International trade is the exchange of goods and services across international borders. In most
countries, it represents a significant share of GDP. While international trade has been present
throughout much of history (see Silk Road, Amber Road), its economic, social, and political
importance have been on the rise in recent centuries, mainly because of Industrialization,
advanced transportation, Globalization, Multinational corporations, and outsourcing. In fact, it is
probably the increasing prevalence of international trade that is usually meant by the term
International trade is also a branch of economics, which together with International finance,
forms the larger branch of International economics.
Regulation of international trade
Traditionally trade was regulated through bilateral treaties between two nations. For centuries
under the belief in Mercantilism most nations had high tariffs and many restrictions on
international trade. In the nineteenth century, especially in Britain, a belief in free trade became
paramount and this view has dominated thinking among western nations for most of the time
since then. In the years since the Second World War multilateral treaties like the GATT and
World Trade Organization have attempted to create a globally regulated trade structure.
Communist and socialist nations often believe in autarchy, a complete lack of international trade.
Fascist and other authoritarian governments have also placed great emphasis on self-sufficiency.
No nation can meet all of its people's needs, however, and every state engages in at least some
Free trade is usually most strongly supported by the most economically powerful nation in the
world. The Netherlands and the United Kingdom were both strong advocates of free trade when
they were on top, today the United States, the European Union and Japan are its greatest
proponents. However, many other countries - including several rapidly developing nations such
as India, China and Russia - are also becoming advocates of free trade.
Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors
often support protectionism. This has changed somewhat in recent years, however. In fact,
agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible
for particular rules in the major international trade treaties which allow for more protectionist
measures in agriculture than for most other goods and services.
During recessions there is often strong domestic pressure to increase tariffs to protect domestic
industries. This occurred around the world during the Great Depression leading to a collapse in
world trade that many believe seriously deepened the depression.
The regulation of international trade is done through the World Trade Organization at the global
level, and through several other regional arrangements such as MERCOSUR in South America,
NAFTA between the United States, Canada and Mexico, and the European Union between
twenty five independant states. There is also the newly established Free Trade Area of the
Americas (FTAA), which provides common standards for almost all countries in the American
Risks in international trade
The risks that exist in international trade can be divided into two major groups:
• Risk of insolvency of the buyer,
• Risk of protracted default - the failure of the buyer to pay the amount due within six
months after the due date, and
• Risk of non-acceptance
• Surrendering economic sovereignty
• Risk of cancellation or non-renewal of export or import licences
• War risks
• Risk of expropriation or confiscation of the importer's company
• Risk of the imposition of an import ban after the shipment of the goods
• Transfer risk - imposition of exchange controls by the importer's country or foreign
• Surrendering political sovereignty
Trading Internationally involves heavy costs because on top of the price of the product or
service, the nation's government will usually impose tariffs, time costs and the many other costs
involved in moving (usually) the goods across into another country where language, system,
culture and rules are considered a big hindrance.
One of the largest movers in the International trading world that we have today is China where
labor is plentiful and cheap. Many labor-intensive products designed and produced by United
States and other European countries are assembled or manufactured in China where labor is
inexpensive. This is typical because it's a move that can save the original country a lot of time
and money. Furthermore, with the opening of door of China, citizens now have more income
opportunities to make life better.
However, when a country deals a lot with International trade, although it creates exponential
income opportunities for the locals, by importing or exporting too much of something can cause
damage to the local scene. During recession, countries suffer local pressure to change laws
governing International trade to protect the local industries. The most painful and memorable of
such incident is the Great Depression. Each country dealing with International trade have their
very own laws and bylaws which governs their trading policies but on a global level, trading
activities are monitored and done through the World Trade Organization.
The role of WTO is to ensure that there is peaceful and mutually benefiting business atmosphere.
Trading amongst each other can cause minor unwanted rifts between parties concerned and if left
to sizzle can cause major problems on the International front. In the event such problems are
detected or voiced, the WTO can step in and take precedence over the disputes by holding talks,
discussions and finding ways of solving the International trading problems amicably. One of the
ways to do this is to sign agreements or multilateral agreements not unlike the FTAA between
the Buenos Aires on the Free Trade Area of the Americans.
Benefits of intl trade:
B enhances the domestic competitiveness
B Takes advantage of international trade technology
B Increase sales and profits
B Extend sales potential of the existing products
B Maintain cost competitiveness in your domestic market
B Enhance potential for expansion of your business
Gains a global market share
Reduce dependence on existing markets
Stabilize seasonal market fluctuations
Importance of International Trade
The buying and selling of goods and services across national borders is known as international
trade. International trade is the backbone of our modern, commercial world, as producers in
various nations try to profit from an expanded market, rather than be limited to selling within
their own borders. There are many reasons that trade across national borders occurs, including
lower production costs in one region versus another, specialized industries, lack or surplus of
natural resources and consumer tastes.
