INTERNATIONAL TRADE (EUEB4E)

Department of Trade and Finance

Faculty of Economics and Management

Lecturer: Ing. Petra Šánová, Ph.D./Herbert P. Ricardo Ph.D.

Teaching period: academic year 2015/2016 (autumn semester)

Type subject: Masters

ECTS credit: 5.0

Assessment: written and oral

Marking scale: 4-point scale

Contact hours: 36

Prerequisites: none

Objective and general description:

The course focuses on teaching international business environment in terms of legal, foreign exchange, corporate and global relations. It introduces students to the basic principles of international trade from a position of export subsidies by domestic exporters to the EU and third countries. The course includes analysis of the risk of international trade transactions.

Lectures:1. International trade - characterisation and terminology. International and world business structures2. Operations in an international trade.3. Export and import (rendu) price calculation. Price in an international trade. Construction of price4. Tariff provision. Integraded tariff of the Czech Republic and EU.5. Licence procedure and other not tariff measures6. Payment tools in an international trade.7. Trade parity and an insurance.8. International transport.9. Trade negotiations with foreign partners.10. Risks in international trade.11. International and global business structure communities.12. Globalization of international trade

Seminars:1. Terminology used in international trade. Prices calculation for export and import operations - models2. Exporting and importing procedure - models.3. Customs declaration. Customs régimes.4. Risks in international business relations.5. Insurance in an international trade.6. Support of Czech exporters.

GENERAL ECONOMICS- International Economics

1 . W h a t i s W o r l d T r a d e ? A n O v e r v i e w

W h a t i s t h e W T O ?

WTO is short for the World Trade Organization

The WTO is the only international body dealing with the rules of trade between nations. Membership is voluntary and is composed of the governments of sovereign nations and autonomous trade/tariff districts. The WTO has nearly 150 member nations, who together represent over 97% of global trade. Over 30 additional countries are negotiating membership.

Headquartered in Geneva, Switzerland, the WTO is completely separate from the United Nations. Known initially as GATT, it grew up as an informal organization supporting the 1947 GATT treaty. The WTO was not formally established until January 1, 1995 as part of the GATT 1994 revision.

The WTO provides the framework for member governments to negotiate trade agreements and resolve trade disputes. Trade agreements have the status of international treaties. They are negotiated by consensus and signed by ministerial-level representatives of member governments, but they do not enter into force until ratified by two-thirds of the national legislatures (parliaments) of member nations.

The scope of trade agreements has expanded over the years. Initially focused on agricultural products and manufactured goods, WTO treaties now cover services and intellectual property:

General Agreements on Tariffs and Trade (GATT), the initial treaty, was first adopted in 1947 and substantially revised in 1994.

General Agreement on Trade in Services (GATS) entered into force January 1995 and covers banking, insurance, telecommunications, transport, travel and hotels.

Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPs) also entered into force January 1995 and covers copyrights, patents, trademarks, industrial designs, integrated circuit layout and trade secrets.

Barriers to trade are mechanisms devised by national governments to give their domestic producers an advantage in their home markets over imports from other nations. Three principal types of barriers to trade have been recognized by WTO agreements:

Tariffs (customs duties) are a governmental tax levied on imported goods or services that is not assessed against similar goods or services produced within the country. Lowering tariff levels on imports remains a substantial area of concern, especially among developing nations.

"Dumping" refers to the practice of selling exported goods below-cost with the aid of government

subsidies. Because this tends to drive the importing nation's own producers out of business, "anti-dumping" agreements are a contentious issue.Technical barriers to trade are overly-restrictive government mandates posing as technical specifications for safety or the protection of human health and the environmental, but whose real intent is to restrict access to domestic markets.

The WTO serves as a sort of clearinghouse for proposed environmental and safety regulations because the Agreement on Technical Barriers to Trade (TBT) requires national governments to notify the WTO Secretariat whenever their proposed technical regulations or conformity assessment procedures are not based upon international standards.

This summary of the World Trade Organization is designed to provide you with an accurate, easy-to-understand overview of the topic and does not constitute legal advice. The actual standard in the original language should be reviewed and used for all business, legal, and product compliance purposes.

http://www.rsjtechnical.com/WhatisWTO.htm

2. Labor Productivity; The Competitive Advantage of Nations

National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economics insists.

A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.

In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. There are striking differences in the patterns of competitiveness in every country; no nation can or will be competitive in every or even most industries. Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic, and challenging.

These conclusions, the product of a four-year study of the patterns of competitive success in ten leading trading nations, contradict the conventional wisdom that guides the thinking of many companies and national governments—and that is pervasive today in the United States. (For more about the study, see the insert “Patterns of National Competitive Success.”) According to prevailing thinking, labor costs, interest rates, exchange rates, and economies of scale are the most potent determinants of competitiveness. In companies, the words of the day are merger, alliance, strategic partnerships, collaboration, and supranational globalization. Managers are pressing for more government support for particular industries. Among governments, there is a growing tendency to experiment with various policies intended to promote national competitiveness—from efforts to manage exchange rates to new

measures to manage trade to policies to relax antitrust—which usually end up only under mining it. (See the insert “What Is National Competitiveness?”)

Patterns of National Competitive Success by: Michael E. Porter What Is National Competitiveness? by: Michael E. Porter

These approaches, now much in favor in both companies and governments, are flawed. They fundamentally misperceive the true sources of competitive advantage. Pursuing them, with all their short-term appeal, will virtually guarantee that the United States—or any other advanced nation—never achieves real and sustainable competitive advantage.

We need a new perspective and new tools—an approach to competitiveness that grows directly out of an analysis of internationally successful industries, without regard for traditional ideology or current intellectual fashion. We need to know, very simply, what works and why. Then we need to apply it.

How Companies Succeed in International Markets

Around the world, companies that have achieved international leadership employ strategies that differ from each other in every respect. But while every successful company will employ its own particular strategy, the underlying mode of operation—the character and trajectory of all successful companies—is fundamentally the same.

Companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies and new ways of doing things. They perceive a new basis for competing or find better means for competing in old ways. Innovation can be manifested in a new product design, a new production process, a new marketing approach, or a new way of conducting training. Much innovation is mundane and incremental, depending more on a cumulation of small insights and advances than on a single, major technological breakthrough. It often involves ideas that are not even “new”—ideas that have been around, but never vigorously pursued. It always involves investments in skill and knowledge, as well as in physical assets and brand reputations.

http://hbr.org/1990/03/the-competitive-advantage-of-nations/ar/1

How the Specialization of Labor Can Lead to Increased Productivity

Industrial workers often have highly specialized jobs.

Related Articles

Specialization of Labor Ways to Improve Labor and Productivity How to Estimate Labor Productivity What Is Productivity of Labor? How to Set Goals for Productivity in the Workplace The Labor Productivity Ratio

Labor specialization is one of the key features of modern economic systems, enabling factories and other business operations to produce goods on a global scale and to increase productivity. Labor specialization, also known as division of labor, was first recognized by Adam Smith in his classic economics text "Wealth of Nations" and helped spur the Industrial Revolution and the technology-driven world in which we live.

www.biworldwide.com

Division of Labor

Labor specialization is known by economists as the division of labor. It refers to the practice of splitting a job into discrete tasks and assigning each task to a specific worker. For example, no worker in a modern car factory makes an entire car from start to finish. Instead, some workers specialize in painting, others in frame assembly, while other workers install seats or dashboards. There are hundreds of specific tasks involved in manufacturing a car, and each task is assigned to an individual worker.

