INTERNATIONAL TRADE PRACTICES

INCOTERMSStandard trade definitionsUsed in International Sales ContractDevised & published by International Chamber of Commerce (ICC) in 1936 (1st version)Indicate each contracting partys costs, risks & obligations with regard to delivery of goods

INCOTERMS - LIMITATIONSNo guideline in the following cases:Determine how title of goods will be transferredSpecify details of transfer, transport or delivery of the goodsDefine the remedies for breach of contract

In case of a dispute, courts & arbitrators will look at:1. The Sales Contract, 2. Who has possession of the goods & 3. what payment (if any) has been made.

MOST COMMONLY USED INCOTERMSFOB (Free On Board)Buyer bears risk (loss or damage) & cost of transport

CIF (Cost, Insurance & Freight)Seller bears cost of transport (including insurance) & Buyer bears the risk

CFR (Cost & Freight)Seller bears cost of transport onlyBuyer arranges & bears cost of insuranceBuyer bears risks due to damage or loss during transport

Modus Operandi

X-BORDER TRADEBUYERSELLER

X-BORDER TRADEIMPORTEREXPORTERRISKS

QUALITYQUANTITYTIMERISKS

PAYMENT/AGREEMENT FOR PAYMENT

X-BORDER TRADEIMPORTEREXPORTERBANKBANKPROMISE TO PAY IF QUALITY/QUANTITY TERMS SATISFY

X-BORDER TRADEIMPORTEREXPORTERBANKBANKLETTER OF CREDIT [SIGHT/TENURE]

X-BORDER TRADEIMPORTEREXPORTERBANKBANKDOCUMENTS [Bill s of Exchange, Bill of Lading, Airway/Shipment Challan etc.]

Physical Delivery of Goods

X-BORDER TRADEIMPORTEREXPORTERBANKBANKMatch Documents with LC If Yes, ask Importer to PAY [now, for Sight LC or by maturity of tenure, for Tenure LC If No, Inform exporters Bank

X-BORDER TRADEIMPORTEREXPORTERBANKBANK

Outward Remittance Domestic currency (X)Inward Remittance

Domestic currency (Y)Foreign Currency (Y)Foreign Currency (X)

X-BORDER TRADEIMPORTEREXPORTERBANKBANKInward Remittance

Foreign Currency (X)EEFC ACCOUNT

RISK ASSESSMENT OF IB

Product Life Cycle International Markets

Market requirement & product characteristics

Cost components of consumer product

INTERNATIONAL TRADE Issues

POWER EQUATIONPrimary, Secondary & Tertiary ProductsBalance between supply & demand is not evenFair Trade vs Free TradeDumping

Developed CountriesThe strategies of Transnational Corporate for Technology creation and outward foreign direct investment (FDI) to access resources and markets. Export-oriented (specially output of Manufacturing Sector)Higher bargaining power in trade negotiationsDeveloping/underdeveloped CountriesOver-dependent on limited export goodsPrice/demand depends on International EnvironmentFor example, the island nation of St Lucia, in the Caribbean, depends heavily on one cash crop, bananas, while Zambia relies on the export of copper. If the crop fails, or the price of the mineral drops, the economies of these nations suffer. As a result, many primary-producing nations import far more goods than they export, leading to a trade deficit with the rest of the world. Conversely, most secondary- and tertiary-producing nations maintain healthy trade surpluses.

INTERNATIONAL CARTELSOPEC (1960) by 13 oil producing nationsAchieved great success in the 1970s when it restricted oil production, thereby raising the price.In recent years, OPEC has had less success because oil-producing countries outside the organisation, such as Norway and Britain, have set their own prices and levels of supply. A similar cartel, Geplacea, operates between 23 sugar-producing nations.

Negative impact:Cartels impede the free movement of goods and services around the world by erecting artificial barriers to trade. As a result, the volume of world trade is reduced

REGIONAL COMMON MARKETSTo reduce barriers between member states to trade in both goods and servicesEuropean Union (EU), which began when six European nations pooled their coal and steel industries in 1951. It has since grown to become a massive free trade union comprising 15 of the richest nations in western and southern Europe. North American Free Trade Agreement (NAFTA), established in 1994 by Canada, the USA, and Mexico, Caribbean Community and Common Market (CARICOM), set up by 13 Caribbean nations in 1973.The General Agreement on Trade and Tariffs (GATT) is the international treaty which preceded the WTO's formation; it began in 1947.

