In the previous lesson you have learnt about internal trade which means
buying and selling of goods within the boundaries of a country. But when
buying and selling of goods and services take place between nationals of
different countries it is called external trade or foreign trade. Every
country, big or small, buys and sells different goods from and to other
countries. Goods worth crores of rupees are bought and sold every year.
Foreign trade is an important economic activity because both the countries
participating in it benefit in the process. For some countries, external
trade is the most essential economic activity because most of their
industrial activities depend on it. For example economic development of
Hongkong, Singapore, South Korea and Japan has been possible largely
due to their foreign trade. World trade is dominated by the developed
countries and the developing countries of Asia, Africa and Latin America
have a small share.
Like other countries, India imports and exports a large number of goods.
After independence, foreign trade of India has considerably expanded.
For economic development, it was necessary to import machinery, raw
materials and fuel oil. As a result, imports into India increased. However,
it was also necessary to increase exports to pay for the imports. Suitable
export promotion measures were adopted by the Government to increase
India's exports. In the present lesson we shall discuss external trade in
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After studying this lesson you will be able to -
• recall the meaning of external trade;
• enumerate the advantages and difficulties in external trade;
• identify the middlemen in external trade;
• describe the procedure in export trade by sea routes;
• describe the procedure in import trade by sea routes;
• enumerate the main documents used in external trade.
9.3 External Trade : Meaning
External trade refers to buying and selling of goods and services between
nationals of different countries, or trade between agencies of the
governments of different countries.
External trade consists of export trade and import trade. Export involves
sale of goods and services to other countries. Import consists of purchases
from other countries. When goods are traded by way of imports and
exports the transactions are regarded as visible trade. External trade in
service is referred to as invisible trade. Thus, for example, if Indian
exporters avail of British shipping services for transportation of goods,
they have to pay for transport services. Hence, services used may be
called invisible imports by India. Sale of services would be regarded as
invisible exports. Likewise, other services such as warehousing, insurance,
banking and finance, and railway services are also required in external
When goods are imported into a country with the purpose of re-exporting
them to some other country, it is known as entrepot trade.
9.4 Advantages and Difficulties in External Trade
Advantages of external trade are enumerated below :
External Trade :: 55
1. Availability of a large variety of goods : External trade enables
a country to avail of the use of a variety of goods which cannot
be produced in the home country or can only be produced at a
higher cost. In this way, a country can get the benefit of using
goods which it is not able to produce due to certain natural,
physical or other limitations, by importing them from other
2. Export of surplus production : External trade facilitates export
of surplus production of a country and import necessary items.
This results in development of large scale industries.
3. Specialisation based on resources endowment : The quantity
and quality of resources available in countries differ on account
of climate and geographical formation. External trade enables each
country to specialise in the production of those commodities for
which it enjoys relative advantage. Specialisation leads to increase
in productivity and superior quality of goods.
4. Higher standard of living : It improves the standard of living of
people in different countries. Exchange of goods and consumption
thereof leads to a higher standard of living of the people in the
5. Price equalisation : External trade leads to equalisation of prices
of commodities in the world markets after making allowance for
transport and other costs. It brings stability and uniformity in the
prices of commodities in all the countries of the world.
6. Security from natural calamaties : Natural calamities such as
flood, famine, drought etc., adversely affect the productive capacity
of a country. External trade ensures adequate supply of those
commodities which are in short supply within the country due to
such natural calamities. For instance, medicine and food can be
imported from other countries during an emergency.
7. International relations : External trade develops business relations
among different countries of the world which facilitate exchange
of ideas and enrichment of culture. For example, the carpets of
middle east countries, leather goods of Africa, batik art of
Indonesia and brassware of India are known all over the world.
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There is always a demand for these goods specially in developed
countries. Thus, external trade promotes cordial relations and
understanding among nations of the world.
8. Development of trade promoting services : Foreign trade has
led to development of modern means of communication and
efficiency in banking and insurance services. These services have
enabled countries to have trade even in voluminous goods like
food grains, wood, coal, and perishable goods, like fruits, flowers,
vegetables, meat, etc.