Wealth of Nations

Adam Smith coined the phrase division of labor in his classic economic study "Wealth of Nations," published in 1776. In fact, the first chapter of the book is titled "Of the Division of Labor" and is central to Smith's ideas. He used an example of a factory manufacturing pins to describe how dividing the pin-making process into individual steps, and training workers to perform each step, greatly increased the overall productivity of the factory.

Related Reading: Differences Between the Marginal Product of Labor & the Marginal Value of Labor

Productivity

Productivity is a measure of economic output relative to the amount of labor involved. For example, if a factory can make 100 cars every day and then finds a way to increase production to 110 cars per hour without needing more workers or longer shifts, it has increased its productivity. By the same token, if the factory only makes 90 cars in one week, its productivity has decreased for that week.

Labor Specialization and Productivity

Having workers perform specialized labor tasks is one of the factors that can lead to increased productivity. Division of labor can lead to a large increase in efficiency for two key reasons. Allocational efficiency makes the best use of a particular worker's skill. For example, a worker who is good with numbers can do a better job on inventory control than one who is not. Technical efficiency arises from a division of labor by reducing the transition time between tasks. A worker who completes painting a car, for example, does not then have to put down his painting tools and pick up the tools needed to assemble the car, as that job goes to a different worker.

http://smallbusiness.chron.com/specialization-labor-can-lead-increased-productivity-12347.html

3. Income Distribution Resources and Comparative Advantages Branko Milanovic : "Income inequalities between the populations of the world have decreased since the early 2000s"

Income inequalities have decreased in the world since the early 2000s, but they still are at a high level. Branko Milanovic is chief-economist at the World Bank and member of the scientific council of Inequality Watch. He is known for his work on inequalities in the world. His recent publications include The Haves and the Have-Nots. A Brief and Idiosyncratic History of Global Inequality (Nova Iorque, Basic Books, 2011) and Worlds Apart: Measuring International and Global inequality (Princeton, Princeton University Press, 2005). Interview conducted by Cédric Rio and translated in English by Rita Stadtfeld.

What has been the evolution of income inequalities in the world?

In order to answer this question in a simple way, it is necessary to address the income disparities between populations of each country. The worldwide income inequalities are higher today than in the time of the Industrial Revolution, in the middle of the 19th century. This rise of inequalities does not reflect the impoverishment of the poorest countries and populations, but the increased enrichment of the richest countries and populations.

However, a changing trend can be observed since some years: the inequalities between the populations of the world are not growing anymore since the end of the 1980s and are decreasing since the 2000s. This recent evolution is the result of a greater enrichment of developing countries than of the richest countries. In other words, the growth rates of rich countries are lower than those of developing countries. And when considering the current growth rates, one can expect an even greater decrease of income inequalities in the coming years.

Does then the current economic crisis, by which mainly rich countries are affected, lead to a decrease of inequalities between countries?

The weakening of the growth rates in the richest countries and, in parallel, the improvement of the growth rates in developing countries, results automatically in a reduction of income inequalities on the global scale.

We, the citizens of rich countries, have the tendency to worry more about the disparities and social difficulties encountered within our own countries, totally omitting the worldwide inequalities. With the crisis and the significant rise of unemployment, this phenomenon is of course further exacerbated. This preoccupation is logical, because the people are directly concerned and we are always induced to first think on a national level before doing so on a global level. But when it comes to global distribution, this is not reasonable: the fact itself of being born in a rich country is enough to guarantee a level of income way higher than most of the population worldwide. For example, the poorest in the United Stated are part of the 30 % richest of the world… Being a citizen of a rich country protects from difficulties issued by the worldwide income inequalities.

Is the level of inequality in the world rather explained by the disparities between countries or by the different living standards within the countries?

Income inequalities between individuals within each country have an impact on the level of inequalities worldwide. If inequalities rise, which is notably the case in rich countries or for example in China, this will of course restrain the reduction of inequalities observed between national populations.

Income inequalities between populations of different countries, however, have a greater impact on the distribution of income worldwide than the disparities observed within the countries. The global inequalities are a lot higher than those within any country of the world, including Brazil or South Africa, two countries with very high levels of inequality. By way of comparison, the Gini-coefficient [1] of the world is estimated at 0.70 [2], while the one of a country like Brazil is below 0.60. The birth country of persons – which I call “location” – has a lot more impact on the income level of a person than the social position – which I call “class” – assumed by that person.

This constitutes a substantial reversal of what can be said about the time of the Industrial Revolution: on the long term, the rise of inequalities in the world was accompanied by a change in the composition of these inequalities. At the end of the 19th century, social class was more determining than the birth country to explain the level of income inequalities in the world. This is why one could have thought, as did the economist Karl Marx that the income distribution in the world reflects in a way a class struggle.This can no longer be said today.

What is the best way to fight against worldwide income inequalities?

First of all, the idea of a global redistribution of wealth is utopian. There is no willingness among the western population to take such an effort of redistribution, even though development aid, the partial transfer of wealth from rich countries towards poor countries, has never been as high as today.

To the contrary, I think that growth is necessary to reduce inequalities: on the basis of the conclusion that the global inequalities illustrate mainly a gap between the populations of rich countries and poor countries, the best thing to happen would be if the poorest countries were getting richer faster than the richest countries. Another key component, just as important, would be to facilitate immigration in rich countries. We must somehow change our understanding of development. Above all it is a process of enrichment. But development is also eased by the migration of poor people towards rich countries. The result, concerning the elimination of poverty and inequality on the global scale, would be the same. Politically speaking migration, of course, brings about more problems, but that is a different subject.

http://www.inequalitywatch.eu/spip.php?article101&id_mot=21

4. The Standard Trade Model. Krugman’s Alternative Theory of Trade

To many young economics students, Paul Krugman’s legacy is defined, in large part, by his blog. If you have not had a chance to read his academic work, your view of him is going to be based on Krugman the pundit and Krugman the economist who advocates for fiscal stimulus, the minimum wage — an economist who is turning towards Old Keynesian, or Post Keynesianism, whatever the differences may be. But, modern Krugman is probably not what will be remembered within 15–30 years. Rather, what he is known for by economists, and what he will be known for in the future, is his work in trade and international monetary theory (specifically, exchange rates and capital flows). This is what he won the Nobel Memorial Prize for, in 2008. Krugman introduced a formal model of a new trade theory, an alternative to the theory of comparative advantage.

This post is an attempt to communicate the core of Krugman’s theory, for the layman. I will rely mainly on three of Krugman’s original articles on the subject: Krugman (1979), Krugman (1980), and Krugman (1981). There is also Krugman (1985), but the three earlier papers are shorter and go straight to the point, so I recommend interested readers to read those.1 I am also using my favorite textbook, Krugman, Obstfeld, and Melitz, International Economics.

Prior to the 1980s, most trade theorists thought about international trade within the Ricardian framework of comparative advantage. The theory states that, assuming heterogeneous agents and opportunity costs, a person can specialize in producing the good of lowest opportunity cost to them and trade for other products (produced by other people) and be better off than if there were no trade at all, and each person manufactured everything they want on their own. If someone else can make you t-shirts at a lesser opportunity cost than you, you can buy the t-shirt at that cost, and use your own time towards something more productive. You specialize in products others’ demand, which you can sell to them at at least the cost of production — and your relative costs are the lowest, so that is where your competitive advantage is.2

Ricardian trade theory continued to be developed throughout the 19th and 20th centuries, and one of the directions later economists took Ricardian trade theory in is worth mentioning. In the early 20th century, trade theorists began working towards what is now known as the Heckscher–Ohlin theory. Ohlin would go on to win the Nobel Memorial Prize, in 1977. The main insight the model gives is that countries will tend to specialize in goods that are relatively intensive in the inputs (factors of production) that country is relatively abundant in. Thus, the model looks at differences in factor endowments as a cause of international trade. If the U.S. is relatively abundant in capital and Mexico is relatively abundant in labor, it means that the ratio of labor to capital is lower in the U.S. than it is in Mexico. If labor is cheaper in Mexico, Mexican industry is likely to use a greater labor to capital ratio in their production than U.S. industry. Mexico will also tend to produce more of their labor-intensive goods, because labor is relatively inexpensive (to capital). The U.S. will export capital-intensive goods to Mexico, and Mexico labor-intensive goods to the U.S.

