basic of int trade

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APPAREL EXPORT MANAGEMENT

UNIT - I

BASICS OF INTERNATIONAL TRADE

International trade can be defined as either the buying (importing) or selling (exporting)

of goods or services on a global basis. International trade is exchange of capital, goods,

and services across international borders or territories. In most countries, it represents a

significant share of gross domestic product (GDP). While international trade has been

present throughout much of history (Silk Road), its economic, social, and political

importance has been on the rise in recent centuries. Industrialization, advanced

transportation, globalization, multinational corporations, and outsourcing are all having a

major impact on the international trade system. Increasing international trade is crucial tothe continuance of globalization.

International trade is a major source of economic revenue for any nation that is

considered a world power. Without international trade, nations would be limited to the

goods and services produced within their own borders. International trade is in principle

not different from domestic trade as the motivation and the behavior of parties involved

in a trade does not change fundamentally depending on whether trade is across a border

or not. The main difference is that international trade is typically more costly thandomestic trade. The reason is that a border typically imposes additional costs such as

tariffs, time costs due to border delays and costs associated with country differences such

as language, the legal system or a different culture.

Another difference between domestic and international trade is that factors of production

such as capital and labor are typically more mobile within a country than across

countries. Thus international trade is mostly restricted to trade in goods and services, and

only to a lesser extent to trade in capital, labor or other factors of production. Then trade

in goods and services can serve as a substitute for trade in factors of production. Instead

of importing the factor of production a country can import goods that make intensive use

of the factor of production and are thus embodying the respective factor. An example is

the import of labor-intensive goods by the United States from China. Instead of importing

Chinese labor the United States is importing goods from China that were produced with

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Chinese labor. International trade is also a branch of economics , which, together with

international finance , forms the larger branch of international economics.

International trade uses a variety of currencies, the most important of which are held as

foreign reserves by governments and central banks. US dollar is the most sought-after

currency, with the Euro in strong demand as well. Competitiveness is an important

determinant for the well-being of states in an international trade environment.

Advantages and Disadvantages of International Trade

Advantages:

Enhances domestic competitiveness

Increases sales and profits

Gains global market share Reduces dependence on existing markets

Exploits international trade technology Extends sales potential of existing products

Stabilizes seasonal market fluctuations Enhances potential for expansion of existing business

Sells excess production capacity Maintains cost competitiveness in domestic market

Disadvantages :

Need to wait for long-term gains

Hiring staff to launch international trading

Modifying product or packaging

Developing new promotional material Incuring added administrative costs

Dedicating personnel for traveling Waiting for long periods for payments

Applying for additional financing increased liablity

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Dealing with special licenses and regulations which are not familiar

Common Mistakes Made in International Trade

Common Export Mistakes Solutions

1. Failure to obtain qualified export counseling

and to develop a master international marketing

plan before starting an export business.

Obtain Export Counseling

2. Insufficient commitment by top management to

exporting.

Determine Export Readiness

3. Failure to have a solid agent/distributors

agreement

Understand Agent/Distributor

Contracts

4. Blindly chasing E-orders from around the

world.

Avoid Accidental Exporting

5. Failure to understand the connection

between country risk and securing export

financing.

Understand Export Financing

6. Failure to understand Intellectual Property

Rights

Understand Intellectual Property

Rights (IPR)

7. Insufficient attention to marketing and

advertising requirements.

Pay Attention to Overseas Marketing

and Advertising

8. Lack of attention to product preparation needs. Pay Attention to Product Preparation

Requirements

9. Failure to consider legal aspects of going

global.

Understand Licensing and Joint

Ventures

10. Failure to know the rules of trade. Understand Export Regulations

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1. Failure to obtain export counseling and to develop master international

marketing plan before starting an export business.

Utilize Government and Association Resources for Export Counseling: It is also

important for new exporters to seek legal counsel. Hire a lawyer to help structure export

operations for the long run: lawyers are concerned with issues of compliance on both

ends of the transaction, therefore they are instrumental in helping to make sure that

recordkeeping system is planned correctly, that legal documents are structured correctly,

and to advise on broad range of compliance issues before the sale, during the sale, and

after the sale.

2. Insufficient commitment to overcome the initial difficulties and financial

requirements of exporting.

To be successful in exporting, firms have to establish an export department to which they

dedicate personnel and a budget, and for which they develop appropriate procedures,

preferably in consultation with a qualified trade lawyer.