Difficulties in external trade
The various difficulties which are faced by a trader engaged in foreign
trade are enumerated below:
1. Distance : External trade involves transport of goods over long
distances except for neighbouring countries. Distance between
various countries makes it difficult to establish quick and close
trade contact between the importers and exporters. Even though
trade directories provide information regarding the markets for
various products, procurement of information regarding individual
products and their market is a tedious task. There is a long time
lag between placing of indent and receipt of goods from foreign
2. Diversity of languages : Different languages are used in different
countries of the world. This diversity of language creates another
problem in the external trade. Price-lists and catalogues are to be
prepared in foreign language. So the traders who wish to establish
trade relations with foreigners, must know the language of that
3. Greater risk : Foreign trade involves transport of goods over
long distances. Goods are thus exposed to greater risk. Goods are
transported by ships which may sink due to storm or hidden rocks.
The ships or goods may also be captured by the enemies. These
risks may be covered through marine insurance, but that increases
the cost of goods.
4. Difficulties of transport and communication : Long distances
External Trade :: 57
incidental to foreign trade create difficulties of proper and quick
means of transport and communication. Though modern means of
communication has solved this problem, it is quite costly and
cannot be used for securing all sorts of information. Loading and
unloading of goods often take long time and also involve large
expenses which increases the cost of goods.
5. Difficulties in payments : Each country has its own currency
which makes it difficult for exporters to get payment for the goods
sold. Various formalities are required to be completed for this
purpose. Exchange rates are determined for different currencies in
each country. Devaluation of a country's currency may mean a
great loss to its importers as imports become costlier. There is
loss to exporters also if the volume of export does not increase
adequately after devaluation.
6. Restrictions : Foreign trade is subject to various restrictions by
way of customs, tariff, quotas and exchange regulations, which
restrict the scope of foreign trade.
7. Lack of personal touch : In foreign trade, the transactions are
made with unknown persons through correspondence and other
means of communication. There is no direct contact between the
buyer and seller. In the absence of personal contact, settlement of
disputes becomes difficult. So long as the disputes are not settled
on the basis of mutual trust and faith, there is always a risk of bad
8. Study of foreign markets : Markets for different products have
their own characteristics as regards demand, intensity of
competition, buyers' preferences, etc. Thus, an extensive study of
foreign markets is required for success in foreign trade, which is
not easily possible from an exporter’s as well as importer's point
9. Cost : Both import and export of goods involve very costly
operations due to high cost of transport, insurance, intermediaries
and cost of formalities to be completed.
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Intext Question 9.1
Fill in the blanks
1. External trade _____________ the standard of living of the
people in different countries.
2. External trade leads to _____________ of the prices of
commodities in the world market.
3. External trade facilitates export of ________ production of
4. In general, the greatest difficulty in foreign trade is of
____________ between the countries.
5. Goods are exposed to greater ____________ in external
6. When goods are imported with an idea of re-exporting to
some other country it is know as ____________ trade.
9.5 Middlemen in External Trade
1. Indent Houses/Indent firms : They help importer and exporter in
sending and receiving the order of goods alongwith other
2. Export Houses : These are organisations involved in Export
promotion activities, such as STC, MMTC, Handicrafts and
Handloom Export Corporation (H.H.E.C) and Central Cottage
Industries Corporation (CCIC) etc. When an exporter is given a
licence to import goods, it is called replenishment licence.
3. Forwarding and Clearing Agents : Forwarding agents acting on
behalf of exporters complete all the formalities for loading the
goods on the ship. Clearing agents act on behalf of the importer
and complete all the formalities required for clearing the goods from
the port of destination. He sends the goods by rail/road to the place
of importer after taking delivery of the goods from the customs
authority. Both these agents act on an agreed commission to be paid.
External Trade :: 59
4. Shipping Company : It carries goods on behalf of exporters on
payment of freight charges, and undertakes to deliver the same to
the importer. For example, in India this service is provided by
Shipping Corporation of India and other shipping lines.
5. Insurance Company : It also acts as an agency which facilities
external trade as it is ready to bear the loss or damage to the
goods against insured risks right from the godown of the exporter
to the godown of the importer.
6. Merchant Exporter : Wholesalers and retailers are middlemen
engaged in external trade. Wholesalers import or export goods in
large quantities while retailers import or export goods in small
7. Trade Commissioners : These are officials appointed by the
Government to represent the country’s interests abroad. They
collect information relating to trade relations and disseminate the
same among traders. They also advise merchants on matters relating
to imports and exports.
8. Trade Representatives : They are officials who provide guidance
to exporters abroad on behalf of the government of their own
country. They make efforts to secure payment for goods and also
advise on legal matters.