But, there are empirical problems to Ricardian trade theory,

Against the predictions of the Heckscher–Ohlin theory, Wassily Leontief, in a 1953 article, published data showing that U.S. exports are less capital-intensive than its imports.

Other evidence shows that the degree to which countries specialize is exaggerated in the models, and that intra-trade industry makes up a significant chunk of international exchange that is not accounted for by standard, Ricardian, trade theory.

After the Second World War, and before the 1990s, it was found that growth in international trade was not leading to the distributional changes that Ricardian theory predicts. In fact, trade was found to be, in large part, neutral to income distribution.

Economists had been toying around with the relationship between economies of scale and trade, but it wasn’t until Krugman that we had a simple formal model. Krugman also took the original insights and developed them further. He did all this by focusing on internal returns to scale, and by adopting a recent modelling innovation in Dixit and Stiglitz (1977), making it easier to model monopolistic competition.

Assuming a situation where are all agents have identical comparative costs, technologies, and tastes, and there is only one factor, there are none of the standard reasons for trade. But, we assume that there are internal economies of scale. Internal economies of scale occur as long as the average cost per unit of output falls as total output increases. The easiest reasons to cite for internal economies are high fixed costs, where more output allows the firm to spread this fixed cost. If there are internal economies of scale, markets are not perfectly competitive. Instead, there will be less firms, and each firm will produce more. Each firm will also have an incentive to differentiate their product from those of their competitors — if they are close/imperfect substitutes —, to compete for profits. The total number of firms can be said to be determined by average cost and price. As long as price is higher than average cost, it might pay for new firms to enter the market to compete; but, when price equals average cost, profits won’t be high enough for new firms to recover their fixed cost investment.

The size of an economy matters for its well-being. All else equal, larger economies — economies with more people — are wealthier. This is because larger economies will have higher demand, will have more inputs, and therefore more output. More output allows firms to exploit greater internal economies of scale, which in turn lowers average cost. Prices fall, real wages increase, the number of firms will increase, and therefore product diversity will increase (the italicized consequences are welfare-enhancing).

International trade creates similar benefits as population growth. If trade between, say, the U.S. and China suddenly emerged, the market each firm faces would grow. There will be less total firms (if the two countries were isolated, the sum of their firms would be greater than the total number of firms in an integrated market), and each surviving firm would produce more, but all consumers in both countries would be able to buy from a greater range of firms. That is, the diversity of the products offer would increase. The price per unit would also fall, because of the exploitation of further internal economies of scale. Thus, even if none of the standard reasons for trade (comparative advantage) existed, trade would still occur, to exploit the benefits of internal economies of scale.

One implication is that if there are barriers to trade, factors of production will tend to move to countries where there are economies of scale in industries relatively intensive in a given factor (input). For example, if we assume that the only factor is labor, barriers to trade would induce foreign labor to move to the country with the largest market. Remember, larger markets mean more product diversity and higher real wages, both of which are incentives to immigrants. As immigrants arrive, the market grows further, and real wages and product diversity will increase. Sending states, in turn, become poorer, as product diversity and real wages fall.

Countries will, all else equal, export the goods where domestic demand is highest. It will behoove firms to localize production in markets where demand for that type of product is highest. This is because these firms will be able to exploit greater internal economies of scale than anywhere else. Thus, under conditions of internal economies, countries will tend to export the good they produce more of. In a world of no transaction costs, differences in local demand for a product will induce the country with the greatest internal economies to specialize in that product. In a world of transaction costs — where there are added costs to trade —, specialization will be more limited, because these costs reduce the profitability of exporting. Also, the extent of internal economies will also decide the extent of specialization; the less the opportunities for internal economies, the less a country will specialize in a type of good. Thus, with costs to trade and limits to economies of scale, what we expect is intra-industry trade, as each country produces multiple types of good and trade these between each other, even goods of the same type. But, generally speaking, the country with the larger home market for a given good will be a net exporter of that good, because of economies of scale (and out of interest in minimizing transaction costs).

Finally, the type of trade between two nations has much to do with differences in factor endowments (the type of inputs which are relatively abundant). If two countries are similarly endowed, then trade will tend to be of the intra-industry type. As factor endowments become more unique, the type of trade predicted by the Heckscher–Ohlin model will prevail. The implications for changes in the distribution of income as a result of trade is that if endowments are the same, trade is Pareto optimal. If factor endowments differ, how much they differ will decide relative gains from trade and changes in income distribution. Namely, the more unique a country’s factor endowment, the more the relatively scarce factor will lose from trade and the relatively abundant factor will gain. The scarce factor loses, because with international trade, the price of that product in that country falls (as it faces competition from foreign producers, who have lower costs, because they are in countries that have a relative abundance in that factor). Whether trade is Pareto optimal depends on whether the welfare increase from product differentiation is large enough to make up for the relative loss of income for the scarce factor.

The internal economies of scale argument Krugman formalized allows economists to explain aspects of international trade that were previously not explainable by Ricardian comparative advantage. If there are internal economies of scale — firms are monopolistically competitive —, markets will be supplied by a certain quantity of firms (less than the number in perfectly competitive markets), each producing a greater amount of output than its perfectly competitive analogue. In these cases, even if there are no differences in relative costs, tastes, or technology, there will be gains from trade in the form of lower prices and greater product diversity. Whereas standard Ricardian theory applies when there are differences between agents, economies of scale explain trade when agents are similar. It is an alternative approach to the theories of the division of labor and trade.

All economists borrow from their predecessors and their peers, so Krugman’s theory is by no means entirely original to him. In fact, he cites a number of trade theorists who dabbled with economies of scale prior to him: Herbert Grubel, Bertil Ohlin, Irving Kravis, Bela Balassa, et cetera. But, Krugman was able to formalize the theory in a relatively simple model (more simple than alternative approaches to trade with economies of scale). This allowed him to explore the implications of internal economies in greater detail, and with much more precision. This allowed him to persuade the majority of his peers, whereas previously Ricardian theory had continued to dominate alternatives. This is what rightfully earned Krugman his Nobel Memorial Prize.

http://www.economicthought.net/blog/2014/03/krugmans-alternative-theory-on-trade/

5. Economies of scale and scope

Economies of scale

Economies of scale are factors that cause the average cost of producing something to fall as the volume of its output increases. Hence it might cost $3,000 to produce 100 copies of a magazine but only $4,000 to produce 1,000 copies. The average cost in this case has fallen from $30 to $4 a copy because the main elements of cost in producing a magazine (editorial and design) are unrelated to the number of magazines produced.

Economies of scale were the main drivers of corporate gigantism in the 20th century. They were fundamental to Henry Ford's revolutionary assembly line, and they continue to be the spur to many mergers and acquisitions today.

There are two types of economies of scale:

• Internal. These are cost savings that accrue to a firm regardless of the industry, market or environment in which it operates.

