Foreign Trade - An Introduction

Foreign Trade
Foreign Trade-Meaning
Balance of Trade
Balance of Payments-Meaning-Accounting
Foreign Contracts
International Trade Agreement/Institutions
Methods of Foreign Trade
Banking Facilities
Role & Objectives of Exim Bank
Free Port/Free Trade Zone
Off-Shore Banking Operations
European Currency Unit
Foreign Trade Trade Finance Chapter 01

Introduction and Meaning
The foreign trade of a country refers to its import
and export of merchandise from and to other countries
under contract of sale. No country in world produces all
the commodities it requires. The commodities which
country produces in surplus, it exports, while those
producing in deficit, it imports. In short, foreign trade
refers to Exchange of goods and services between two
or more different countries. Such trade is also known as
International Trade.


Features and Types
Foreign Trade is having following features.
Involvement of different monitory units.
Imposition of restrictions in import and export.
by various countries.
Imposition of restrictions on release of foreign
currencies existence of multiple regulation.

Foreign Trade is of 2 type:-
a) Import
b) Export


Features and Types
If the seller is abroad and the buyer is in the home
country, exchange of goods between them is called
Import.
If the seller is in home country and the purchaser is
abroad, the Trade between them is called Export. A
foreign trade can be further classified in to two according
to visibility.
a) Visible b) Invisible.
A trade which can seen i.e. exchange of goods,
merchandise is a visible trade. Where as, exchange of
services between the purchaser and seller is invisible
trade i.e. technical know-how, insurance etc.

Dumping
When goods are sold in foreign market without
contract of sale it is known as dumping. The dumping has
following types.
1) Sporadic 2) Predatory 3) Persistent 4) Reverse
dumping.
When manufacturer wants to dispose of goods in
foreign market at low price, without harming its normal
market, the dumping is sporadic.
To gain access in foreign market by selling goods at
loss and to drive out the competitors refers to predatory
dumping.
When a producer consistently sells at a lower price in
one market than in another, it is called persistent dumping.
When manufacturer sells goods abroad at a higher
price than at home, the practice followed is called reverse
dumping.

Balance of Trade

Balance of trade refers to as the difference between
a country’s import of merchandise and its exports thereof.
This is also called the net difference between the value of
commodities imported and exported. Balance of trade
may be positive, surplus or negative deficit depending on
situation of net position.
The positive, surplus position occur when export
exceeds import and when import exceeds export the
balance of trade is said to be deficit or negative.


Causes of Reduction/Enhancement in
Balance of Trade
There are two main factors for variation in balance of trade
position.
a) External Factors. b) Internal Factors
a)External Factors:
• The sudden rise in price of essential commodities like edible
oil, drugs, medical equipments. Etc.
• Position of world
• Wide inflation or recession.
• Trade restrictions imposed by the developed countries
b) Internal Factors:
• Domestic shortage of industrial and agricultural products.
• Absence of high technology.
• Inadequate knowledge of export market.
• Neglect of export profitability.

Corrective Measures
To come out of unfavorable trade position,
following corrective measures are required;
• Export Promotion: By keeping quality & price
competitive
• Import Restriction: By imposing heavy tax & duty in
import
• Finance: By borrowings overseas.
• Monitory Measures: By putting restriction on bank’s
credit.
• Fiscal Measures: By curtailing public expenditure
• Devaluation: By devaluating country’s official rate of
exchange

Balance of Payment:- Meaning, Accounting

The balance of payment of a country refers to, a systematic
record of all trade transactions, visible and invisible imports and
exports during a given period. The balance of payment is a
difference between international transfer of funds for a country’s
imports and exports of goods and services for certain period. The
accounting of balance of payment has two types viz. current
account and capital account.
According to sec. 2(J) FEMA Act, 1999 Current Account
includes private and government merchandise, invisible items like,
Foreign trade, Services, Short term banking, etc.
While the capital account transactions includes private long
and short-term assets, banking transactions and official loans,
amortization, IMF and reserves and monetary gold contingent
liabilities [sec. 2(e)]

Balance of Payment
The study of balance of payment can be
summarized as below:
Definition: The balance of payment of a country is a
systematic record of all transactions between residents of
that country and the residents of foreign countries during
given period of time.
Contents: It includes, Merchandise, visible and invisible
trade, Errors and Omission to strike a balance between
two sides of accounts.
Use: The most important use is, it is guide for
Government in framing it’s monetary, fiscal, exchange
and other policies.