One of the most controversial components of international trade today is the lower production
costs of “developing” nations. There is currently a great deal of concern over jobs being taken
away from the United States, member countries of the European Union and other “developed”
nations as countries such as China, Korea, India, Indonesia and others produce goods and
services at much lower costs. Both the United States and the European Union have imposed
severe restrictions on imports from Asian nations to try to stem this tide. Clearly, a company
that can pay its workers the equivalent of dollars a day, as compared to dollars an hour, has a
distinct selling advantage. Nevertheless, American and European consumers are only too happy
to lower their costs of living by taking advantage of cheaper, imported goods.
Even though many consumers prefer to buy less expensive goods, some international trade is
fostered by a specialized industry that has developed due to national talent and/or tradition.
Swiss watches, for example, will never be price-competitive with mass produced watches from
Asia. Regardless, there is a strong market among certain consumer groups for the quality,
endurance and even “snob appeal” that owning a Rolex, Patek-Philippe or Audemars Piguet
offers. German cutlery, English bone China, Scottish wool, fine French silks such as Hermes
and other such products always find their way onto the international trade scene because
consumers in many parts of the world are willing to foster the importation of these goods to
satisfy their concept that certain countries are the best at making certain goods.
One of the biggest components of international trade, both in terms of volume and value of
goods is oil. Total net oil imports in 2005 are over 26 million barrels per day (U.S. Energy
Information Administration figures) (Note: Imports include crude oil, natural gas liquids, and
refined products.) At a recent average of $50 per barrel, that translates to $1billion, three hundred
million, PER DAY. The natural resources of a handful of nations, most notably the nations of
OPEC, the Organization of Petroleum Exporting Countries, are swept onto the international trade
scene in staggering numbers each day, and consumer nations continue to absorb this flow. Other
natural resources contribute to the movement of international trade, but none to the extent of the
oil trade. Diamonds from Africa, both for industrial and jewelry use, wheat and other agricultural
products from the United States and Australia, coal and steel from Canada and Russia, all flow
across borders from these nations that have the natural resources to the nations that lack them.
Despite complaints about trade imbalances, effects on domestic economies, currency upheavals,
and loss of jobs, the reality of goods and services continually crossing borders will not go away.
International trade will continue to be the engine that runs most nations.
Basis of International Trade?
International trade can be defined as either the buying (importing) or selling (exporting) of goods
or services on a global basis.
Thanks in great measure to the Internet, many starting businesses can enrich their prospects of
success by incorporating IT into their overall business plan. In some cases, a business can be
enhanced by incorporating IT marketing to supplement a domestic operation. In other cases, a
business can depend solely on international trade. Let’s review some examples:
Quality Naturally Foods, Inc., in the City of Industry, California, manufactures prepared bakery
mixes for its sister companies Yum Yum Donuts and Winchell Donuts. These and similar mixes
are now sold to outlets in Japan. The added volume has reduced costs of production which has
benefited all customers.
Amazon.com, the preeminent online marketer (and inspiration for thousands of online
entrepreneurs) has a home page toolbar called “International”. Amazon says: “Around the
World, wherever you are, get what you want—fast—from our family of Web sites.”
Good Tables, Inc. of Carson, California, formerly manufactured furniture in its California plant
but was losing sales due to cheaper foreign made products. The manufacturing was moved to
Mexico in a “maquiladoras” factory.
Funrise, Inc. Woodland Hills, California, has become a world leading marketer of toys. Design,
packaging and production are outsourced, primary to vendors in China.
International trade is especially appropriate for the rapidly growing number of “hollow
corporations.” Session one of this course refers to a hollow corporation as a business without a
factory and with a minimum number of employees in which manufacturing is performed by
outside suppliers. A hollow corporation might depend on outside suppliers for virtually all of its
products, such as an American toy company importing product from China. Or, it might depend
on outside suppliers for selected components in its overall product line, such as The Boeing
Company. (Boeing is using Japanese firms for components of the new 787 airliner.)
Is International Trade Appropriate for Small Businesses?
The answer is definitely yes! According to the U.S. Department of Commerce, big companies
make up about 4 % of U.S. Exports. Which means that 96% of exporters are small companies.
Why is international trade so important to starting small businesses? In some cases the products
or services you may wish to market are not available or made in your home country. For
example, think about selling cashmere sweaters. You may need to become an importer in order
to compete with imported products sold by your competitors.