• External. These are economies that benefit a firm because of the way in which its industry is organised.

Internal economies of scale arise in a number of areas. For example, it is easier for large firms to carry the overheads of sophisticated research and development (R&D). In the pharmaceuticals industry R&D is crucial. Yet the cost of discovering the next blockbuster drug is enormous and increasing. Several of the mergers between pharmaceuticals companies in recent years have been driven by the companies' desire to spread their R&D expenditure across a greater volume of sales.

Economies of scale, however, have a dark side, called diseconomies of scale. The larger an organisation becomes in order to reap economies of scale, the more complex it has to be to manage and run such scale. This complexity incurs a cost, and eventually this cost may come to outweigh the savings gained from greater scale. In other words, economies of scale cannot be gleaned for ever.

Frederick Herzberg, a distinguished professor of management, suggested a reason why companies should not aim blindly for economies of scale:

Numbers numb our feelings for what is being counted and lead to adoration of the economies of scale. Passion is in feeling the quality of experience, not in trying to measure it.

T. Boone Pickens, a geologist turned oil magnate turned corporate raider, wrote about diseconomies of scale in his 1987 autobiography:

It's unusual to find a large corporation that's efficient. I know about economies of scale and all the other advantages that are supposed to come with size. But when you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work.

Economies of scope

First cousins to economies of scale are economies of scope, factors that make it cheaper to produce a range of products together than to produce each one of them on its own. Such economies can come from businesses sharing centralised functions, such as finance or marketing. Or they can come from interrelationships elsewhere in the business process, such as cross-selling one product alongside another, or using the outputs of one business as the inputs of another.

Just as the theory of economies of scale has been the underpinning for all sorts of corporate behaviour, from mass production to mergers and acquisitions, so the idea of economies of scope has been the underpinning for other sorts of corporate behaviour, particularly diversification.

The desire to garner economies of scope was the driving force behind the vast international conglomerates built up in the 1970s and 1980s, including BTR and Hanson in the UK and ITT in the United States. The logic behind these amalgamations lay mostly in the scope for the companies to leverage their financial skills across a diversified range of industries.

A number of conglomerates put together in the 1990s relied on cross-selling, thus reaping economies of scope by using the same people and systems to market many different products. The combination of Travelers Group and Citicorp in 1998, for instance, was based on the logic of selling the financial products of the one by using the sales teams of the other.

http://www.economist.com/node/12446567

6. International factor movements

In international economics, international factor movements are movements of labor, capital, and other factors of production between countries. International factor movements occur in three ways: immigration/emigration, capital transfers through international borrowing and lending, and foreign direct investment.[1] International factor movements also raise political and social issues not present in trade in goods and services. Nations frequently restrict immigration, capital flows, and foreign direct investment.

Substitutability of factors and commodities

Trade in goods and services can to some extent be considered a substitute for factor movements. In the absence of trade barriers, even when factors are not mobile, there is a tendency toward factor price equalization. In the absence of barriers to factor mobility, commodity prices will move toward equalization, even if commodities may not freely move. However, complete substitution between factors of production and commodities is only theoretical, and will only be fully realized under the economic model called the Heckscher-Ohlin model, or the 2x2x2 model, wherein there are two-

countries, two-commodities, and two factors of production. While the assumptions of that model are unlikely to hold true in reality, the model is still informative as to how prices of factors and commodities react as trade barriers are erected or removed.[2]

International labor mobility

International labor migration is a key feature of our international economy.[3] For example, many industries in the United States are heavily dependent on legal and illegal labor from Mexico and the Caribbean.[3] Middle Eastern economic development has been fueled by laborers from South Asian countries, and several European countries have had formal guest-worker programs in place for years. [3] The United Nations estimated that more than 175 million people, roughly 3 percent of the world’s population, live in a country other than where they were born.[4]

International labor mobility is a politically contentious subject, particularly when considering the illegal movements of people across international borders to seek work. For example, a number of European countries saw the rise in the 1990s of a number of anti-immigrant political parties such as the National Front in France, the National Alliance in Italy, and the Republikaner in Germany. [5] The subject is equally contentious among academics who have espoused numerous theories for the effects of immigration, both illegal and legal, on foreign and domestic economies. Traditional international economic theory maintains that reducing barriers to labor mobility results in the equalization of wages across countries. [1]

http://en.wikipedia.org/wiki/International_factor_movements

7. Trade Policy Instruments and its effects

T r a d e p o l i c i e s c o m e i n m a n y v a r i e ti e s . G e n e r a l l y t h e y c o n s i s t o f t a x e s o r s u b s i d i e s , quantitative restrictions or encouragements, on either imported or exported goods, services and assets. In this section we describe many of the policies that countries have implemented or have proposed implementing. The purpose of this section is not to explain the likely effects of each policy, but rather to define and describe the use of each policy.

Tariffs Import Quotas Voluntary Export Restraints (VERs) Export Taxes Export Subsidies Voluntary Import Expansions (VIEs) Other Trade Policies

TariffsAn import tariff is a tax collected on imported goods. Generally speaking, a tariff is any tax or fee collected by a government. However, the term is much more commonly applied to a tax on imported goods. There are two basic ways in which tariffs may be levied: specific tariffs and ad valorem tariffs. A specific tariff is levied as a fixed charge per unit of imports. An ad v a l o r e m t a r i ff i s l e v i e d a s a fi x e d p e r c e n t a g e o f t h e v a l u e o f t h e c o m m o d i t y i m p o r t e d . " A d valorem" is Latin for "on value" or "in proportion to the value."

Import QuotasI m p o r t q u o t a s a r e l i m i t a ti o n s o n t h e q u a n ti t y o f g o o d s t h a t c a n b e i m p o r t e d i n t o t h e country during a specified period of time. An import quota is typically set below the free trade level of imports. In this case it is called a binding quota. If a quota is set at or above the free trade level of imports then it is referred to as a non-binding quota. Goods that are illegal within a country effectively have a quota set equal to zero. Thus many countries have a zero quota on narcotics and other illicit drugs. There are two basic types of quotas: absolute quotas and tariff-rate quotas. Absolute q u o t a s l i m i t t h e q u a n ti t y o f i m p o r t s t o a s p e c i fi e d l e v e l d u r i n g a s p e c i fi e d p e r i o d o f ti m e . Sometimes these quotas are set globally and thus affect all imports while sometimes they are set only against specified countries. Absolute quotas are generally administered on a first-come first-served basis. For this reason, many quotas are filled shortly after the opening of the quota period. Tariff-rate quotas allow a specified quantity of goods to be imported at a reduced tariff rate during the specified quota period.

Voluntary Export Restraints (VERs)A voluntary export restraint is a restriction set by a government on the quantity of goods that can be exported out of a country during a specified period of time. Often the word voluntary is placed in quotes because these restraints are typically implemented upon the insistence of the importing nations.Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer. Thus VERs are rarely completely voluntary. Also, VERs are typically implemented on a bilateral basis, that is, on exports from one exporter to one importing country.

Export TaxesAn export tax is a tax collected on exported goods. As with tariffs, export taxes can be set on a specific or an ad valorem basis. In the US, export taxes are unconstitutional since the US constitution contains a clause prohibiting their use. This was imposed due to the concerns of Southern cotton producers who exported much of their product to England and France. However, many other countries employ export taxes. For example, Indonesia applies taxes on palm oil exports; Madagascar applies them on vanilla, coffee, pepper and cloves; Russia uses export taxes on petroleum, while Brazil imposed a 40% export tax on sugar in 1996. In December 1995 the EU imposed a $32 per ton export tax on wheat.