Balance of Payment

Broad Division: It is broadly divided into
• Balance of payments on current account and
• Balance of payments on capital account
Balances within the total: For the purpose of analysis the
items are divided into five;
a) Trade Balance b) Current Account Balance
c) Basic Balance d) Net Liquidity Balance
e) Official transaction Balance.


Disequilibrium
In balance of payments, debit and credit items
seldom balance. As a result, the balance of payment is
either in surplus or in deficit. When a country happens to
have a surplus balance in balance of payment over the
years, inflows of foreign capital take place, for that the
rates of interest are high and also there is confidence in
the country’s currency. The confidence in country’s
currency refers to no devaluation of that country’s
currency is apprehended. When, on the other hand, a
country has a deficit or unfavorable balance of payment
its foreign exchange resources get depleted.


Correcting the Deficit
As said earlier, if country has an president deficit,
following corrective measures are to be taken by it’s
Government
•Import Curtail : When imports are restricted, the
position improves. But it has to be
used wisely.
•Export Promotion :By way of packing credit facility,
export bill purchase, insurance cover
etc.
•Monetary Measures :By raising the (SLR) Statutory
Liquidity Ratio / or by open
market operations by the Central
Foreign Trade
Bank. Finance
Trade Chapter 01

Correcting the Deficit

•Fiscal Measures : These relate to a government’s
revenue and expenditure and include
budgeting for a surplus.
•Devaluation : This refers to a reduction by the
government in the country’s official
rate of exchange between it’s own
currency and other currencies.


Foreign Contracts
Goods are traded between two countries under contracts of
sale / purchase which contains price, mode of delivery etc. The
foreign contracts can be studied by following points :
•Mode of Delivery : The delivery may be actual or constructive.
As the name suggest, actual delivery mean physical delivery of
goods to buyer. In constructive type not the physical but the
documents are handed over to the buyer. In foreign trade the
delivery is always constructive.
•Mode of Payment : Following are different types of payments :
a) OD / DP : Payment on Demand/Payment against Documents.
b) DA : Documents delivered after Acceptance through Bill of
Exchange.
c) VP / CoD : Value Payable/ Cash on Delivery both these terms
related to post parcel delivery.

Foreign Contracts
Freight and Insurance : In foreign trade in case of
freight and insurance certain abbreviations are used as:
1. c.i.f. : Refers to the amount of insurance, freight are
included in invoice or contract of sale / purchase.
2. c. & f. : Stands for cost and freight, mean that when
goods shipped under c.i.f. contract, freight should be
prepaid.
3. f.o.b. : These letter stands for free on board. In this
buyer names the vessel and specifies the date of
delivery.
4. f.a.s. : This means free alongside ship and imply that
seller is responsible for the delivery of goods within
specific time.

International Trade Institutions
Following chart represents some of the International Trade
Institutions / Agreements :
Let’s look each of above in brief.

EEC

G.A.T.T. UNCTAD

International
Trade
Agreements

ACU OPEC

Petro Dollars


G.A.T.T.
G.A.T.T. is the abbreviation of the General
Agreement on Tariff and Trade, which was signed at
Geneva by 23 countries in 1947, effective January 1948.
It is a world organization designed to bring about
maximum possible rate of growth in world trade by
reducing tariff barriers among members countries. It
believes in negotiation and throughout it, GATT works
for reduction of barriers of trade. In 1967, the negotiation
round called, Kennedy Round was the biggest ever tariff
cutting deed. In September 1986, ministers of 100
countries got together in Uruguay and began 8th round of
negotiation.

G.A.T.T.
The round of talks concluded on 15th December,
1993. The concerned matters are :
•Reducing specific trade barriers and improving market
access.
•Strengthening G.A.T.T. disciplines.
•Trade Related Intellectual Property Rights (TRIPs).
•Trade Related Investment Measures (TRIMs).
•Trade in Service.
Mr. Arthur Dunkel, former Director General of
G.A.T.T. submitted comprehensive document which is
commonly known as, Dunkal Proposal on December 20th
1991. India signed this Pact on 15/4/1994 along with 124
other countries.

EEC and UNCTAD
The European Economic Community (EEC) : The
European community also referred as the European Common
Market (ECM) come into being with Treaty of Rome in 1957,
by six countries viz. France, Germany, Italy, Belgium,
Holland and Luxembourg. The treaty provides free movement
of goods, service and capital amongst member countries.
United Nations Conference on Trade and development
(UNCTAD) : This is a forum of the United Nations
Organization, aiming at international economic co-operation
in the areas of trade and aid. The UNCTAD is held every four
years to seek ways to end disparities between the rich and
poor nations. There have been so far four conferences. So for,
the success of such meetings in achieving its objectives has
been very limited.