Intext Questions 9.2
Match the following phrases given in column A and B
(1) Payment of freight (a) Clearing Agent
(2) Import of goods (b) Forwarding Agent
(3) Export of goods (c) Shipping company
(4) Placement of order (d) Export House
(5) Export promotion activities (e) Indent house
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9.6 Procedure in Export Trade
The procedure generally adopted for exporting goods to a foreign country
is as follows :
1. Receipt of an indent or order : After trade enquiry, receiving
the indent/order is the first step in export procedure. Order may
be received either directly from the importer or through some
specified agency like indent houses.
2. Credit Enquiry : The exporter must ensure that there is no risk
of default in payment. He should verify the credit worthiness of
the importer. For this purpose he may ask the importer to send a
letter of credit, bank guarantee or any other guarantee.
3. Obtaining export licence : Each and every country has its own
import and export policy for free goods and restricted goods. An
exporter in India has to complete various formalities such as
submission of G R Form with Reserve Bank of India, furnishing
declaration for surrender of foreign exchange and getting
registration number in order to get an export licence.
4. Collection of goods : The exporter has to assemble the goods
specified in the indent. The goods must be in accordance to the
instructions given in the indent regarding the quality, quantity, price,
5. Packing and marking of the goods : Packing should be done
strictly according to the instructions given in the indent. If loss
arises due to defective packing, the exporter may have to bear it.
If necessary, grading should be done before packing. The packages
should be properly marked according to instructions, if any, so
that they may be easily recognised.
6. Appointment of forwarding agent : Packed goods may be despatched
to the port directly by the exporter or through a forwarding agent. If
the goods are stored in any location, he may appoint a forwarding
agent who will perform all the formalities on behalf of the exporter
before shipping the goods, for a commission.
External Trade :: 61
7. Despatch of goods by rail/road : The exporter has to despatch
the goods by rail/road to the port town. He will send the R/R
(railway receipt) to the forwarding agent alongwith other
instructions. The agent will take delivery of the goods and complete
other formalities before shipping them to the importer.
8. Formalities to be completed by Forwarding agent :
(i) Obtaining the custom permit : The agent has to apply to
the customs office giving full details of the goods and also
their destination in order to receive the custom permit. If
goods are duty free then custom permit is given immediately,
otherwise it will be necessary to complete other formalities.
(ii) Obtaining shipping order : The agent has to secure
adequate space in the ship for loading goods. For this
purpose he has to sign an agreement with the shipping
company for issue of the shipping order which will enable
him to put the goods on board the ship. If the entire ship is
hired it is called ‘Charter party’.
(iii) Completion of Shipping Bill and payment of export
duty : The Agent has to fill in three copies of shipping bill
and submit them to the custom house. On the basis of the
bill, duty is calculated by the customs authority. The agent
has to make payment of the duty and get the original and
third copy of the Shipping Bill from the customs authorities.
(iv) Payment of dock dues : The agent has then to make
arrangement for carrying the goods to the dock. For this
purpose, two copies of properly completed ‘Dock Challan’
are submitted to the dock authorities alongwith one copy
each of shipping bill and shipping order. After dock charges
are received, the dock authorities retain one copy of dock
challan and return the second copy duly signed to the agent.
(v) Custom’s verification before loading of goods : As soon
as the ship touches the port, the dock authorities start loading
the goods on it. Before the goods are actually loaded, custom
officials verify them to know if there is anything on which
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duty remains to be paid or which is not mentioned in the
shipping bill. The captain or his assistant (mate) will receive
goods on board the ship only when shipping order has been
produced before him.
(vi) Mate's receipt : The captain or mate will issue a receipt
known as ‘mate’s receipt’ after the goods have been loaded.
This receipt contains particulars like quantity of goods,
number of packages, condition of packing, etc.
(vii) Bill of lading : The forwarding agent has to present the
mate’s receipt at the office of the shipping company and in
exchange will get a document known as Bill of lading. He
has to fill in three blank forms of bills of lading giving
details regarding the goods, destination, name of the ship,
date and place of loading and, name and address of the
person to whom delivery is to be made. If the frieght is
paid in advance the bill of lading is marked ‘Frieght paid’
otherwise it is marked ‘frieght forward’ which means frieght
will be paid at the port of destination.
(viii) Insurance of cargo : As a safeguard against marine risks,
it is necessary to insure the goods. Insurance must be done
strictly according to the instructions of the importer, if any,
given in the indent. If there is no instruction, the exporter
himself should insure the goods. The insurance policy is
sent to the importer alongwith the bill of lading and other
(ix) Advice to the exporter: The agent has then to inform the
exporter about the shipment of goods and other related
matters. He will send the bill of lading, insurance policy,
shipping bill etc., to the exporter alongwith a statement
showing his expenses and remuneration.