Export SubsidiesE x p o r t s u b s i d i e s a r e p a y m e n t s m a d e b y t h e g o v e r n m e n t t o e n c o u r a g e t h e e x p o r t o f specified products. As with taxes, subsidies can be levied on a specific or ad valorem basis. The m o s t c o m m o n p r o d u c t g r o u p s w h e r e e x p o r t s u b s i d i e s a r e a p p l i e d a r e a g r i c u l t u r a l a n d d a i r y products.

Voluntary Import Expansions (VIEs)A Voluntary Import Expansion (VIE) is an agreement to increase the quantity of imports of a product over a specified period of time. In the late 1980s, VIEs were suggested by the US as a w a y o f e x p a n d i n g U S e x p o r t s i n t o J a p a n e s e m a r k e t s . U n d e r t h e a s s u m p ti o n t h a t J a p a n maintained barriers to trade that restricted the entry of US exports, Japan was asked to increase its volume of imports on specified products including semiconductors, automobiles, auto parts, medical equipment and flat glass. The intention was that VIEs would force a pattern of trade that more closely replicated the free trade level.

Other Trade Policy ToolsGovernment Procurement Policies A Government Procurement Policy requires that a specified percentage of purchases by the federal or state governments be made from domestic firms rather than foreign firms.Health and Safety Standards The U.S. generally has more regulations than other countries governing the use of some goods, such as pharmaceuticals. These regulations can have an effect upon trade patterns even though the policies are not designed based on their effects on trade.

Red-Tape Barriers Red-tape barriers refers to costly administrative procedures required for the importation of foreign goods. Red-tape barriers can take many forms. France once required that video cassette recorders enter the country through one small port facility in the south of France.

http://www.scribd.com/doc/19009513/Trade-Policy-Instruments-and-Its-Effects

Basics of Exporting - Pricing, Quotations, Payment & Collections

Pricing

To establish an overseas price, you need to consider many of the same factors involved in pricing for the domestic market. These factors include competition; costs such as production, packaging, transportation and handling, promotion and selling expenses; the demand for your product or service and the maximum price that the market is willing to pay.

There are three common methods of pricing exports:

Domestic Pricing is a common but not necessarily accurate method of pricing exports. This type of pricing uses the domestic price of the product or service as a base and adds export costs, including packaging, shipping and insurance. Because the domestic price already includes an allocation of domestic marketing costs, prices determined using the method might be too high to be competitive.

Incremental cost pricing determines a basic unit cost that takes into account the costs of producing and selling products for export, and then adds a markup to arrive at the desired profit margin. To determine a price using this method, first establish the "export base cost" by stripping profit markup and the cost of domestic selling. In addition to the base cost, include genuine export expenses (export overheads, special packing, shipping, port charges, insurance, overseas commissions, and allowance for sales promotion and advertising) and the unit price necessary to yield the desired profit margin.

Cost modification involves reducing the quality of an item by using cheaper materials, simplifying the product or modifying your marketing program, which lowers the price.

In addition, consider your company's objectives and the price sensitivity and uniqueness of your product. A Price Determination Worksheet has been included in Appendix H in order to aid you in calculating the proper export price of your product.

Quotation

In international trade, an export quotation includes the price and all of the principal conditions of a possible sale. Basically, the quotation describes a product, its price, payment terms, delivery period and the place of delivery. Many times it is advantageous to include gross and net shipping weight in this description. With this information, the buyer can make inland forwarding plans, and many times this measurement is helpful in the determination of import duties at the foreign port.

The most common method of providing a sales quotation is the "pro forma" invoice. A pro forma invoice is not used as a form of prepayment, but rather to further describe products, price, payment terms, and

delivery information so the buyer can arrange funds. Many banks provide their customers with a checklist for preparing this information.

A pro forma invoice should include a statement certifying that the pro forma invoice is true and correct and a statement naming the country of origin of the goods. Also, the invoice should be conspicuously marked "pro forma invoice." It is good business practice to include a pro forma invoice with any international quotation, whether it has been requested or not. A Sample Pro Forma Invoice can be found in Appendix I and a detailed explanation of the terms involved can be found in the Export Documents section of this book. We have also included a Glossary of Exporting Terms in Appendix C of this publication for your reference.

Generally, price quotations should state explicitly that they are subject to change without notice. If a specific price has been agreed upon or guaranteed by the exporter, the precise period during which the offer remains valid should be specified in the pro forma invoice.

Terms of Sale

Since an entirely different set of terms is used in international trade, the buyer and the seller must have a common understanding of the terms of sale. Based upon the quoted terms of sale, your responsibility for insurance coverage will be clarified in terms called Incoterms®. These Incoterms® are used universally to determine who pays for what and when the responsibility for goods transfers from the seller to the buyer. Information on new terms can be obtained from the International Chamber of Commerce at www.iccwbo.org/incoterms and other sources. Of note, Incoterms® are reviewed and modified every 10 years. Buyer and seller should not only use Incoterms® but should also ensure that they are using the same year. The following are descriptions of some of the most common terms and definitions used in international trade:

CFR (Cost and Freight) — Seller quotes a price for the cost of goods, which includes the cost of inland and overseas transportation from the point of origin to port of debarkation. If additional charges outside of the agreed freight charges are charged, they fall to the account of the buyer. Insurance is the responsibility of the buyer. For example, you will see this as "CFR Lagos, Nigeria." This basically means that your quotation will show the costs involved in landing the goods at the port of Lagos, Nigeria.

CIF (Cost, Insurance,and Freight) — Seller quotes a price for the costs of the goods, insurance, inland and overseas transportation as well as the miscellaneous charges from the point of origin to a named port of debarkation of a vessel or aircraft.

FOB (Free on Board) — Seller quotes a price for the cost of goods which includes the cost of loading that good into trucks, rail cars, barges or vessels at a designated point. The buyer assumes responsibility for ocean transportation and insurance.

FAS (Free alongside ship at designated port of export) — Seller quotes a price for the cost of goods which includes the charge for delivery of the goods alongside a vessel at the designated port. The seller is also responsible for the unloading and wharf fees. Loading aboard the vessel, ocean transportation, and ocean cargo insurance are the responsibility of the buyer.

EXW (EX Works named point of origin) — Price quoted applies only at the point of origin and the seller agrees to place the goods at the disposal of the buyer at a specified place on a certain date or within a fixed period. All other charges are the responsibility of the buyer. Many times this term is seen in forms such as EXW Factory or EXW Warehouse. Most often EXW is used to indicate that title transfers at the seller's loading dock, and that all responsibility for the goods then belongs to the buyer.

Using Terms of Sale in a QuotationWhen quoting a price, the exporter should make it meaningful to the prospective buyer. For example, a price for industrial machinery quoted "FOB Columbia, MD, not export packed" would be meaningless because most prospective buyers would have difficulty determining the total costs. Therefore, they would be hesitant to place an order.

For this reason, it is advisable to quote CIF whenever possible because it is easily understood by your prospective customer. A freight forwarder can help you determine a CIF price. However, some countries will not permit quotes in CIF.

Methods of Payment

There are various methods of receiving payment for your exports. These methods include payment in advance, letters of credit, documentary drafts and open account.

Payment in advance. This method is most desirable from the seller's standpoint because all risk is eliminated. While cash in advance may seem most advantageous to you, insisting on these terms may cost you sales. Just like domestic buyers, foreign buyers prefer greater security and better cash utilization. Some buyers may also find this requirement insulting, especially if they are considered credit-worthy in the eyes of the rest of the world. Advance payments and progressive payments may be more acceptable to a buyer, but even these terms can result in a loss of sales in a highly competitive market.