International trade is enormously beneficial for entrepreneurs and enables producers of goods
and services to move beyond the U.S. market of 280 million people to the world market of 6.2
billion. While international trade accounted for 5% of U.S. economic growth in 1950, today it
has become an integral part of business, accounting for more than 25% in 2002. For many small
companies importing and exporting is becoming an essential cornerstone in achieving success,
yet it requires knowledge of business disciplines far beyond the basic do’s and don’ts of
operating a domestic business.
Advantages and Disadvantages of International Trade
Advantages to consider:
• Enhance your domestic competitiveness
• Increase sales and profits
• Gain your global market share
• Reduce dependence on existing markets
• Exploit international trade technology
• Reduce dependence on existing markets
• Exploit international trade technology
• Extend sales potential of existing products
• Stabilize seasonal market fluctuations
• Enhance potential for expansion of your business
• Sell excess production capacity
• Maintain cost competitiveness in your domestic market
Disadvantages to keep in mind:
• You may need to wait for long-term gains
• Hire staff to launch international trading
• Modify your product or packaging
• Develop new promotional material
• Incur added administrative costs
• Dedicate personnel for traveling
• Wait long for payments
• Apply for additional financing
• Deal with special licenses and regulations
Since international trade necessarily requires interaction with governmental agencies, and most
all governments wish to expand their country's role in international trade, entrepreneurs can look
to governments themselves for a great deal of information. The U.S. government provides many
valuable resources of information and these will be generously referred to in this session. The
U.S. Small Business Administration offers aid to small international businesses through two
major programs: business development assistance and financial assistance. Our first
recommended resource is therefore the U.S. Small Business Administration’s Office of
International Trade. The SBA Web site www.sba.gov/oit is the place to begin.
Resources are offered in four building blocks: Education, Technical Assistance, Risk
Management, and Finance.
• General export information and development assistance including legal assistance.
• Small Business Guide to Exporting.
• An online trade mission: a search engine for foreign firms and U.S. businesses seeking
partners or suppliers. See
• Information on export financing.
Other valuable resources from the U.S. government include
• The Department of Commerce Web site www.commerce.gov furnishes trade
opportunities for U.S. Business and export related assistance and market information.
• The U.S. Government Export Portal www.export.gov provides online trade resources and
one-on-one assistance for your international business.
• The International Trade Administration (ITA) www.ita.doc.gov offers market
information, trade leads and overseas business contacts. Trade professionals can assist
you every step of the way with information counseling that reduce the cost, risk and
mystery of exporting.
• BISNIS www.bisnis.doc.gov is the U.S. Government’s primary market information
center for companies exploring opportunities in Russia and other newly independent
• Counterfeiting and Piracy cost the world economy approximately $650 billion per year.
You can find articles and initiatives about protecting your Intellectual Property abroad at
www.stopfakes.gov as well as toolkits for Brazil, China, Korea, Malaysia, Mexico Peru,
Russia and Taiwan.
Here are some non-governmental resources to expand your knowledge about international trade:
• Search engines such as Google or Yahoo www.google.com or www.yahoo.com provide a
huge database of information (type in “international trade”) that will require selectivity to
retrieve the most helpful information.
• The Federation of International Trade Associations www.fita.org provides portals to trade
leads, market research, a global trade shop and even a job bank.
• www.worldbid.com is a large network of international trade market places, providing
trade leads and new business contacts.
• A large database of suppliers can be found at www.alibaba.com. Users can either find
suppliers or sell products.
• www.wand.com is a business to business center matching buyers and sellers in most all
industries throughout the world.
• www.peoplink.org - Non-profit marketplace enabling you to purchase directly from
artisans all over the world.
• www.openentry.com - Catalog authoring tool for e-commerce.
Common Mistakes Made in International Trade
A detailed guide on international trade can be found in Exporting, Importing and E-Commerce
by Sharon T. Freeman, Ph.D., President of the All American Small Business Exporters
Association. Another book of interest would be Conversations With Women Who Export.”
Following is a condensed version of Dr. Freeman’s “how-to” guide in avoiding the ten common
export start-up mistakes
Common Export Mistakes Solutions
1. Failure to obtain qualified export counseling and Obtain Export Counseling
to develop a master international marketing plan
before starting an export business.
2. Insufficient commitment by top management to Determine Export Readiness
3. Failure to have a solid agent/distributor’s Understand Agent/Distributor Contracts
4. Blindly chasing “E-orders” from around the Avoid Accidental Exporting
5. Failure to understand the connection Understand Export Financing
between country risk and securing export
6. Failure to understand Intellectual Property Understand Intellectual Property Rights
7. Insufficient attention to marketing and Pay Attention to Overseas Marketing
advertising requirements. and Advertising
8 . Lack of attention to product preparation needs. Pay Attention to Product Preparation
9. Failure to consider legal aspects of going global. Understand Licensing and Joint
10. Failure to know the rules of trade. Understand Export Regulations
1. Failure to obtain export counseling and to develop a master international marketing
plan before starting an export business.