OPEC & Petro Dollars
Organization of Petroleum Export Countries (OPEC)
: The organization, which consist of Iraq, Iran, Saudi
Arabia, UAR, Kuwait, Libya, Nigeria etc. aims at
protecting the interest of the member countries by
controlling the prices of petrol and petroleum products.
Petro Dollars :The accumulation of currencies at the
disposal of the oil exporting countries of Western Asia
and other places, have been invested by the owner
countries with American banks and / or in shares in
multinational concerns in the U.S.A. Such deposits in
dollars in the U.S.A. are referred to as oil or petro dollars.


Asian Clearing Union
Asian Clearing Union (ACU) : It was established on 9th
December 1947 by Reserve Bank of India, the Bangladesh Bank,
the Bank Markazi of Iran, the Nepal Rastra Bank, the State Bank of
Pakistan and the Central bank of Sri Lanka as the founder
members. In April 1977, the union of Burma Bank joined the
Union. It’s headquarters are at Teheran, Iran and its operations are
conducted by Board of Directors and a manager. The objectives of
this union are,
•To facilitate payments for current international transactions within
the ESCAP region.
•To reduce / eliminate use of extra regional currencies to settle
transactions by promoting the use of the participants currencies.
•To contribute to the expansion of trade and promotion of monetary
cooperation among the countries of the area.


ACU and India
Since 1984, all eligible payments between India
and other member countries except, Nepal, to be settled
through the ACU. The payments excluded are as below :
•Travel
•Contracts made from an International Financial
Institution like world bank.
•Deferred payments facilities extended by one member
country to another member country.
Payments between India and Nepal are not eligible to be
settled through ACU.


Benefits of ACU
The advantages of ACU can be summarized as below :
Appreciable savings of the liquid foreign
exchange reserves.
Reduction of the working balances in the foreign
exchange.
Saving in the cost of settlement.
Curtailment of the time needed before for
settlement of transactions by the elimination of
the intermediary correspondents in London or
New York.


Euro Money
It is a monetary system of eleven European
countries, which started it’s functioning since January
1999. This is third strong currency after dollar (U.S.).
This is the money against which there is neither gold
banking nor any natural government. Some of the
countries who’s joint efforts make this are, Italy,
Germany, Belgium, Finland, Ireland etc. Other 5
mentioned nations not yet joined the Euro due to
economic and political reasons are Great Britain,
Denmark, Egypt, Sweden and France.


Conditions for Euro Money Agreement
Following are some of the conditions for this
agreement :
The countries have to keep their Budget deficit,
below 3% of G.D.P. i.e. Gross Domestic Product.
Countries should have government debts below
60% of GDP.
Inflation should not exceed 1.5%.
Rate of interest should not be more than 2%.


Foreign Trade : Methods
Goods may be traded or exchanged between
exporter and importer in any of the three ways :
a)On Open Account Basis : Where the credit status of
importer is high, the goods are sent direct to him in
anticipation of payment in due course. Export on this
basis is not permissible in India.
b)Under Bill of Exchange : The exporter may draw bills
of exchange on the importer for the value of the exports
and collect the bills through bank.
c)Under Letter of credit : The exporter may agree to
export the goods only against a letter of credit opened in
his favour.

Banking Facilities
Banks can render assistance to Indian merchants
and manufacturers already engaged in or intending to
enter in foreign markets in following ways :
• Bank can provide credit worthiness and status reports.
• Bank can assist to Indian exporter who wish to go
abroad for export promotion, business tour etc.
• Bankers can, when required provide the name, address
of foreign firms which may be interested in joint
ventures in India.
• For importers bank can collect import bills drawn on
them and arrange remittance.
• For exporters bank may render agency service.
• Bankers also provide to importers and exporters
information about exchange control regulation, import
license procedures to be followed etc.

Role of Exim Bank
Exim Bank is short form of Export Import bank of
India. It is a public sector bank established on January 1st
1982 with authorised share capital of Rs.200 crores. The
main objects of Exim Bank are :
•Provide financial assistance to exporters.
•Promoting foreign trade of India.
•Coordinating the working of institutions engaged in
financing export and import.
•Assist Indian Joint Ventures in third world.
•Concentrate on medium and long term finance.


Functions of Exim Bank
Following are some of the functions of Exim bank :
To provide financial assistance to exporters and
importers.
Granting loans and advances in and outside India.
Refinancing usance export bills of banks.
Granting obligation, jointly with banks on behalf of
project exporters engaged in the execution of
construction and turnkey contracts abroad.
To act as a principal financial institution for
coordinating the working of other institutions.