9. Preparation of export invoice and consular invoice : Having
received the advice from the forwarding agent, the exporter prepares
an export invoice known as foreign invoice. It is prepared in
triplicate according to the agreed terms and conditions of sale.
External Trade :: 63
Custom regulations of many countries require consular invoice
for the purpose of easy clearance of goods at the port of destination
in the importing country. If it is required by the importer, then the
exporter has to arrange for such a document also.
10. Securing Payment: There are two alternative methods by which
payment can be received by the exporter.
(i) Letter of credit: The exporter can get immediate payment
on the strength of the letter of credit which is issued by the
importer's bank in favour of the exporter. The exporter has
to draw the bill in order to get the payment from the local
branch of the bank (in home country) which has issued the
letter of credit on behalf of the importer.
(ii) Letter of hypothecation: If the exporter wants to receive
payment immediately, he can get the bill (bill of exchange)
accepted by the importer and given to the exporter,
discounted with his bank. In that case he gets the amount
stated in the bill (minus the discount charges of the bank).
But for this purpose he has to give a letter of hypothecation
to his bank. Letter of hypothecation is a letter addressed to
a bank attached with the bill of exchange (accepted by the
importer) drawn by the exporter for the goods shipped by
him. Through his letter of hypothecation, the exporter
authorises the bank to sell the goods in case of dishonour
of the bill by the importer so that the bank can realise the
amount advanced by it to the exporter. Thus, a letter of
hypothecation gives the bank a charge on the goods and its
sales proceeds. In the letter of hypothecation it is clearly
mentioned that if the sales proceeds of goods (after meeting
expenses of selling the goods) exceeds the amount advanced,
the excess will be returned to the exporter, but if it is less,
then the exporter has to pay the difference (sales proceeds
– expenses of selling the goods – amount advanced) to the
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Intext Questions 9.3
Fill in the blank :
1. The exporter has to bear the _________ if goods have not
been packed according to the instructions of the importer.
2. Forwarding agent acts as an agent of the __________.
3. Goods are marked according to the instructions so that they
can be easily __________.
4. Letter of hypothecation gives the bank the right to sell the
goods if bill of exchange is _________ by the importer.
5. Last step in export procedure is to send an ______ to the
9.7 Procedure in Import Trade
The steps involved in importing goods are discussed below :
1. Obtaining the import licence: An importer cannot import goods
without having a valid licence from the Import Licensing Authority.
He has to get a valid licence according to the import policy
announced by the Government of his home country from time to
2. Obtaining foreign exchange : As foreign exchange transactions
are controlled by Reserve Bank of India, the importer has to submit
an application along with a duly filled G R Form to the Exchange
Control department of R B I. After scrutinising the application,
the Reserve Bank of India will sanction the release of foreign
3. Placing the Indent : Indent is the purchase order to the exporter
by an importer for specified goods. The indent may be sent directly
to the manufacturer of goods or to the exporting agent.
4. Sending letter of credit : Generally, the parties in foreign trade are
not known to each other. So the exporter wants to be sure of the
External Trade :: 65
credit-worthiness of the importer. Usually, the exporter asks the
importer to send a letter of credit. An importer can get a letter of
credit issued as per terms and conditions of his banker and send it
to the exporter. It ensures payment of bill of exchange drawn by the
exporter upto the amount specified in the letter of credit.
5. Procuring the shipping documents: The importer will arrange
to obtain necessary documents such as bill of lading, shipping bill,
etc., after receiving the advice letter from the exporter. The
documents are procured to take delivery of the goods. He has to
go to the exporter’s bank to make payment in order to get the
necessary documents for taking delivery of the goods.
6. Appointment of clearing agent : The importer may take delivery
on his own or appoint an agent (clearing agent) to take delivery of
the goods. The importer sends necessary documents to his agent
to clear the goods. The clearing agent charges commission for his
services for clearing the goods.
7. Formalities to be completed by the clearing agent
(i) Endorsement for delivery. When the ship arrives at the
port, the clearing agent approaches the concerned shipping
company and gets the bill of lading endorsed in his own
name from the shipping company. If the frieght has not been
paid by the exporter, it will have to be paid before
endorsement of the bill of lading.
(ii) Bill of entry and Bill of sight. The agent has to fill in and
submit three copies of the bill of entry to the custom
authorities. The custom authorities will calculate the duty
and receive the same from the clearing agent.