Utilize Government and Association Resources for Export Counseling: It is also important for
new exporters to seek legal counsel.
Hire a Lawyer to Help You Structure Your Export Operations for the Long Run: Lawyers are
concerned with issues of compliance on both ends of the transaction, therefore they are
instrumental in helping you to make sure that your recordkeeping system is planned correctly,
that your legal documents are structured correctly, and to advise you on a broad range of
compliance issues before the sale, during the sale, and after the sale.
2. Insufficient commitment to overcome the initial difficulties and financial requirements of
To be successful in exporting, firms have to establish an export department to which they
dedicate personnel and a budget, and for which they develop appropriate procedures, preferably
in consultation with a qualified trade lawyer. A recommended resource for helping firms to
assess their “readiness” to export is cited below:
Michigan State University’s Center for International Business Education and Research—CIBER:
MSU has an Export Academy that has developed a state-of-the-art system to assess export
readiness. Called CORE V™, it is a Windows-based managerial tool for self-assessment of
organizational readiness to export.
3. Failure to have a solid agent and or distributor’s agreement.
Firms that intend to enter and to expand in exporting will likely need an agent or distributor at
some point. Key considerations include
Understanding the Role of Agents: The NTDB Web site at (www.stat-USA.gov) provides
information on agents and distributors. As explained on this Web site, agents receive
commission on their sales rather than buying and selling for their own account. As agents do not
own the products they sell, the risk of loss remains with the company the agent represents (the
Understanding the Role of Distributors: The key legal distinctions between an agent and
• A distributor takes title to the goods and accepts the risk of loss. A distributor makes
profits by reselling the goods.
• Distributors cannot contractually bind the company producing the goods.
• Distributors establish the price and sales terms of the goods.
Contract Drafting Considerations for Agent/Distributor Agreements: The first and most
important consideration when drafting an agreement is to ensure that the agreement clearly states
whether there is an agent or a distributor relationship. The agreement should also clarify the
terms and conditions for selling the products. For example:
• Determine whether the relationship is exclusive versus non-exclusive.
• Specify which geographic regions are to be covered.
• Outline issues of payment and payment schedules for the products (in the case of a
distributor) and for payments of commissions (in the case of agents).
• Determine the currency in which payments are to be made and address currency
• Provide specific provisions regarding renewal of the agreement, including specific
parameters for performance, promotional activity and notice of desire to renew.
• Establish a specific provision for termination of the agreement and terms for such
termination. (Some foreign countries restrict or prohibit termination without just cause or
• Outline the termination process for the end of the agreement period.
• Provide for workable and acceptable dispute settlement clauses.
• Assure that the agreement addresses whether or not intellectual property rights are being
licensed or reserved.
• Do not allow, without seller’s consent, the contract to be assigned to another party (sub-
agents or sub-distributors) to be used to fulfill obligations in the contract or the contract
to be transferred with a change of ownership or control over the agent/distributor.
• Assure that your contract complies with both U.S. and foreign laws.
The Commercial Service of the Commerce Department provides a service to identify qualified
agents, distributors, and representatives for U.S. firms. For each Agent/Distributor Service,
(www.ita.doc.gov/cs/) Commercial officers abroad identify up to six foreign prospects that have
examined the U.S. firm's product literature and expressed interest in representing the U.S. firm's
4. Blindly chasing orders from around the world
You may be in your office when suddenly and unexpectedly someone from a foreign country
contacts you electronically and wants to buy a line of your products. What do you do next?
Make sure the order is not on the denied list: Go to the Bureau of Industry and Security’s Web
site to view the entire list of denied orders (www.bis.doc.gov/dpl/default.shtm).
Business considerations in checking out the firm making the inquiry: Make sure the opportunity
is a reasonable one and involves something that can reasonably be handled by your firm, without
spending countless hours researching the requirement. The Department of Commerce
Commercial Service has a number of services to assist you.
• International Company Profile (ICP) – The ICP service, referred to earlier, helps firms
investigate the reliability of prospective trading partners.
• Country Directories of International Contacts (CDIC)Provides the name and contact
information for directories of importers, agents, trade associations, government agencies,
etc., on a country-by-country basis. The information is available on the National Trade
Competitive considerations in checking out the market for the product: By reviewing industry
sector information, firms can obtain useful data to assess the probability that the inquiry they are
investigating is real. One resource that may be helpful is the Department of Commerce,
Commercial Service’s Industry Sector.