Letters of credit. A letter of credit (LC) is a payment method, which substitutes the credit-worthiness of a bank for that of a buyer. Thus, the importer, or buyer, applies to a bank for the LC. An irrevocable LC cannot be changed without the expressed permission of the exporter. If an irrevocable letter is confirmed by a U.S. bank, it virtually eliminates the foreign credit risk of an export sale. In part, a letter of credit also protects the buyer, because a bank cannot pay the exporter until the exporter presents documents that comply fully with the terms and conditions of the letter of credit. Of note, in practice, LCs are hard to use with perishable goods as the definition of "quality" that may be part of the contract, and therefore the LC, may be subject to interpretation. In short, LCs are not often used with perishables.

Payment under a LC can be at sight, a certain number of days after sight, or by a date certain. At sight signifies that payment must be made within 72 hours, upon presentation of the required documents. Payment a certain number of days after sight means that the exporter will be paid sometime after negotiation or acceptance of the documents. Payment at a date certain is at a date fixed by the terms of the LC.

When deciding whether to use a LC, consider the additional cost of bank confirmation and related fees. The greater the value of your shipment, the greater the fees are.

Another factor is the possibility that competitors may offer payment terms more favorable to the buyer. Generally, the cost of a LC to the importer is significantly higher than the cost to an exporter. Due to these higher costs, some importers may not accept your payment terms. Consult an experienced international banker to determine which payment method is right for your business.

Documentary Drafts. A "draft" is a written demand by the exporter directing the importer to pay to the order of a third party. There are three types of documentary drafts: sight drafts, time drafts and date drafts.

A sight draft is used when the seller wishes to retain title and control of the shipment until it reaches its destination and is paid for. Before the order can be released to the buyer, the original bill of lading must be properly endorsed by the buyer and surrendered to the carrier of the goods. In actual practice, shipment is made on a negotiable bill of lading that is given to the shipper. The bill of lading is endorsed by the shipper and sent to the buyer's bank or to another intermediary along with the sight draft, invoices, and other necessary supporting documents specified by the buyer or the buyer's country. Some of the necessary supporting documents are packing lists, consular invoices or insurance certificates. The bank notifies the buyer that it has received these documents and as soon as the draft is paid, the bank will turn over the bill of lading, enabling the buyer to obtain the shipment. This method does involve some risk because the buyer's ability and willingness to pay may change between the time the goods are shipped and the time the draft is presented for payment. Also, there exists the risk of a change in the policies of the importing country. If the buyer cannot or will not pay for the goods, the return or disposal of the goods becomes the responsibility of the exporter.

A time draft can be used to require payment within a certain time frame after the buyer accepts the draft and receives the goods. By signing and marking "accepted" on the draft, the buyer is formally obligated to pay in the determined period of time. When this signature is received, the draft is called "trade acceptance" and can either be kept by the exporter until maturity or sold to a bank at a discount so the exporter can receive immediate payment. There is a certain risk involved for the exporter because a buyer may delay payment by delaying acceptance of the draft or refusing to pay at its maturity. In most countries, an accepted time draft is stronger evidence of debt than an unpaid invoice.

A date draft differs slightly from a time draft in that it specifies a date by which the payment is due rather than establishing a time period. When a sight or time draft is used, a buyer can delay payment by delaying acceptance of the draft, but the use of a date draft can prevent this occurrence.

Open Account. Selling on open account carries the greatest risk for the exporter. Under this method the buyer does not pay for the goods until they have been received. If the buyer refuses to pay, the only recourse of the exporter is to seek legal action in the buyer's country. Thus, the open account method should only be utilized when there is an established relationship with the buyer and the country of the buyer possesses a stable political and economic environment. If your sales must be made on open account, the date upon which the payment is due should be stipulated.

Letters of Credit

If the buyer pays in advance, he risks that the goods may not be sent. Similarly, if the seller ships the goods before he receives full payment from the buyer, he risks not being paid. To cover these risks, buyers, sellers, and banks use documentary letters of credit in international trade transactions. Under this method, the supplier requires these documents to be presented before payment is made.

Essentially, a letter of credit adds a bank's promise of paying the exporter to that of the foreign buyer once the exporter has complied with all of the terms and conditions of the letter of credit. The foreign buyer or "applicant" applies for issuance of a letter of credit to the exporter or "beneficiary."

When using a documentary letter of credit, parties base payments on terms contained within the documents, not on the terms of sale, nor the conditions of the goods sold. Before the bank completes the payment process, it verifies that all documents comply with terms in the letter of credit. If a discrepancy exists between the required documents and terms in the letter of credit, the non-complying party must reconcile the differences before payment can be made. Thus, the letter of credit mandates full compliance of documents as specified by the letter of credit.

Confirmed Letter of Credit: The foreign bank often issues the letter of credit, while the U.S. bank confirms it. With confirmation, the U.S. bank adds its promise to pay to that of the foreign bank. U.S. exporters concerned about the political or economic risk associated with the country in which the bank is located may wish to obtain a confirmed letter of credit. An international banker or the local U.S. Department of Commerce district office can help exporters evaluate these risks and determine whether a confirmed letter is necessary. Alternatively, an "advised" letter of credit, in which the U.S. bank gives advice without officially confirming, may be appropriate.

Irrevocable and Revocable Letters of Credit: If a letter of credit is irrevocable, the buyer and the seller cannot make a change unless both agree to it. In contrast, the buyer or seller can unilaterally make a change with a revocable letter of credit. Therefore, most exporters advise against the use of a revocable letter of credit.

Letter of Credit at Sight: The terms of the letter of credit require immediate payment.

Time or Date Letter of Credit: The terms of the letter of credit do not require payment until a future date.

Banks charge fees, usually a small percentage of the amount of payment, for handling letters of credit. They also charge fees for any amendment made to the letter of credit after it has been issued. All quotations and drafts should explicitly state that fees are to be charged to the buyer's account, since the buyer generally incurs all fees.

All terms of sale should be clearly specified, since payment is made according to the document's contents. For example, "net 30 days" should be specified as "net 30 days from acceptance" or "net 30 days from

date of bill of lading" to avoid confusion and delay of payment. Likewise, the currency of payment should be specified as "US$xxx" if payment is to be made in U.S. dollars. International bankers can offer other helpful suggestions.

An exporter usually does not receive payment until the advising or confirming bank receives the funds from the issuing bank. To expedite the receipt of funds, wire transfers may be used. However, for an additional charge, the exporter may be able to receive funds immediately by discounting the letter of credit at the bank. Exporters should consult with their international bankers about the bank policy toward letters of credit.

Each documentary letter of credit must contain the following information:

Expiration date (latest shipping date) Dollar amount covered under such credit Name and address of buyer (applicant) Name and address of seller (beneficiary) Reimbursing instructions

Also, the most common documents required under commercial letters of credit are:

Commercial Invoice Customs Invoice Certificate of Origin Packing List Clean on Board Bills of Lading Insurance Policy or Certificate Airway Bill

A Typical Letter of Credit TransactionBelow is the typical process that takes place when payment is made by an irrevocable letter of credit, which a U.S. bank confirmed:

1. After the exporter and customer agree on the terms of sale, the customer arranges for its bank to open a letter of credit. Delays may be encountered if, for example, the buyer had insufficient funds.

2. The buyer's bank prepares an irrevocable letter of credit, including all instructions to the seller concerning the shipment.