3. Failure to have a solid agent and or distributors agreement.

Firms that intend to enter and to expand in exporting will likely need an agent or distributor at some point. Key considerations include:

Understanding the Role of Agents: The agents receive commission on their sales rather

than buying and selling for their own account. As agents do not own the products they

sell, the risk of loss remains with the company the agent represents (the principal).

Understanding the Role of Distributors: The key legal distinctions between an agent and

distributor are

A distributor takes title to the goods and accepts the risk of loss. A distributor

makes profits by reselling the goods.

Distributors cannot contractually bind the company producing the goods. Distributors establish the price and sales terms of the goods.

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The first and most important consideration when drafting an agreement is to ensure that

the agreement clearly states whether there is an agent or a distributor relationship. The

agreement should also clarify the terms and conditions for selling the products. For

example:

Determine whether the relationship is exclusive versus non-exclusive. Specify which geographic regions are to be covered.

Outline issues of payment and payment schedules for the products (in the case of

a distributor) and for payments of commissions (in the case of agents).

Determine the currency in which payments are to be made and address currency

fluctuation issues.

Provide specific provisions regarding renewal of the agreement, including specific parameters for performance, promotional activity and notice of desire to renew.

Establish a specific provision for termination of the agreement and terms for such

termination. (Some foreign countries restrict or prohibit termination without just

cause or compensation.)

Outline the termination process for the end of the agreement period. Provide for workable and acceptable dispute settlement clauses.

Assure that the agreement addresses whether or not intellectual property rights are

being licensed or reserved.

Do not allow, without sellers consent, the contract to be assigned to another party

(sub-agents or sub-distributors) to be used to fulfill obligations in the contract or

the contract to be transferred with a change of ownership or control over the

agent/distributor.

Assure that your contract complies with both domestic and foreign laws.

4. Blindly chasing orders from around the world

You may be in your office when suddenly and unexpectedly someone from a foreign

country contacts you electronically and wants to buy a line of your products. What do

you do next? Make sure the order is not on the denied list. Make sure the opportunity is a

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reasonable one and involves something that can reasonably be handled by the firm,

without spending countless hours researching the requirement.

Competitive considerations in checking out the market for the product: By reviewing

industry sector information, firms can obtain useful data to assess the probability that

they are investigating is real.

5. Failure to understand the connection between country risk and the probability of

getting export financing.

The best source of information about whether a country is in good standing with

Guarantee Corporation.

6. Failure to understand Intellectual Property Rights (IPR).

Intellectual property rights refer to the legal system that protects patents, trademarks,

copyrights, trade secrets. It is important for exporters to understand how and whether

intellectual property rights are protected in different countries.

7. Insufficient attention to marketing and advertising requirements.

Key considerations include :

Trade Shows and Trade Missions: Trade shows and missions may be in the virtual form

or entail traveling to the foreign country. For information on upcoming trade shows visit

the Internet Web site for Trade Show Central ( www.tsnn.com )or the Trade Show Center

(tradeshow.globalsources.com ) Web site which lists trade shows around the world.

Advertising: Exporters can advertise products or services in appropriate magazines ,

journals, trade catalogs etc.

Trade Show Pavilions: Many trade fairs, shows are organized all over the world for

garments, fabrics, accessories etc. Export promotion councils and corporations also

organize trade meets, buyer seller meet periodically.

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8. Lack of attention to product adaptation and preparation needs

The selection and preparation of a firms product for export requires not only knowledge

of the product, but also knowledge of the unique characteristics of each market being

targeted. Key considerations include

Product Adaptation to standards requirements: As tariff barriers (tariffs, duties, and

quotas) are eliminated around the world in accordance with the requirements of

participation in the World Trade Organization (WTO), other non-tariff barriers, such as

product standards, are proliferating. Exporters must understand conformity requirements

to operate on an international basis. The Bureau of Indian Standards, customs

departments of importing countries, internationally approved testing and inspecting

agencies provide information on conformity assessment procedures and standards.

Product Engineering and Redesign: The factors that may necessitate re-engineering or

redesign of products may include differences in electrical and measurement systems.

Branding, Labeling and Packaging: Cultural considerations and customs may influence

branding, labeling and package considerations.

Are certain colors used on labels and packages attractive or offensive?

Do labels have to be in the local language? Must each item be labeled individually?

Must each item be labeled individually? Are name brands important?

Warranties: In order to compete with competitors in the market, firms may have to

include warranties on their products.