WTOStarted in 1995Consists of 157 countriesApprox 75% are developing countriesEmanated from 1986-94 Uruguay Round negotiations, and earlier negotiations in GATT (General Agreements on Tariff and Trade)Core consists of legal agreements, signed by bulk of world trading organizationsDirector general-------Pascal Lamy

Objectives Organization for liberalizing cross country tradeForum for Govt to negotiate trade agreements & settle disputes in tradeProducers of goods, services etc to conduct business smoothlyAllows Govt to meet social and environmental objectives

Fundamental PrinciplesTrade without discriminationMost Favoured Nation(MFN)Countries cannot discriminate between trading partnersExceptions allowed, eg. Raising trade barriers for countries following unfair trade practice, give developing countries special access to marketsNational treatmentEqual treatment to foreign and local trade

Fundamental PrinciplesFreer tradeLowering of trade barriersLowering of custom dutiesRestricting import bans

Progressive liberalizationDeveloping countries given longer turnaround time

Fundamental PrinciplesPredictability and stabilityPromise to stick to argumentsEncourage investmentCreate jobsImprove market security for tradersPromoting fair competitionEg. Antidumping policies

Fundamental PrinciplesEncouraging development and economic reformTime flexibility for developing countriesSpecial assistanceTrade concessionsEg. Developed countries allow duty free imports from least developed countries

Fundamental PrinciplesAbsolute advantages: produce a good using less resources than another country. For example if one unit of labour in Scotland can produce 80 units of wool or 20 units of wine; while in Spain one unit of labour makes 50 units of wool or 75 units of wine, then Scotland has an absolute advantage in producing wool and Spain has an absolute advantage in producing wine.

Fundamental PrinciplesComparative advantages: only to be able to make something at a lower cost, in terms of other goods sacrificed, to oneself to gain from trade. For example if 1 unit of labour in the Singapore can produce 100 units of electronics and 60 units of textiles, as compared to India where 1 unit of labour can produce 50 units of electronics and 50 units of textiles, then Singapore has the absolute advantage in both items. However, it would be better for Singapore to produce electronics and import textiles from India. This is because the labour that would have gone into textiles can be diverted to electronics where Singapore is comparatively better. The effective labour wage rate would be lower in India and hence keeps textile cost lower.

This also explains why a CEO should hire a driver as well as typist even if he may be a better driver and typist than those he hires

Understanding the OrganizationRun by member govts, power not delegated to board of directorsHighest authorityministerial conference2nd levelGeneral councilDispute settlement bodyTrade policy review bodyAll consist of all WTO members

Understanding the Organization3rd levelCouncil for trade in goodsgoods councilCouncil for trade in servicesservices councilCouncil for Trade in Intellectual Property rightsTRIPS4th levelEach council has subsidiary bodies

Pro-WTOKey to economic growth, as it provides the correct stable macroeconomic environmentFocused on developing countriesDeveloping countriescomparative advantage in labour. Developed countriesadvantage in capital and technology, liberalization helps Inefficiencies of developed countries publicized

Pro-WTOHindrance due to less bargaining power of developing countries overcomeCan be addressed as they form majority and can negotiate in blocksCommitment mechanism provided to govt helps in overcoming domestic pressure against liberalizationDeveloping countries with less retaliating power can address through WTO

Pro-WTOWithdrawal of concession allowed for compensating losses for developing countriesLegalization makes it difficult for interest groups to demand protectionism if WTO rules against itDeveloped countries have interest in the services sector of developing countries, WTO regulations can prevent exploitation

Anti-WTOProtectionism in developed countries still continueSpecial and Differential Treatment (STD) rule conflicts with non-discrimination ruleInterest groups oppose trade reforms, especially in corrupt political scenarioBeneficiaries of protectionism more organized than the traders

Anti-WTODeveloping countries lack capabilities to perform obligationsDeveloping countries not compatible with the pace and degree of liberalizationMore serious due to single undertaking principle Increased legalization costs tilt decisions in favour of developed countries

Anti-WTOIncreased legalization costs allow increased influence of organized groups in developing countriesLeast developed countries lack effective representationOther reforms associated with trade reformsDanger from regional agreements

Anti-WTOAlthough regional agreements are allowed, they are in conflict with MFN principleConflicts due to regional agreements outside WTO dispute settlement mechanismMembership in regional agreements decrease incentive to participate in WTOSDT produce conflict among recipient and non-recipient countries

Anti-WTOSDT used as bargaining chips by the developed countriesTrade barriers of developed countries disproportionately target developing countriesWTO rules for harmonization pose constraint to diverse needs of a developing nation

To ConcludeIntention justifiedChallenges still exist in the integration of developing countries in the trade regimeStill the best forum to address trade related concerns of developing countriesRevision of rules and principles needed in sync with the changing needs of the world economy

Thank You!!!& All the Best!!!