The U.S. Department of Commerce’s Commercial Service Officers are a valuable resource for
information about firms overseas. Access this service to learn if a particular deal sounds
legitimate and whether the agency has any information on the firm making the inquiry. For the e-
mail addresses of Commercial Service Offices go to www.export.gov/eac/index.asp.
5. Failure to understand the connection between country risk and the probability of getting
The best source of information about whether a country is in good standing with the U.S. is the
U.S. Export-Import Bank’s Country Limitation Schedule. (www.exim.gov).
Access the Export Financing Options: The SBA, ExIm, and the Agriculture Department are three
of the biggest providers of export financing in the federal government. A list of the strategic
banking partners of the ExIm and SBA export financing and credit insurance programs can be
obtained from ExIm and SBA.
Check out SBA’s Export Financing Products: The SBA’s Export Working Capital Program
(EWCP) provides short-term working capital for up to one year.
Consult the ExIm’s Export Financing Products: The ExIm’s Working Capital Guarantee
Program allows commercial lenders to make working capital loans to U.S. exporters for various
export-related activities by substantially reducing the risks associated with these loans.
Access ExIm’s Export Credit Insurance: The Export Credit Insurance program provides
protection against losses associated with foreign buyers or other foreign debtor default for
political or commercial reasons.
6. Failure to understand Intellectual Property Rights (IPR).
Intellectual property rights refer to the legal system that protects patents, trademarks, copyrights,
trade secrets. It is important for exporters to understand how and whether intellectual property
rights are protected in different countries. See the U.S. Department of Commerce’s Legal
Counsel Web site at: (www.ita.doc.gov/legal).
7. Insufficient attention to marketing and advertising requirements.
Key considerations include
Trade Shows and Trade Missions: Trade shows and missions may be in the virtual form or entail
traveling to the foreign country. All Department of Commerce-sponsored shows and trade
missions are listed in the Export Promotion Calendar, available on the TIC Web site; the NTDB
or by mail from a TIC trade specialist. Information is also usually posted on the Internet pages
for industry offices accessible from the International Trade Administration (www.ita.doc.gov).
For an additional source of information on upcoming trade shows visit the Internet Web site for
Trade Show Central (www.tsnn.com)or the Trade Show Center (tradeshow.globalsources.com)
Web site which lists trade shows around the world.
Advertising: Exporters can advertise U.S.-made products or services in Commercial News USA,
a catalog-magazine published 10 times a year to promote U.S. products and services in overseas
markets. Commercial News USA is disseminated to business readers worldwide via U.S.
embassies and consulates and international electronic bulletin boards, and selected portions are
also reprinted in certain newsletters.
U.S. Pavilions: About eighty to one hundred worldwide trade fairs are selected annually by the
Commerce Department for recruitment of a USA pavilion. Selection priority is given to events in
viable markets that are suitable for new-to-export or new-to-market, "export ready" firms.
8. Lack of attention to product adaptation and preparation needs
The selection and preparation of a firm’s product for export requires not only knowledge of the
product, but also knowledge of the unique characteristics of each market being targeted. Key
Product Adaptation to standards requirements: As tariff barriers (tariffs, duties, and quotas) are
eliminated around the world in accordance with the requirements of participation in the World
Trade Organization (WTO), other non-tariff barriers, such as product standards, are proliferating.
Exporters must understand conformity requirements to operate on an international basis. The
DOC’s National Center for Standards and Certification Information (NCSCI) provides
information on U.S. and foreign conformity assessment procedures and standards for non-
agricultural products. You can visit their Web site by going to ts.nist.gov.
Product Engineering and Redesign: The factors that may necessitate re-engineering or redesign
of U.S. products may include differences in electrical and measurement systems.
Branding, Labeling and Packaging: Cultural considerations and customs may influence branding,
labeling and package considerations.
• Are certain colors used on labels and packages attractive or offensive?
• Do labels have to be in the local language?
• Must each item be labeled individually?
• Must each item be labeled individually?
• Are name brands important?
Installation: Another important element of product preparation is to ensure that the product can
be easily installed in the foreign location. Importers and exporters need to know they may also
consider providing training or providing manuals that have been translated into the local
language along with the product.
Warranties: In order to compete with competitors in the market, firms may have to include
warranties on their products.
Servicing: The service that U.S. companies provide for their products is of concern to foreign
consumers. Foreign consumers want to know whether they can access spare parts, technicians
who can service the product, and distributors of the products in their countries.
