international -unit1

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INTERNATIONAL TRADE FINANCE



Topics CoveredUnit ± 1

� INTRODUCTION

� BOP

� WTO

� INDIAN EXIM POLICYUNIT ± 2

� EXIM FINANCE

� INTERNATIONAL COMMERTIAL TERMS� PAYMENT TERMS

� EXIM BANK

� EXPORT CREDIT GUARENTEE

CORPORATION(ECGC)



UNIT ± 3

� FOREX MARKET

� EXCHANGE RATE� HEDGING

� FOREIGN EXCHANGE MANAGEMENTACT(FEMA)

UNIT ± 4

� EXPORT DOCUMENTS

� FINANCIAL DOCUMENTS

� COMMERTIAL DOCUMENTS� CERTIFICATE

� TRANSPORT DOCUMENTS

� RISK COVERING DOCUMENT

� FORMS



UNIT - 5

� EXPORT PROMOTION

� EXPORT INCENTIVES



International Trade

Some Basic Terms:(1) Imports ± goods or services that a nation buy from other nations

(2)Exports ± the goods or services that a nation produces

and then sells to another nation

(3)Absolute Advantage ± a country¶s ability to producemore of a given product than can another country

(4)Comparative Advantage ± a country¶s ability to producea given product relatively more efficiently than another country ± or ± production at a lower opportunity cost



International Trade ModelsThe theory of international trade and its possible effects

can be explained with the help of the following models:

(1)Absolute Advantage Theory� Country A is said to have absolute advantage over

country B if it can produce commodity C with lower cost of resources than Country B. On the other handCountry B can have an absolute advantage over country A in the production of commodity D. In thiscase the countries A and B would benefit by trade.Adam Smith put forward his theory of absoluteadvantage.

(2)Comparative Advantage Theory� According to this theory a country would produce andspecialize in those commodities in which it hascomparative advantage in terms of resources. Therelative factor endowments in a country play a vital

role to govern the pattern of trade.



(3)Heckscher-Ohlin Model

� According to this theory a country will export that good

which utilizes its abundant its factor of production moreintensively. Conversely, the country will import goodsthat utilize factors of production that are locally lessabundant in nature. Hence we see that variation in thefactor endowments play a key role in the pattern of

international trade in the case of the Heckscher-OhlinModel.

Leontief Paradox:

On testing this theory empirically WasilyLeotieff found that this theory might not hold true always.

For instance United States was found to exportcommodities that were labor intensive although it was acapital abundant country itself. This phenomenon wastermed as the Leontief Paradox.



(4)Specific Factors Model

� This model assumes labor to be mobile but

capital fixed in the short run. According to thismodel if the price of a commodity increases thenthe producer of that used the specific factor toproduce the good would profit. The model is

most suited for particular types of industries.

(5)Gravity Model

� According to this model the distance between

the countries would influence the pattern of trade. Econometric findings have also supportedthis assumption.



(6)Product Life Cycle Theory

Firms first produces product in home country

& then go for exporting & as competitionincreases, the firm starts production also inforeign country to decrease transportation cost &then it follows some new strategy to force the

foreign competitors. This is drawn below



FIRM CREATES PRODUCTTO LOCAL DEMAND

FIRM EXPORTS PRODUCT TOACCOMMODATE FOREIGN TRADE

FIRM ESTABLISHES FOREIGN SUBSIDIARYTO ESTABLISH

PRESENCE IN FOREIGN COUNTRY &POSSIBLY TO DECREASE COST

FIRM DIFFERENTIATE PRODUCTFROM COMPETITORS / EXPAND

PRODUCT LINE IN FOREIGN

FIRMS FOREIGN BUSINESS DECLINESAS ITS COMPETITIVE ADVANTAGES

ARE ELIMINATED

(OR)



International trade meaning

� It is relatively conservative approach thatcan be used by firms to penetrate markets(by exporting) or to obtain supplies at alow cost (by importing)



Benefits

1.Investment opportunity

2.Financial opportunity

3.Low trade & investment barriers4.Innovation in IT

5.Innovation in Transportation technology



The Basis for International Trade

1.The basis for international trade is that a nation canimport a particular good or service at a lower cost than if it were produced domestically

In other words, if you can buy it cheaper than you can

make it you buy it± This maxim is true for individuals and nations

± This is called specialization and exchange

2.INCREASE IN SALES

-International sales growth opportunities-Excess production capacity

3.Access Resources

-Natural resources



4. Trade maintains and improves relations

between countries.