If the agent does not have detailed information of the
imported goods, he has to prepare a document known as
Bill of sight. The bill of sight must contain as much
information as the agent possesses and the document is
completed by the custom authorities on the arrival of goods.
(iii) Payment of dock charges. The agent has to complete and
file two copies of Port Trust receipt and three copies of
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Bill of entry to the landing and shipping dues office. After
receiving the dock charges, the dock authority will return
one copy of Port Trust receipt and two copies of the Bill
of entry to the agent. Then the agent has to submit this
copy alongwith two copies of Bill of entry to the custom
office. If customs duty is to be paid, he will make the
payment and take delivery of the goods.
(iv) Despatch of goods by Rail/Road. The clearing agent has
to arrange carriage of the goods to the railway station or
the transport authority after taking the delivery from the
dock authority. He will despatch the goods by rail/road to
his principal and get the railway receipt/carrier receipt.
(v) Advice to the importer. The clearing agent has to write a
letter of advice to the importer after despatch of goods. In
this letter of advice, information regarding arrival of goods
and their despatch by rail/road are specified. He has to
enclose with it the railway receipt/carrier receipt and a
statement of his expenses and charges.
8. Delivery of goods from Railway/Transport Authority. The
importer can take delivery of the goods and carry them to his
godown. Thus the whole procedure of importing goods is
Intext Questions 9.4
Fill in the blanks.
1. An importer has to complete various formalities with the
Reserve Bank of India in order to get ______exchange.
2. Letter of Credit ensures payment to the ______.
3. The agent appointed for the importer to complete various
formalities in importing goods is known as _____ agent
4. When the clearing agent does not have details of the goods
External Trade :: 67
imported, he has to fill up a document known as Bill of
5. Indent is a document which is sent by the ______ to the
9.8 Documents to be used in External Trade
The documents which are used in external trade are classified under
1. Documents used in both import and export trade
2. Documents used in export trade
3. Documents used in import trade
1. Documents used in both import and export trade
It is an order placed for import of goods. It is sent to the exporter
for supply of the goods. It contains full information regarding the
goods to be imported: quantity, quality, mode of packing and
marking, period of delivery, mode of payment and other instructions
regarding shipment and insurance, etc. An indent is a closed indent
when the price at which goods are to be purchased and the source
from where they are to be purchased are clearly specified. Indent
is said be ‘open’ when no price is specified and it is left to the
discretion of the exporter to purchase goods at the lowest price.
(ii) Letter of credit
In external trade, the importer has to prove his credit-worthiness
to the exporter, who may demand a certain amount of deposit or
even full payment of due price before the shipment of goods. For
this purpose, the importer arranges with his bank for issuing a
letter of credit in favour of the exporter. Thus a letter of credit is
issued by a bank in the importer’s country in favour of the foreign
dealer. It contains an undertaking by the bank concerned that the
bill of exchange drawn by the foreign dealer on the importer will
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be honoured on presentation to the extent of amount specified in
it. Thus it establishes the credit-worthiness of the importer and
guarantees payment of price to the exporter for the goods exported
(iii) Bill of Lading
It is a document prepared by the ship owner or by the master of
the ship acknowledging the receipt of goods on board the ship and
undertaking to deliver the goods at the port of destination. This is,
on the one hand, proof of the receipt of goods specified therein
and, on the other, a document of title to the goods. The document
is sent by the exporter to the importer who can take delivery of
the goods at the port of destination on presentation of the bill of
lading and other shipping documents.
(iv) Advice letter
It is a document which is prepared by the forwarding agent and
sent to the exporter indicating that all the formalities for export
of goods have been completed and goods have been shipped. Along
with this letter the forwarding agent sends a statement showing
expenses incurred on the goods exported and his remuneration.
Similarly, a letter of advice is also prepared by the clearing agent
and sent to the importer stating that all the formalities for clearing
the imported goods have been completed. Along with this letter
the clearing agent sends the railway receipt as a proof of goods
sent to importer as well as his statement of account for expenses
incurred and commission charged. Thus, it is a document used
both in export and import trade.
(v) Documentary Bill
When the documents of title to goods are sent along with the bill
of exchange drawn by the exporter on the importer, it is called a
documentary bill. It may be of two types (a) Documentary bill
against payment (b) Documentary bill against acceptance. In case
of documentary bill against payment, the documents of title to
exported goods are delivered to the importer only when the importer
has paid the amount specified in the Bill of exchange. In case of
External Trade :: 69
documentary bill against acceptance, the documents of title to the
exported goods are delivered to the importer after he has accepted
the bill of exchange drawn by the exporter
(vi) Insurance Policy
The insurance policy is issued by the insurance company to cover
the risks of loss or damage to goods due to specified causes. If
there is no insurance then the loss will have to be borne by the
owner of the goods, the exporter or importer. Under CIF (Cost
Insurance Freight) contract, insurance is generally taken by the
exporter while under FOB (Free on Board) contract, insurance is
taken by the importer. There are different types of insurance
policies to cover different types of risks in foreign trade.