3. The buyer's bank sends the irrevocable letter of credit to a U.S. bank requesting confirmation. The exporter may request that a particular U.S. bank be the confirming bank, or the foreign bank may select one of its U.S. correspondent banks.

4. The U.S. bank prepares a letter of confirmation to forward to the exporter along with the irrevocable letter of credit.

5. The exporter reviews carefully all conditions in the letter of credit. The exporter's freight forwarder should be contacted to make sure that the shipping date can be met. If the exporter cannot comply with one or more of the conditions, the buyer should be alerted at once.

6. The exporter arranges with the freight forwarder to deliver the goods to the appropriate port or airport.

7. When the goods are loaded, the forwarder completes the necessary documents.

8. The exporter (or freight forwarder) presents to the U.S. bank documents indicating full compliance with the terms stated in the letter of credit.

9. The bank reviews the documents. If they are in order, the documents are airmailed to the buyer's bank for review and transmitted to the buyer.

10. The buyer (or agent) gets the documents that may be needed to claim the goods. 11. A draft, which may accompany the letter of credit, is paid by the exporter's bank at the time

specified or may be discounted at an earlier date.

Tips on Using a Letter of CreditFollow the tips below to avoid shipment delays for time-consuming and costly letter of credit amendments. Present this list to your importer.

1. The exporter should carefully compare the letter of credit terms with the terms stated on the pro forma quotation. This is extremely important since the terms must be precisely met or the letter of credit may be invalid and the exporter may not be paid. If there are any discrepancies (including spelling mistakes), the customer should be notified immediately, and an amendment should be requested to correct the problem.

2. Confirm that the amount of credit is sufficient to cover all expenses you want the bank to repay (freight, insurance, forwarding fees, consular fees, inspection fees, etc.). Banks pay only the amount specified in the letter of credit, even if higher charges for shipping, insurance, or other factors are documented.

3. Be sure the letter of credit is irrevocable and will be confirmed by a prime U.S. bank. Stipulate that payment will be made upon presentation of documents to the U.S. bank confirming the credit.

4. If your credit provides for separate amounts for the merchandise and for shipping expenses, be sure that sufficient funds are established for each, since banks cannot permit merchandise funds to be used for expenses, and vice versa.

5. Be sure your bank is shown as the beneficiary, with its name and address spelled correctly. 6. Be sure your correct name is shown as the "opener," since the same name must usually appear as

the "buyer" and "importer" on your shipping documents. 7. Require only documents you know your bank can supply, and if "analysis" or inspection"

certificates are to be furnished, specify who to issue them and at whose expense. 8. If the goods may be shipped in standard shipping containers, be sure to specify that "container

bills of lading" are acceptable. Difficulties also may be avoided if the letter of credit and bill of lading clauses specify "shippers load and count" and "on deck or underdeck loading at carrier's option."

9. If shipment is to move via barge, to be towed by tugs, or to be loaded aboard LASH ships (described below), be sure to specify this fact in your letter of credit. You should also consider stating in the letter of credit that "bills of lading are acceptable as 'on board' when issued by steamship companies for reloading on LASH ship."

10. If "charter party" bills of lading are acceptable, this fact must be specifically stated in the letter of credit.

11. Describe merchandise ordered in English, and in as general and as broad of terms as possible. 12. If you must describe the type of insurance coverage required, be sure that type, such as "all risks",

is available for the specific goods being shipped. 13. Allow partial shipments and part payments in your letter of credit to avoid the necessity of

expensive and delaying credit amendments should single packages be short-shipped or damaged

on the wharf. Also, specify that any statement of quantity (gallons, ton, etc.) is approximate and not exact.

14. Provide in the credit that shipment via air or parcel post is allowed, if your order may be so shipped. If air freight shipment is required, provide in the letter or credit that only one copy of the air waybill is required, and that it is consigned directly to you or your agent ("to order" air waybills are prohibited).

15. Be sure adequate time is allowed for manufacturing, shipment, and presentation of documents before credit expiration (in general, a minimum of two months).

Collections

Collections is the process in which an instrument or document accompanied by a draft is presented to an entity for payment. A draft is the negotiable instrument, which contains an order to pay. It must be signed by the seller and be payable at sight or within a certain time period. Purchased by your foreign buyers, drafts are used in order to pay the bills owed to you, the exporting company or individual. The most commonly employed type of collection is documentary collections, which were described under the previous heading of Methods of Payment.

Local banks offer a selection of collection products. These products provide your organization with an efficient, costeffective alternative to the in-house handling of collections. For international collections, banks offer lockboxes and electronic data interchange (EDI).

There are two main types of lockboxes, the wholesale and the retail lockbox. The wholesale box is geared toward low volumes of high dollar remittances. Most times the bank will assign an individual teller to a specific group of customers so that he is trained in those customers' special needs and requirements. The retail lockbox service is created for those organizations that receive a high volume of low-dollar remittances accompanied by a scannable document. This retail lockbox system reduces in-house processing costs and the transactions are assigned a unique identification number, which creates a complete audit trail of the deposited checks.

Electronic Data Interchange (EDI), the computerized exchange of information in a standardized format, is quickly becoming vital for a successful business. Customers of the bank can initiate electronic payments or collections accompanied by complete invoice and shipping information needed by a supplier to post the payment. The EDI provide an efficient, cost-effective alternative to handling incoming payments. These advantages include a quick response to trading partners who are using EDI, an improved accuracy of cash flow forecasting, improved control over expected payments or receipts, reduced internal processing and banking transaction costs, reduced time and cost of collecting, tracking and updating open receivables, the notification of incoming payments or collections and a fully automated update of your accounts receivable system.

To determine the best type of collections for your company or for more detailed information about the various services offered, contact your local bank's international division.

http://www.susta.org/export/pricing.html

Tariffs and Import Fees

What is a tariff?

A tariff or duty (the words are used interchangeably) is a tax levied by governments on the value including freight and insurance of imported products. Different tariffs are applied on different products by different countries. National sales and local taxes, and in some instances customs fees, will often be charged in addition to the tariff. The tariff, along with the other assessments, is collected at the time of customs clearance in the foreign port. Tariffs and taxes increase the cost of your product to the foreign buyer and may affect your competitiveness in the market. So knowing what the final cost to your buyer is can help you price your product for that market. In addition, your buyer may ask you to quote an estimate of these costs before making the purchase. This estimate can be made via email, phone or in the pro forma invoice.

Some countries have very high duties and taxes; some have relatively low duties and taxes. If your product is primarily made in the U.S. of U.S. originating components it may qualify for duty-free entry into countries with which the U.S. has a free trade agreement (FTA). We currently have FTAs with more than 20 countries. Targeting FTA countries is a good market entry strategy because buyers pay less tariff for goods made in the U.S. compared with similar goods from countries without FTAs. Here are the steps for finding and calculating estimated tariffs and taxes. Keep in mind that what you get from this process is an estimate. Only the customs officers in the country where the goods clear can make the final determination.

http://export.gov/logistics/eg_main_018130.asp

Pricing Considerations

The price considerations listed below will help an exporter determine the best price for the product overseas.

At what price should the firm sell its product in the foreign market? What type of market positioning (customer perception) does the company want to

convey from its pricing structure? Does the export price reflect the product's quality? Is the price competitive? Should the firm pursue market penetration or market-skimming pricing objectives

abroad? What type of discount (trade, cash, quantity) and allowances (advertising, trade-off)

should the firm offer its foreign customers? Should prices differ by market segment? What should the firm do about product line pricing? What pricing options are available if the firm's costs increase or decrease? Is the

demand in the foreign market elastic or inelastic? Are the prices going to be viewed by the foreign government as reasonable or

exploitative? Do the foreign country's antidumping laws pose a problem?

