted countries, special permit is needed for Canada to trade to a country on this list. Export control is a list that consists of restricted goods. Import control is a list of goods that are not permitted into Canada. Import control list is not used to impose sanctions onto a foreign state. But there are some exceptional circumstances.

Safety Regulations

The government regulates and administers commerce and trade in specified goods under the fallowing acts

*Food and drug act *Meat inspection act *Health of animals act *Hazardous Products act *Customs act

All of these acts affect both domestic and foreign imports. Each of these acts sets up many regulations. These regulations could act as barriers to trade for foreign exporters who may need to make costly changes in their manufacturing procedures to conform to Canadian standards.

Immigration Policies

Since the first settlers arrived in New France in the early 1600s, Canada has been a nation that depended on immigrants to grow the country and its economy. The Canadian economy benefits from their skills and financial investments. The immigrants maintain Canada’s population as well as create a demand for imports –this encourages trade and makes Canada more culturally diverse.

Visitors

Canada welcomes visitors. People coming to Canada spend money on goods, services, or products they purchase to take home. Many international companies wish to transfer key managers and specialists to Canada for a period of time. They must apply for a work permit and if the work permit is granted these individuals may later apply for Permanent Resident Status in Canada.

Immigrants

People wishing to relocate from their home country to Canada must have a Canadian Immigrant Visa. Immigrants with a Canadian Immigrant Visa are allowed to work or live anywhere in Canada. After having the Visa for three years they can apply for Canadian citizenship and they can sponsor a family member for Canadian Permanent Resident Status.

There are two ways to qualify for Canadian Permanent Resident Status: as an Independent Immigrant or as a member of the Family Class. Independent Immigrants are divided into two categories: Skilled Worker Category and Business Category.

Refugees

Refugees are peoples who have fled their country to escape persecution or war. The persecution could be physical violence, harassment, wrongful arrest or threats to their lives. Other reasons they might be persecuted could be for reasons of race, religion, gender, nationality, political opinion, or membership in a particular social group. Refugees cannot rely on their own government to provide them with legal or physical protection. They have to try and find safety in other countries.

“Asylum” is somewhere one can go to find safety. Individuals who flee to Canada have their refugee claims heard before they are granted refugee status. In 2001, approximately 11 000 refugees were granted asylum in Canada.

When refugees are in Canada they are allowed to fully participate in Canadian society. When they come over they can seek work and go to school without hassle.

Dealing with Trade Barriers

Numerous trade missions, organized by federal, provincial, and even some municipal governments, have visited foreign countries in an attempt to develop more trade with them.

The federal government has indicated a willingness to establish the FTAA. Canada has strong ties to the United Kingdom and is using them to forge trade deals with European Union at preferred tariff rates. The Asia-Pacific Economic Cooperation (APEC) was established in 1989 in response to the growing interdependence among Asia-Pacific economies. APEC has since become the primary regional vehicle for promoting open trade and economic cooperation with Canada and the other twenty member countries. The World Trade Organization (WTO) is influencing and ruling on international trade policies and on some existing bilateral and multilateral agreements.

As for currency fluctuations, business can deal with the fluctuation in the value of the Canadian dollar by buying foreign currency.

Canada’s immigration policies are constantly being reviewed to allow more people to come to Canada.

The Investment Canada Act replaced the more restrictive Foreign Investment Review Act and significantly loosened restrictions on foreign investment in Canada, allowing the establishment of almost any new business by foreign investors without government review.