5. Trade allows countries to acquire goods andservices, often natural resources or rawmaterials, that it does not have available tothem.

6. Trade allows countries to obtain products thatother countries may produce more efficiently

and therefore are less costly.



Foreign Trade & economic growth

1.To become a major player in world trade, acomprehensive approach needs to be takenthrough the Foreign Trade Policy of India .

2. Increment of exports is of utmost importance,India will have to facilitate imports which, are

required for the growth Indian economy.3. Rationality and consistency among trade and

other economic policies is important for maximizing the contribution of such policies todevelopment.

4.while incorporating the new Foreign TradePolicy of India, the past policies should also beintegrated to allow developmental scope of India¶s foreign trade.



5.Trade propels economic growth and nationaldevelopment.

6.The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity.

7.The Foreign Trade Policy of India is based on

two major objectives, they are -

-To double the percentage share of globalmerchandise trade within the next five years.

-To act as an effective instrument of economic growth by giving a thrust toemployment generation.



8. Neutralizing inverted duty structures and ensuring thatIndia's domestic sectors are not disadvantaged in the

Free Trade Agreements / Regional Trade Agreements /Preferential Trade Agreements that India enters into inorder to enhance exports.

9. Upgradation of infrastructural network, both physical andvirtual, related to the entire Foreign Trade chain, toglobal standards.

10. Revitalizing the Board of Trade by redefining its role,giving it due recognition and inducting foreign tradeexperts while drafting Trade Policy.

11. Involving Indian Embassies as an important member of export strategy and linking all commercial houses at

international locations through an electronic platform for real time trade intelligence, inquiry and informationdissemination.



Balance of Payments

� It is a measurement of all transactions betweendomestic & foreign residents over a specificperiod of time

� Transactions are recorded using double entry

book keeping (both Cedit & Dedit)� Components may be in surplus or deficit,but TOTAL always sums to ZERO

� Balance of payments always in balance

� Deficit in one component must ALWAYSbe offset by a surplus in another component� EVERYTHING MUST BE PAID FOR!!



Components of BOP

(1) Current AccountIt represents a summary of flow of

funds between one specified country & allother countries due to purchase of goods/services or provision of income onfinancial assets.

(2) Capital Account

It represent a summary of flow of fundsresulting from sale of assets between onspecified country & all other countriesover a specified period of time



(a) Balance Of Trade (BOT):--It is simply the difference between

merchandise exports & merchandise imports

--Merchandise exports & imports represents

tangible products, such as computers &clothing that are transported between countries

--Deficit in BOT implies increase in value of import goods than export goods

--Surplus in BOT implies decrease in valueof imports than exports

--BOT = Exports - Imports

(1) Current Account Component



(b) Service Exports & Imports:

--It represents services, such as legal,insurance & consulting services providedfor customers based in other countries

--service export by US implies inflow of funds to US

--Service import by US implies outflow of funds to US



(c) Factor Income:

--It represents income (interest & dividendpayments) received by investors onforeign investment in financial asset(securities)

--factor income received by US investorsimplies inflow of funds to US

--Factor income paid by US investors

implies outflow of funds to US



(d) Transfer Payments:

It represents aid, grants & gifts from onecountry to another



(2) Capital Account Component

(a) FDI--Investment in fixed assets in foreign

countries that is used to conductbusiness operations

--Control will be there by the investorsExample:

� Firms acquisition of foreign company

� Firms Construction of new plant� Firms expansion of an existing foreign

plant



(b) Portfolio Investment

-transactions involving long termfinancial assets (stocks & bonds) betweencountries that do not affect the transfer of control

Example: Purchase of Netherlands companystock by US investor (here it represents apurchase of foreign financial assetswithout changing control of the company)

or else if US purchased Netherlands stockin an acquisition it implies transfer of control & therefore it implies FDI



(c) Other capital investment

Transactions involving short term financial

assets (money market securities) betweencountries

Interpretation:

� Therefore FDI measures expansion of foreign operations of firms

� Portfolio & other capital investment

measures net flow of funds due to financialasset transactions between individual /institutional investors



Imbalances in Components

� Each component can either in surplus,

deficit, or equilibrium

� Current Account Surplus= Net Exporter � Current Account Deficit= Net Importer

� Capital Account Surplus= Net borrower

� Capital Account Deficit = Net lender



Trade barrier

Trade barriers are a general term thatdescribes any government policy or regulation that restricts international trade.