As in the domestic market, the price at which a product or service is sold directly determines a firm's revenues. It is essential that a firm's market research include an evaluation of all of the variables that may affect the price range for the product or service. If a firm's price is too high, the product or service will not sell. If the price is too low, export activities may not be sufficiently profitable or may actually create a net loss.

The traditional components of determining proper pricing are costs, market demand, and competition. Each of these must be compared with the firm's objective in entering the foreign market. An analysis of each component from an export perspective may result in export prices that are different from domestic prices.

It is also very important that the exporter take into account additional costs that are typically borne by the importer. They include tariffs, customs fees, currency fluctuation transaction costs and value-added taxes (VATs). These additional costs can add substantially to the final price paid by the importer, sometimes resulting in a total of more than double the U.S. domestic price.

Foreign Market Objectives

An important aspect of a company's pricing analysis is determining market objectives. For example, is the company attempting to penetrate a new market, looking for long-term market growth, or looking for an outlet for surplus production or outmoded products? Many firms view the foreign market as a secondary market and consequently have lower expectations regarding market share and sales volume. This naturally affects pricing decisions.

Marketing and pricing objectives may be general or tailored to particular foreign markets. For example, marketing objectives for sales to a developing nation where per capita income may be one tenth of that in the United States are necessarily different from the objectives for Europe or Japan.

Costs

The computation of the actual cost of producing a product and bringing it to market is the core element in determining if exporting is financially viable. Many new exporters calculate their export price by the cost-plus method. In the cost-plus method of calculation, the exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges, and profit.

The effect of this pricing approach may be that the export price escalates into an uncompetitive range. Table 4 gives a sample calculation. It clearly shows that if an export product has the same ex-factory price as the domestic product, its final consumer price is considerably higher once exporting costs are included.

Marginal cost pricing is a more competitive method of pricing a product for market entry. This method considers the direct, out-of-pocket expenses of producing and selling products for

export as a floor beneath which prices cannot be set without incurring a loss. For example, additional costs may occur due to product modification for the export market that accommodates different sizes, electrical systems, or labels. On the other hand, costs may decrease if the export products are stripped-down versions or made without increasing the fixed costs of domestic production.

Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures. Additional costs often associated with export sales include:

Market research and credit checks; Business travel; International postage, cable, and telephone rates; Translation costs; Commissions, training charges, and other costs involving foreign representatives; Consultants and freight forwarders; and Product modification and special packaging.

After the actual cost of the export product has been calculated, the exporter should formulate an approximate consumer price for the foreign market.

Table 4 Sample Cost-Plus Calculation of Product Cost

  Domestic Sale Export Sale

Factory price $7.50 $7.50

Domestic freight .70 .70

subtotal 8.20 8.20

Export documentation   .50

subtotal   8.70

Ocean freight and insurance   1.20

subtotal   9.90

Import duty (12 percent of landed cost)   1.19

subtotal   11.09

Wholesaler markup (15 percent) 1.23  

subtotal 9.43  

Importer/distributor markup   2.44

subtotal   13.53

Retail markup (50 percent) 4.72 6.77

Final consumer price $14.15 $20.30

Market Demand

For most consumer goods, per capita income is a good gauge of a market's ability to pay. Some products may create such a strong demand such as popular goods like Levis, that even low per capita income will not affect their selling price. Simplifying the product to reduce its selling price may be an answer for the exporter to most lower per capita income markets. The firm must also keep in mind that currency fluctuations may alter the affordability of its goods. Thus, pricing should try to accommodate wild changes in the U.S. and/or foreign currency. The firm should anticipate the type of potential customers. If the firm's primary customers in a developing country are expatriates or belong to the upper class, a higher price might be feasible even if the average per capita income is low.

Competition

In the domestic market, few companies are free to set prices without carefully evaluating their competitors' pricing policies. This situation is true in exporting, and is further complicated by the need to evaluate the competition's prices in each potential export market.

If there are many competitors within the foreign market, the exporter may have little choice but to match the market price or even underprice the product or service in order to establish a market share. On the other hand, if the product or service is new to a particular foreign market, it may actually be possible to set a higher price than in the domestic market.

Pricing Summary

In summary, here are the key points to remember when determining your product's price:

Determine the objective in the foreign market. Compute the actual cost of the export product. Compute the final consumer price. Evaluate market demand and competition. Consider modifying the product to reduce the export price. Include "nonmarket" costs, such as tariffs and customs fees. Exclude cost elements that provide no benefit to the export function, such as domestic

advertising.

PRICING STRATEGIES

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Introduction

Pricing is one of the most important elements of the marketing mix, as it is the only mix, which generates a turnover for the organisation. The remaining 3p’s are the variable cost for the organisation. It costs to produce and design a product, it costs to distribute a product and costs to promote it. Price must support these elements of the mix. Pricing is difficult and must reflect supply and demand relationship. Pricing a product too high or too low could mean a loss of sales for the organisation.

Pricing Factors

Pricing should take into account the following factors into account:

1. Fixed and variable costs.2. Competition3. Company objectives4. Proposed positioning strategies.5. Target group and willingness to pay

An organisation can adopt a number of pricing strategies, the pricing strategy will usually be based on corporate objectives.

 

 Types of Pricing Strategy

  Pricing Strategy Definition Example  

Penetration Pricing

Here the organisation sets a low price to increase sales and market share. Once market share has been captured the firm may well then increase their price.

A television satellite company sets a low price to get subscribers then increases the price as their customer base increases.

Skimming Pricing

The organisation sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer.

A games console company reduces the price of their console over 5 years, charging a premium at launch and lowest price near the end of its life cycle.

Competition Pricing

Setting a price in comparison with competitors. Really a firm has three options and these are to price lower, price the same or price higher

Some firms offer a price matching service to match what their competitors are offering.

Product Line Pricing

Pricing different products within the same product range at different price points.

An example would be a DVD manufacturer offering different DVD recorders with different features at different prices eg A HD and non HD version.. The greater the features and the benefit obtained the greater the consumer will pay. This form of price discrimination assists the company in maximising turnover and profits.

Bundle Pricing

The organisation bundles a group of products at a reduced price. Common methods are buy one and get one free promotions or BOGOF's as they are now known. Within the UK some firms are now moving into the realms of buy one get two free can we call this BOGTF i wonder?

This strategy is very popular with supermarkets who often offer BOGOF strategies.

Psychological Pricing

The seller here will consider the psychology of price and the positioning of price within the market place

The seller will therefore charge 99p instead £1 or $199 instead of $200. The reason why this methods work, is because buyers will still say they purchased their product under £200 pounds or dollars, even thought it was a pound or dollar away. My favourite pricing strategy.

Premium Pricing The price set is high to reflect the exclusiveness of the product. An example of products using this strategy would be Harrods, first class

airline services, Porsche etc.

Optional Pricing

The organisation sells optional extras along with the product to maximise its turnover. T

This strategy is used commonly within the car industry as i found out when purchasing my car. 

Cost Based Pricing

The firms takes into account the cost of production and distribution, they then decide on a mark up which they would like for profit to come to their final pricing decision.

If a firm operates in a very volatile industry, where costs are changing regularly no set price can be set, therefore the firm will decide on their mark up to confirm their pricing decision.

Cost Plus Pricing

Here the firm add a percentage to costs as profit margin to come to their final pricing decisions.

For example it may cost £100 to produce a widget and the firm add 20% as a profit margin so the selling price would be £120.00