9. Failure to obtain legal advice
While it is virtually impossible for any firm, no matter how big or small, to know all of the laws
that pertain to exporting from the U.S., as well as the relevant laws of other countries, there are
measures that can be taken by firms in the planning process to minimize the probability that they
will make unnecessary errors that have grave legal consequences. Some of the measures that can
be taken in the planning process are
Utilize SBA’s ELAN service: Under the Export Legal Assistance Network (ELAN), your local
SBA office can arrange a free initial consultation with an attorney to discuss international trade
Consult the Commerce/ITA Legal Web page: the DOC, International Trade Administration’s
(ITA) legal Web site: (www.ita.doc.gov/legal/)
10. Failure to understand export licensing requirements.
Businesses that are new to the export arena may confuse the local and state rules regarding
business taxes, zoning and other issues, i.e., legal registrations, with the federal requirements
governing export licenses. In order to export an item that may be on the restricted list, an export
license is required. This allows the federal government to control the export of the goods. The
license is not required for every item exported.
The U.S. Department of Commerce Bureau of Export Administration (BXA) is the primary
licensing agency for dual-use exports (commercial items that could have military applications).
The first step in determining your license requirements is to classify your product using the
Commerce Control List (CCL). Once the product’s classification is determined, the following
five questions will determine your obligations under the EAR:
• What is the item you intend to export or re-export?
• Where is it going?
• Who will receive it?
• What will they do with it?
• What are the recipient's other activities?
Importance of a Business Plan for International Trade
Once your decision is made to export or import, it is important that your overall business plan
includes provisions for international trade. A downloadable template for this purpose is furnished
at the end of this session.
1. Make a list of your potential competitors and make a tabulation of their principal products or
services. Determine the county of origin of each product or service. Determine the cost of each
product or service.
2. Evaluate your own capabilities to compete with these products or services.
Top Ten Do's and Don'ts
TOP TEN DO'S
1. Take international trade classes at the college level.
2. Visit trade shows and trade missions. See www.tsnn.com.
3. Join an international trade association specializing in your business.
4. Personally visit your offshore suppliers (or customers).
5. Take advantage of online resources such as www.sba.gov/oit.
6. Inspect and approve merchandise before it is shipped.
7. Consider hiring an international trade consultant.
8. Become personally familiar with all monetary transactions.
9. Use a trade lawyer for agent and distributor agreements and licensing requirements.
10. To begin, start on a very small scale.
TOP TEN DON'TS
1. Investigate the potential opportunities and benefits of international trade.
2. Rely on a single source of supply (or customer).
3. Have an understanding of intellectual property rights.
4. Have an understanding of import/export financing.
5. Learn how your best competitors are handling international trade.
6. Provide dispute settlement provisions.
7. Make assumptions as to vendor's compliance with your specifications.
8. Check out your suppliers/customers before establishing relationship.
9. Rely on handshake agreements.
10. Rely solely on others including employees for importing/exporting expertise.
Foreign Trade Policy of India
This site provides comprehensive information on Foreign Trade Policy of India . The site also focuses on India's
achievements as a result of its well designed Foreign Trade Policy.
To become a major player in world trade, a comprehensive approach needs to be taken through the Foreign Trade
Policy of India . Increment of exports is of utmost importance, India will have to facilitate imports which, are
required for the growth Indian economy. Rationality and consistency among trade and other economic policies is
important for maximizing the contribution of such policies to development. Thus, while incorporating the new
Foreign Trade Policy of India, the past policies should also be integrated to allow developmental scope of India’s
foreign trade. This is the main mantra of the Foreign Trade Policy of India.
Objectives of the Foreign Trade Policy of India -
Trade propels economic growth and national development. The primary purpose is not the mere earning of foreign
exchange, but the stimulation of greater economic activity. The Foreign Trade Policy of India is based on two
major objectives, they are -
m To double the percentage share of global merchandise trade within the next five years.
To act as an effective instrument of economic growth by giving a thrust to employment generation.
Strategy of Foreign Trade Policy of India -
entrepreneurship, industrialization and trades.
e Simplification of commercial and legal procedures and bringing down transaction costs.
e Simplification of levies and duties on inputs used in export products.
e Generating additional employment opportunities, particularly in semi-urban and rural areas, and developing a
series of ‘Initiatives’ for each of these sectors.
s Facilitating technological and infrastructural upgradation of all the sectors of the Indian economy, especially
through imports and thereby increasing value addition and productivity, while attaining global standards of quality.
t Neutralizing inverted duty structures and ensuring that India's domestic sectors are not disadvantaged in the
t Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements that India enters into in
order to enhance exports.