Documents used in export trade
Besides the documents used both in export and import trade, the
documents used in export trade are as follows :
1. Export Permit : It is received by the exporter by applying to the
Chief Controller of Exports. The licence is issued according to
the Import and Export Policy of the Government of the home
country. Such a policy is announced from time to time by the
Government in India. When the exporter is given a licence to
import goods it is called a ‘Replenishment Licence’
2. Shipping order : In order to hire space in the ship, the exporter
or his agent has to enter into an agreement with the shipping
company. The shipping company on the conclusion of the agreement
gives a shipping order which contains instruction to the captain of
the ship to receive on board the specified quantity of goods from
3. Shipping Bill : The shipping bill is a document prepared in
triplicate by the exporter. There are three different forms for
different classes of goods. Goods are classified as (i) Free goods,
(ii) Dutiable goods, and (iii) Goods for re-export or ‘Bonded
goods’. The copies of shipping bill along with the export
licence and G R forms are carefully checked by the custom
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authorities. They assess the duty payable on dutiable goods which
the exporter has to pay.
4. Mate’s receipt : When goods are brought to the docks for
shipment, the document issued by the dock authority is known as
a dock receipt. It is the duty of the dock authority to load the
goods in the ship. But if goods are directly taken into the ship, the
captain or his assistant (mate) gives a receipt as a proof of goods
loaded in the ship. This receipt is known as Mate’s receipt. If the
mate is not satisfied regarding the packing of goods, he issues a
foul Mate’s receipt, otherwise he issues a clean Mate’s receipt.
5. Charter Party : It is a formal agreement for hiring the whole
ship or a substantial part of it to carry the goods for a special
voyage for a particular time. When the entire ship is hired by the
exporter it is known as charter party. Here it should be noted that
the bill of lading is an acknowledgement of the receipt of goods
on board the ship as well as a document of title to the goods. It
does not indicate hiring of ship. But in case of charter party, the
ship owner loses his control on the ship for some time because
the crew begin to act as agents of the charterer.
6. Dock Challan, Dock Warrant and Dock Receipt : The exporter
has to fill up a form in duplicate for the payment of dock charges.
This form is known as ‘Dock Challan’. It is after completion of
this process that the exporter can bring the goods for loading in
the ship. For this purpose, a document is issued permitting the
goods to be brought to the docks for loading. This document is
known as Dock Warrant. After the goods are actually brought to
the docks and handed over to the dock authorities for loading in
the ship, the document issued as a proof of delivery is known as
7. Consular Invoice : The exporter fills a special invoice form
available from the office of the consul of the importer’s country
stationed in his (exporter’s) country and gets it signed by the
consul. In this document the exporter or his agent enter all the
particulars about the goods shipped and certify the accuracy of the
prices shown. The special invoice bearing the signature of the
External Trade :: 71
consul of the importer’s country stationed in the exporter’s country
is known as Consular invoice. This document is obtained to avoid
under and over invoicing as well as to save time of custom
authorities in the importer’s country.
8. Certificate of origin : It is a document issued as a proof of the
fact that the goods have been produced in the country mentioned
in it, that is, a certificate about the genuine origin of the goods
exported. This document is issued on the basis of trade agreements
between the countries in which they agree to levy lower rates of
import duties on the goods produced by them. Some chambers of
commerce are also authorised to issue such certificates.
9. Airway bill : When goods, specially perishable ones, are sent to
the importer by air, then this document is needed.It is a receipt
given by the airline for the goods it is carrying. At the destination
it has to be surrendered by the importer to the airline for releasing
goods. It contains such information as name and address of exporter,
name and address of importer or his agent, description of goods,
number of packages, weight and volume of goods, rate of frieght
and total frieght, airport of loading and destination, flight number
and date, etc.
10. Export Invoice/Foreign Invoice : The foreign invoice is prepared
by the exporter in duplicate at agreed price quotations. The invoice
contains details such as the name of the ship, port of shipment,
port of destination, number of indent, details regarding packing
and marking, price of goods and other expenses including frieght,
dock dues, and insurance charges.