Trade barriers

� ENVIRONMENTAL CONSTRAINTS

� REGULATORY CONSTRAINTS

� ETHICAL CONSTRAINTS� INFLATION

� NATIONAL INCOME

� GOVERNMENT RESTRICTIONS (&)� EXCHANGE RATES



Trade barriers

� Tariffs (tax on import goods )

� Import licenses

� Export licenses

� Import quotas (maximum limit of import)� Subsidies (financial assistance )

� Non-tariff barriers to trade (anti-dumping measures )

� Voluntary Export Restraints (specified period of time )

� Local Content Requirements (use a certain proportion of locally made parts and components)

� Embargo (prohibition of the movement of merchantships)



World Trade Organization

�� The World Trade Organization (WTO) is an organizationThe World Trade Organization (WTO) is an organizationthat intends to supervise andthat intends to supervise and liberalize internationaltradetrade..

�� The organization officially commenced on January 1,The organization officially commenced on January 1,1995 under the1995 under the Marrakech AgreementMarrakech Agreement, replacing the, replacing theGeneral Agreement on Tariffs and TradeGeneral Agreement on Tariffs and Trade (GATT), which(GATT), which

commenced in 1948.commenced in 1948.�� The organization deals with regulation of trade betweenThe organization deals with regulation of trade between

participating countries;participating countries;�� It provides a framework for (a) negotiating and (b)It provides a framework for (a) negotiating and (b)

formalizing trade agreements, and (c) a disputeformalizing trade agreements, and (c) a dispute

resolution process aimed at enforcing participants'resolution process aimed at enforcing participants'adherence to WTO agreements which are signed byadherence to WTO agreements which are signed byrepresentatives of member governments and ratified byrepresentatives of member governments and ratified bytheir their parliamentsparliaments

�� Most of the issues that the WTO focuses on derive fromMost of the issues that the WTO focuses on derive fromprevious trade negotiations, especially from theprevious trade negotiations, especially from the UruguayUruguayRoundRound (1986(1986--1994).1994).



Exim policy

� The foreign trade of India is guided by theExport-Import policy of the Government of India.

� Regulated by The Foreign Trade Developmentand Regulation Act 1992.

� Exim policy contain various policy decisions withrespect to import and exports from the country.

� Exim Policy is prepared and announced by thecentral government.

� Exim Policy of India aims to developing exportpotential, improving export performance,encouraging foreign trade and creating favorablebalance of payment position.



Exim Policy of India 2004-2009

� Hon.Shri Kamal Nath minister for commerce andindustry has announced on 31st Aug 2004, India¶s firstExim policy.

� The duration of the policy from 1st Sept. 2004 to 31st

March 2009.

� It takes an integrated view of the overall development of India¶s foreign trade.

� Aim of the policy is to double the global merchandisetrade within the policy time period of 5 year

� To double our percentage of share of globalmerchandise trade within the five year.

� To act as an effective instrument of economic growth bygiving a thrust to employment generation.



General Objectives of Exim Policy

� To establish the framework for globalization.� To promote the productivity competitiveness of Indian

Industry.

� To Encourage the attainment of high and internationally

accepted standards of quality.� To augment export by facilitating access to raw

material, intermediate, components, consumables and

capital goods from the international market.

� To promote internationally competitive importsubstitution and self-reliance.



Strategy of EXIM POLICY� Removing government controls and creating an

atmosphere of trust and transparency to promoteentrepreneurship, industrialization and trades.� Simplification of commercial and legal procedures and

bringing down transaction costs.� Simplification of levies and duties on inputs used in

export products.� Facilitating development of India as a global hub for manufacturing, trading and services.