Upgradation of infrastructural network, both physical and virtual, related to the entire Foreign Trade chain, to
Foreign Capital and Economic Growth
Presentation by Raghuram Rajan, Economic Counsellor and Director of the Research Department, based on a paper
written by Eswar Prasad, Raghuram Rajan, and Arvind Subramanian1
At a Conference Organized by the Federal Reserve Bank
of Kansas City
Jackson Hole, Wyoming
August 25, 2006
Good morning. Let me say at the outset that what follows are the authors' views and should not be seen as the views of
the International Monetary Fund or its management. The essential question our paper asks is, "Does foreign capital play
a helpful, benign, or malign role in the process of economic growth?"
The theory is simple — First, capital should flow from rich countries to poor countries — because in the neoclassical
model, the marginal product of a unit of capital is much higher in poor countries that are typically labor abundant and
capital poor. Second, more productive poor countries should attract more foreign capital because they have the ability to
use it better. And third, because it adds investible resources, and because of the collateral benefits of foreign capital such
as bringing in new technologies of production and control, greater use of foreign capital should be associated with more
What is the evidence? In what follows, I will show you evidence that capital does not flow from rich to poor countries in
the relative quantities it used to — surprising given that financial markets have been getting better. Moreover, it is not
also true that amongst non-industrial countries, the most productive get the most capital inflows. Finally, for non-
industrial countries, there does not seem to be a positive association between growth and reliance on foreign capital. In
fact, there is generally a negative correlation suggesting that non-industrial countries that are more reliant on foreign
capital grow less. For industrial countries, though, there is a positive association.
Correlation is not causation, and indeed there are both benign and malign explanations of
these correlations. What seems to be clear is that non-industrial countries do not have
tremendous absorptive capacity for foreign capital in general, though particular forms of
foreign capital such as FDI may be useful. Put differently, the relatively low use of foreign
capital by successful developing countries may have more to do with their low demand for
foreign capital than with a willingness of developed country creditors to supply it.
One reason for the low demand may be their financial system is underdeveloped so that
when they have growth opportunities, the extra domestic savings they generate are largely
adequate to cover the investment that can profitably be financed. This is a benign
explanation for the limited role of foreign capital in development. More malign is if foreign
capital inflows cause overvaluation of the exchange rate, thus reducing the competitiveness
of the economy, and thus reducing manufacturing exports and undermining a traditional
stepping stone to growth. There are also concerns about foreign capital we do not address,
such as its potentially higher volatility, which may make countries other than the really
needy stay away from it.
Our conclusion is therefore that in the long run, capital account opening is unlikely to help
poor countries grow by providing resources in excess of what is available in the domestic
economy — notwithstanding examples of foreign capital led booms and busts -- though it
may help in other ways. Foreign capital is no panacea for capital-poor countries. Put
differently, the current patterns of flow of capital in the global economy, though seemingly
perverse, may not be so, at least given the financial and institutional constraints non-
industrial countries have. That does not mean these flows are either optimal, safe, or
sustainable in the long run.
Let me now turn to the evidence. The paradox Lucas noted was that capital does not flow
in the requisite quantities from rich to poor countries. Indeed, matters have gotten worse
recently. Capital seems to be flowing uphill as the next slide shows.
The dark line represents weighted average relative incomes of countries exporting capital
(that is, running current account surpluses). Income is measured relative to the richest
country in that year, and the weight on each country's income is the size of its surplus
relative to the total surplus. The dark line has been falling while the dotted line,
representing the weighted average income of countries using capital (that is, running
current account deficits), has been rising. The dotted line is now significantly above the
dark line — simply put, the poor are now exporting capital to the rich. Note that this is not
new. It was also true in the mid 1980s.
Since these periods are also when the U.S. was running large deficits, what does the picture
look like when we drop the U.S. from deficit countries. On the next slide, the picture looks
similar with a narrowing of the income gap between capital exporters and capital receivers
in the mid 1980s, and again since the late 1990s.
What we have seen so far are overall flows. Foreign Direct Investment (FDI) flows by
themselves do behave more in accordance with the models as the next slide suggests--the
weighted-average relative income of countries experiencing net FDI inflows is generally
lower than that of FDI-exporting countries, though the relative income of senders has been
trending down while the relative income of recipients has been moving up since the mid
1990s. So in sum, rich countries are increasingly net users of foreign capital while poorer
countries are increasingly net suppliers.
The next question is who amongst poor countries gets the most capital. This is an
important question because some have argued that the reason poor countries export capital
is because private investors there do not see good investment opportunities in their own
countries and therefore invest abroad — for example, invest in the US, which then invests
it back as FDI. Some therefore call the U.S. the global venture capitalist. There are
problems with this argument taken at face value, including the fact that private investors in
many poor countries do not have access directly to foreign investment opportunities —
they invest in domestic banks, which invest in the central bank, which then invests abroad.
It is not clear that private investors in these countries should have substantially greater
confidence in domestic financial institutions (or in their governments) than in corporations.