9. Failure to obtain legal advice

While it is virtually impossible for any firm, no matter how big or small, to know all of

the laws that pertain to exporting as well as the relevant laws of importing countries,

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there are measures that can be taken by firms in the planning process to minimize the

probability that they will make unnecessary errors that have grave legal consequences.

10. Failure to understand export licensing requirements.

Businesses that are new to the export arena may confuse the local and state rules

regarding business taxes, zoning and other issues, i.e., legal registrations, with the federal

requirements governing export licenses. In order to export an item that may be on the

restricted list, an export license is required. This allows the federal government to control

the export of the goods. The license is not required for every item exported.

What is the item intended to export or re-export?

Where is it going? Who will receive it?

What will they do with it? What are the recipient's other activities?

Importance of a Business Plan for International Trade

Once decision is made to export it is important that overall business plan includes

provisions for international trade.

1. Make a list of potential competitors and make a tabulation of their principal products

or services. Determine the county of origin of each product or service. Determine the cost

of each product or service.

2. Evaluate own capabilities to compete with these products or services.

REGULATION OF INTERNATIONAL TRADETraditionally trade was regulated through bilateral treaties between two nations. For

centuries under the belief in mercantilism most nations had high tariffs and many

restrictions on international trade. Controversial multilateral treaties like the General

Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted

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to create a globally regulated trade structure. These trade agreements have often resulted

in protest and discontent with claims of unfair trade that is not mutually beneficial.

Free trade is usually most strongly supported by the most economically powerful nations,

though they often engage in selective protectionism for those industries which are

strategically important such as the protective tariffs applied to agriculture by the United

States and Europe. The Netherlands and the United Kingdom were both strong advocates

of free trade when they were economically dominant, today the United States, the United

Kingdom, Australia and Japan are its greatest proponents. However, many other countries

(such as India, China and Russia) are increasingly becoming advocates of free trade as

they become more economically powerful themselves. As tariff levels fall there is also an

increasing willingness to negotiate non tariff measures, including foreign direct

investment, procurement and trade facilitation. The latter looks at the transaction costassociated with meeting trade and customs procedures.

Traditionally agricultural interests are usually in favour of free trade while manufacturing

sectors often support protectionism. This has changed somewhat in recent years,

however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan,

are chiefly responsible for particular rules in the major international trade treaties which

allow for more protectionist measures in agriculture than for most other goods and

services. During recessions there is often strong domestic pressure to increase tariffs to

protect domestic industries.

The regulation of international trade is done through the World Trade Organization at the

global level, and through several other regional arrangements such as MERCOSUR in

South America, the North American Free Trade Agreement (NAFTA) between the

United States, Canada and Mexico, and the European Union between 27 independent

states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area

of the Americas (FTAA) failed largely because of opposition from the populations of

Latin American nations. Similar agreements such as the Multilateral Agreement on

Investment (MAI) have also failed in recent years.

RISK IN INTERNATIONAL TRADE

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Companies doing business across international borders face many of the same risks as

would normally be evident in strictly domestic transactions. For example,

Buyer insolvency (purchaser cannot pay);

Non-acceptance (buyer rejects goods as different from the agreed upon

specifications); Credit risk (allowing the buyer to take possession of goods prior

to payment);

Regulatory risk (e.g., a change in rules that prevents the transaction);

Intervention (governmental action to prevent a transaction being completed);

Political risk (change in leadership interfering with transactions or prices);

War and Natural calamities.

In addition, international trade also faces the risk of unfavorable exchange rate

movements (and, the potential benefit of favorable movements).

Do's and Don'ts

DO'S

1. Visit trade shows and trade missions.

2. Join an international trade association specializing in same business.

3. Personally visit offshore suppliers (or customers).

4. Take advantage of online resources.

5. Inspect and approve merchandise before it is shipped.

6. Consider hiring an international trade consultant.

7. Become personally familiar with all monetary transactions.

8. Use a trade lawyer for agent and distributor agreements and licensing

requirements.

9. To begin, start on a very small scale.

DON'TS

1. Investigate the potential opportunities and benefits of international trade.

2. Rely on a single source of supply (or customer).

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3. Have an understanding of intellectual property rights.

4. Have an understanding of import/export financing.

5. Learn how best competitors are handling international trade.

6. Provide dispute settlement provisions.

7. Make assumptions as to vendor's compliance with specifications.

8. Check out suppliers/customers before establishing relationship.

9. Rely on handshake agreements.

10. Rely solely on others including employees for importing/exporting expertise.

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