� Generating additional employment opportunities,particularly in semi-urban and rural areas, anddeveloping a series of µInitiatives¶ for each of thesesectors.

� Facilitating technological and infrastructural upgradationof all the sectors of the Indian economy, especiallythrough imports and thereby increasing value additionand productivity, while attaining global standards of

quality.



Highlights of the New Foreign Trade Policy

2004-2009

� Special Focus Initiatives:Semi-urban and Rural Area

� Agriculture:

Vishesh Krishi Upaj Yojana (boost exports of fruits, vegetables,

flowers, minor forest produce and their value added products) and Agri ExportZones

� Handlooms and Handicrafts:Mark under Market Access Initiatives Scheme

and Proposed to Start new SEZ(special economic zones).

� Gems and Jewellery:Import of gold of 18 carat and above has been

permitted under the replenishment (replacement) scheme



� Leather and Footwear:Duty free import entitlement of specified

items shall be 5% of FOB (Free On Board) value of exports during the preceding year � Export Promotion Schemes±Assistance to States for Infrastructure Development of

Exports [ASIDE]

±Market Access Initiative [MAI]±Marketing Development Assistance [MDA]±Towns of Export Excellence±Target Plus Scheme.±Served from India Scheme±Service Export Promotion Council� Board of Trade:

The role is to advising government on relevant issuesconnected with Foreign Trade Policy.



Current trends in Indian Trade Policy 2009 - 2014

� The UPA Government has assumed office at achallenging time when the entire world is facing anunprecedented economic slow-down.

� The year 2009 is witnessing one of the most severeglobal recessions in the post-war period.

� Countries across the world have been affected invarying degrees and all major economic indicators of

industrial production, trade, capital flows, unemployment,per capita investment and consumption have taken a hit.

� The WTO estimates project a grim forecast that globaltrade is likely to decline by 9% in volume terms and theIMF estimates project a decline of over 11%.

� The recessionary trend has huge social implications.� The World Bank estimate suggests that 53 million more

people would fall into the poverty net this year and over a billion people would go chronically hungry.



INDIA¶S FOREIGN TRADE: June 2010.A. EXPORTS (including re-exports)

� Exports during June, 2010 were valued at US $ 17745 million

(Rs. 82632 crore) which was 30.4 per cent higher in dollar terms (27.1 per cent higher in Rupee terms) than the level of US $ 13606 million (Rs.64996 crore) during June, 2009.Cumulative value of exports for the period April-June2010 was US $ 50777 million (Rs 231743 crore) as againstUS $ 38396 million (Rs. 187218 crore) registering a growth

of 32.2 per cent in Dollar terms and 23.8 per cent in Rupeeterms over the same period last year.

B. IMPORTS

� Imports during June, 2010 were valued at US $ 28299 million(Rs.131781 crore) representing a growth of 23.0 per cent in

dollar terms (19.9 per cent in Rupee terms) over the level of imports valued at US $ 23013 million ( Rs. 109937 crore) inJune, 2009. Cumulative value of imports for the period April-June, 2010 was US $ 83044 million (Rs. 378992 crore) asagainst US $ 61871 million (Rs. 301439 crore) registering agrowth of 34.2 per cent in Dollar terms and 25.7 per cent in

Rupee terms over the same period last year.



C. CRUDE OIL AND NON-OIL IMPORTS:

� Oil imports during June, 2010 were valued at US $ 8354million which was 26.5 per cent higher than oil imports

valued at US $ 6601 million in the corresponding periodlast year. Oil imports during April-June, 2010 werevalued at US$ 25276 million which was 51.8 per centhigher than the oil imports of US $ 16647 million in thecorresponding period last year.

� Non-oil imports during June, 2010 were estimated at US

$ 19946 million which was 21.5 per cent higher thannon-oil imports of US $ 16412 million in June, 2009.Non-oil imports during April - June, 2010 were valued atUS$ 57768 million which was 27.7 per cent higher thanthe level of such imports valued at US$ 45224 million inApril - June, 2009.

D. TRADE BALANCE

� The trade deficit for April - June, 2010 was estimated atUS $ 32267 million which was higher than the deficit of US $ 23475 million during April -June, 2009.

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