Documents used in import trade
Besides the documents used in both export and import trade, the
documents used in import trade are as follows:-
1. Import licence : The Government of India announces the import
and export policy of the country from time to time. Everybody is
not free to import anything he likes. He has to obtain a valid
import licence for the import of required quantity and value of
goods by completing various formalities with the Reserve Bank of India
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(RBI) and other concerned authorities. Import Licence is the
document which enables the importer to import goods upto a
specified quantity and value from a specific country.
2. Bill of Entry and Bill of sight : It is a document which acts as
a proof that the goods of stated value and description in specified
quantity are being entered into the country from abroad. Three
copies of this document are prepared in which the importer has to
give each and every detail of goods imported. Separate bill of
entry forms are used for (a) free goods i.e. those goods on which
customs duty is not payable, (b) bonded goods or dutiable goods
which are subject to payment of customs duty. Import duty payable
may be specific duty when it is payable on the basis of weight or
measurement of the goods, or ad valorem duty when it is payable
on the basis of market value or the invoice value of the goods.
If the importer or his agent does not have details of the goods to
complete the form of Bill of entry, he has to file a document
called Bill of sight. The bill of sight gives him permission to
examine the goods in the dock in the presence of customs officers
and collect the details about the goods to be recorded in the bill
of entry form. If the goods are not subject to custom duty, this
Bill of sight is converted into a Free entry, and delivery of the
goods is given to the importer. If the goods are liable to duty, it
is converted into a ‘Prime entry’ and on payment of the duty,
goods are delivered.
3. Dock Challan : It is a document which acts as proof of payment
of dock charges on the imported goods. This document is issued
by the dock authorities in the imported country to the importer.
Intext Question 9.5
State which of the following statements are true or false.
1. Insurance policy is used as a document both in export trade
and import trade.
2. Certificate of origin is used in export trade.
External Trade :: 73
3. Dock Challan is a proof of payment of dock charges in
4. Letter of credit is sent by the exporter to the importer.
5. Bill of lading is a document of title sent by the importer
and is used as a document in both import and export trade.
What You Have Learnt
External Trade means buying and selling of goods and services between
nationals of different countries across the boundaries of two nations. It
includes import trade, export trade and entrepot trade.
Advantages of external trade
(1) Availability of large variety of goods; (2) Export of surplus production;
(3) Resource endowment; (4) Higher standard of living; (5) Price
equalisation; (6) Relief in case of natural calamities; (7) International
relations; (8) Development of trade promoting services.
Difficulties in external trade
(1) Distance; (2) Diversity of language; (3) Greater risk; (4) Difficulties
in transportation and communication; (5) Difficulties in payments; (6)
Restrictions; (7) Lack of personal touch; (8) Study of foreign markets;
Middlemen in foreign trade
(1) Indent house, (2) Export houses, (3) Forwarding and Clearing agents,
(4) Shipping company, (5) Insurance company, (6) Merchant exporter, (7)
Trade Commissioners, (8) Trade representatives
Procedure in export Trade
In the export procedure the following steps are taken:
(1) Receipt of an indent, (2) Credit enquiry,(3) Obtaining export licence,
(4) Collection of goods, (5) Packing and marking of goods, (6)
Appointment of forwarding agent, (7) Despatch of goods by rail/road. (8)
Formalities to be completed by forwarding agent : (i) Obtaining the
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custom permit, (ii) obtaining the shipping order, (iii) completion of
shipping bill and payment of export duty, (iv) payment of dock dues, (v)
custom verification before loading of goods, (vi) Mate’s receipt, (vii)
Bill of lading, (viii) Insurance of cargo, (ix) advice to the exporter (9)
Preparation of export invoice and consular invoice; (10) Securing payment
: (a) Letter of credit, (b) Letter of hypothecation; (11) Advice to importer
Procedure in import trade
In import procedure the following steps are taken in sequence;
(1) Obtaining the import licence, (2) obtaining foreign exchange, (3)
placing the indent, (4) sending letter of credit, (5) procuring the shipping
documents, (6) appointment or clearing agent, (7) formalities to be
completed by the clearing agent, (a) Endorsement for delivery, (b) Bill
of entry and Bill of sight, (c) payment of dock charges, (d) despatch of
goods by rail/road, (e) advice to importer. (8) Delivery of goods from
Documents used in external trade
These are classified under three heads
1. Documents used in both import and export trade
(i) Indent : It is an order sent by the importer to the exporter. It is
received by the exporter for supply of goods.