Objectives : Exim Bank
Following are some of the objectives which have
been setup before exim bank :
Granting loans and advances in India solely or jointly
with commercial banks.
Granting loans and advances outside India.
Issuing bid-bonds and guarantees and other facilities
in India or abroad.
Selling or discounting of export bills in the world
market.
Maintaining of foreign currency accounts.

Objectives : Exim Bank
Undertaking and financing of research, surveys etc.
Providing technical, administrative and financial
assistance.
Planning, promoting, developing and financing
export oriented business, industries.
Financing export of machinery and equipment on
lease basis.
Granting loans and advances to Indian joint Ventures
abroad.


Supplier’s Credit
It is also called as seller’s credit, under this, funds
are provided on deferred payment terms to Indian
exporters of plant, equipment and related services. This
programme covers project export, which could be turnkey
project or construction projects.
The credit is provided by Exim Bank in
participation with commercial banks where individual
contract value is not more than Rs.3 crores.
The exporter is required to submit the projected
quarterly drawal of entire credit amount well in advance
of it’s utilization. ECGC insures the exporters and in
many cases additionally gives the guarantee to the
negotiating bank.

Buyer’s Credit
This credit is extended by exim bank to buyers
abroad to enable them to import engineering goods and
projects from India on deferred credit terms. This facility
is to be secured by a letter of credit or bank guarantee or
promissory note from government.
Exim Bank directly enter into an agreement with
the overseas borrower outline the terms and conditions of
the credit covering the export contract.


Facilities Provided by Exim Bank
Following are some of the facilities provided by
Exim Banks.
Consultancy and Technology Services.
Overseas Investment Financing Programme.
Pre-shipment Credit.
Export Oriented Units.
Computer Software Exports.
Export Marketing Fund.
Export Product Development.
Project Preparatory services.


Terms and Conditions
Exim Bank has been operating a lending
programme subject to following terms and conditions :
• The assistance may be direct or may be refinance to a
commercial bank.
• Commercial banks lending for projects costing up to
Rs.2 crores are eligible for refinance.
• The assistance rendered is usable for acquisition of
fixed asset.
• No credit authorization from RBI or any reference to
IDBI is necessary.
• The rate of interest is currently 9 % p.a.
• The loan is repayable in 10 years including
moratorium period.

Free Port / Free Trade Zone
A free port is a port declared as such by the
government of the country where no quantitative
restrictions on imports into or exports. A free port or a free
trade zone is also conductive to entrepot trade i.e. imports
not for domestic consumption but for re export.
In India, the idea of establishing free ports or free
trade zones was first mooted in 1957 by the Export
Promotion Committee. The object behind this was
stimulation of exports.
At the moment there are two free trade zones in
India, one at Kandla in Gujrat and other at Santa Cruz in
Mumbai.
The electronic Export Processing Zone (EEPZ) at
Santa Cruz, Mumbai has about 30 units set up in its area
engaged in producing 100% export oriented electronic
equipment.

Off-Shore Banking
Off-shore banking is altogether new system of banking.
This system is operated through the off-shore banking units of
overseas banks in under developed countries. The funds of an off-
shore banking units are employed in financing capital intensive
local projects or in turnkey projects undertaken by exporters of the
host country. The profit made out of such banking operations may
be repatriated, usually tax free, to the parent bank.
Off-shore baking units are at present operating at Bahrain,
Singapore, Hong Kong etc. There are 20 centers in world. The
benefits to host country of such banking are as below :
•Inflow of interest free foreign capital into the country.
•Exemption from minimum reserve requirement.
•License fees are generally low.
•Close proximity to the important loan outlets or deposit sources .

IBU International Finance Ltd.

The first ever international financial organization
sponsored by a corporation of Indian nationalized banks,
such as Indian, Bank of Baroda and Union Bank of India.
It was established in Hong Kong and started functioning
in October 1980. This is a deposit taking organization
with off-shore and other activities. The organization is
eligible to accept deposits of Hong Kong dollars 50,000
and above.


ECU
ECU is abbreviation of European Currency Unit. It
has been recognized as a foreign currency officially by
Italy, France, Belgium and Luxembourg and de facto by
the United Kingdom, Eire, Netherlands and Denmark
from January 2002. The EUC is a currency basket
composed according to the ‘open basket’ formula of the
eight EMS currencies plus sterling and Greek drachma.
There is also an inter-bank deposit market in ECU
for ECU 10 billion or move for maturities up to one year
or more. The ECU is quoted against U.S. dollars and
cross rates are calculated against other currencies with
very narrow spreads.


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Foreign Trade - An Introduction

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