(ii) Letter of Credit : It is issued by a bank in the importer’s country
in favour of the foreign dealer certaining an undertaking to honour
the bills of exchange drawn by the latter on the former. It is a
proof of the credit worthiness of the importer.
(iii) Bill of Lading : It is a proof of goods received and specified the
document to be carried and to be delivered at the port of
destination. It is issued by the shipping company to the exporter
who sends it to the importer. It is also a documents of title to the
(iv) Letter of Advice : It is sent by the forwarding agent and indicates
that all the formalities for export of goods have been completed
and goods have been shipped. It is prepared by the forwarding
External Trade :: 75
agent and is sent to the exporter. Similarly a letter of advice is
prepared by the clearing agent which indicates that all the
formalities have been completed and delivery of the imported goods
have been taken. It is sent by the clearing agent to the importer.
(v) Documentary Bill : When a bill of exchange drawn by the exporter
on the importer is sent alongwith other documents of title to the
goods, it is known as documentary bill.
(vi) Insurance Policy : It is issued by the insurance company to cover
the risks of loss or damage to goods when the goods are in
voyage. The exporter insures the goods to be exported and sends
the policy to the importer.
Documents used in export Trade
Besides the documents used in both import and export trade, the following
documents are used in export trade.
(i) Export permit : This document permits the exporter to export
goods specified in it.
(ii) Shipping order : It is a document which instructs the captain of
the ship to receive the specified goods on board the ship. It is
prepared by the shipping company and is delivered to the exporter.
(iii) Mate’s receipt : It is a document which acts as a proof of goods
loaded into the ship. It is issued by the captain or his assistant
(iv) Charter Party : When the whole ship is hired by the exporter to
carry the goods, the document issued by the shipping company is
known as Charter party. It is a contract between the hirer and the
(v) Dock Challan/Dock Warrant/Dock Receipt : Dock Challan is
used to pay dock charges on the goods to be exported. Dock warrant
is issued to bring the goods from the port for loading in the ship.
Dock receipt is a proof of delivery of the goods to the dock
authority for loading into the ship.
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(vi) Consular invoice : It is a special invoice issued by the consul of the
importer’s country stationed in the exporter’s country. This document
prevents under and over invoicing of the goods to be exported and
saves time of the customs authority in calculating the duties to be
charged from the importer at the time of delivery of goods.
(vii) Certificate of origin : This document acts as a proof of the fact
that the exported goods have been produced in the country specified
in the document. This document helps to pay lower rate of import
duties on the goods imported.
(viii) Airway bill : It is a receipt issued by the airline authority to
carry and deliver the goods at the particular airport. It contains all
the details regarding the exporter, importer, goods, and the freight
(ix) Export invoice : It is prepared by the exporter and sent to the
importer in which all the details relating to the exported goods
including name of ship, port of shipment, freight, insurance charges,
dock charges, etc, are specified.
Documents used in Import trade
Besides the documents used in both import and export trade, the following
documents are used in import trade:
(i) Import Licence : It is a document which entitles the importer
named in it to import the specified quantity of goods upto the
(ii) Bill of entry and Bill of sight : Bill of entry is filled up when
the importer/agent has details of the goods imported. But when he
does not have the details, the importer/agent has to fill up a
document known as Bill of sight. Bill of sight entitles him to
open the packages of imported goods so that he/agent can fill up
a bill of entry form and can pay the custom duties on imported
(iii) Dock Challan : It is a proof of payment of dock dues on the
imported goods. It is issued by the dock authority to the importer/
External Trade :: 77
9.10 Terminal Exercise
1. What do you mean by external trade ? Explain its advantages.
2. What are the difficulties which may be faced in external trade by
traders ? Discuss.
3. Explain the procedure for exporting goods to the United States of
America by sea route.
4. Explain the procedure for exporting goods from India.
5. Describe the procedure of importing goods by sea from London
6. A Delhi merchant desires to buy tinned milk from Australia.
Describe in brief the procedure he will adopt to buy goods.
7. Write short notes on:
(i) Shipping Bill
(ii) Consular invoice
(iii) Bill of lading
(iv) Mate’s Receipt
(v) Letter of Credit
(vi) Air-way Bill
1. Distinguish between open and closed indent.
2. Distinguish between Bill of Lading and Charter Party.
3. Identify/ Name any three middlemen in external trade.
4. Name any four important documents in export trade.
5. Name any four important documents used in import trade.
6. Name two main difficulties faced by traders in external trade.
7. Name any three documents used both in export and import trade.