Be that as it may there is a deeper problem. In the next slide, we divide non-industrial
countries based on growth into three groups, each with approximately the same total
population. We keep aside populous India and China. The theory would say that the high
growth countries should attract the most capital because they have the best investment
opportunities (and also are the most credit worthy). The reality is very different.
The Allocation of Capital Flows to Non-Industrial Countries 1970-2004
High growth countries use less foreign capital than even low growth countries. China, the
fastest growing country of them all, is a net exporter of capital between 1970 and 2004.
In fact, if you turn to the next slide, both in the heyday of capital flows to poor countries
from 1985 to 1997, and in the most recent years, the flows have been inversely
proportional to growth. Between 2000 and 2004, we see the well known phenomenon of
reserve build up as all but the slowest growing poor countries export capital.
The Allocation of Capital Flows to Non-Industrial Countries
1985-1997 and 2000-2004
Note again in the next slide that FDI is different. Here it does seem that over long periods,
more FDI goes to the faster growing countries, but again there is a reversal in the most
recent years, with the fastest growing countries getting less FDI than slower growing
countries. It is suggestive that in the period 2000-2004, countries are taking in FDI, even
while exporting savings on net, suggesting that FDI has benefits over and above simply
augmenting the resource base.
The Allocation of Net FDI Flows to Non-Industrial Countries
This immediately leads to the question: Do countries that rely more on foreign capital grow
faster in the long run? It turns out, that this is not so.
Indeed , as the next slide shows, if you plot growth over a 30 year period against current
account balances, you find a positive correlation for non-industrial countries. Countries
that use less foreign finance, or export more savings, grow faster. Clearly, one might
expect this for the countries that are development disasters and totally reliant on foreign
To check for this possibility, we drop countries that got annual aid of more than 10 percent
of GDP. It turns out the correlation is even stronger.
The positive association between current account balances and growth holds in a more
formal setting. As the next slide shows, in a standard regression of long run growth a la
Bosworth and Collins, the coefficient on the current account balance is positive and
statistically significant even after controlling for typical determinants of growth (initial
income, trade policy, fiscal policy, institutional quality, life expectancy, and dummies for
oil exporters and sub-Saharan Africa).
Is this relationship robust? Turning to the next slide, even if we drop countries that have
high levels of official financing (aid-to-GDP ratio greater than 10 percent), we find that the
relationship holds for the whole sample and also for the three regions separately—Asia,
Africa, and Latin America.
Current Account Balances and Growth in Non-Industrial Countries
1970-2000 - Excluding Countries with Aid/GDP>10 Percent
So far, we have looked just at non-industrial countries. The table in the next slide suggests
when we include industrial countries to see if the association between current accounts and
growth is different for these two countries, we find that indeed that is the case. The
correlation is negative for industrial countries (a 1 percentage point increase in the ratio of
the current account balance to GDP decreases growth by 0.14 percent per year); while this
correlation is positive for both emerging markets and developing countries.
Finally, a very simple way of assessing whether foreign capital matters is to look at
countries with high and low investments and high and low savings, to see what
combination of savings and investment matter for growth. The chart in the next slide shows
that countries that invest more grow more than countries that invest less; but it is countries
that invest more and save more (that is rely less on foreign capital) that do the best of all.
In fact, within countries that invest more, those that save more (and thus run lower current
account deficits) grow at a rate of about 1 percent a year more than countries that save less.
Current Account, Investment and Growth
in Non-Industrial Countries
All this suggests that domestic savings rather than foreign savings are critical for growth.
Indeed, turning to the table in the next slide, we find in the second column that controlling
for domestic savings in our baseline regression eliminates the effect of the current account
on growth but controlling for investment does not. We have conducted a number of
robustness checks given that savings or investment could be mismeasured to verify this
finding is robust. This suggests that domestic savings are an important correlate with
Interestingly, while this is true for non-industrial countries, it is not the case for industrial
countries. Why so?
There are at least three potential explanations for this finding, all to do with the fact that
non-industrial countries do not have much capacity to absorb foreign capital.
The first relates to the domestic financial system. In industrial countries that have well
developed financial systems, a sustained increase in productivity would not only result in
more investment — as firms borrow to take advantage of investment opportunities — but
also more consumption as consumers borrow to consume in anticipation of their higher
income. This implies more financing from abroad or current account deficits.
In non-industrial countries, by contrast, a productivity shock creates higher incomes, but is
filtered by a weak financial system into weaker investment growth and greater savings
growth because firms are constrained to self-finance investment and households cannot
borrow much against higher future income to increase consumption. It is possible that
greater productivity growth shrinks the current account deficit, and even results in surplus
One implication is that savings should grow more than investment around the time when
non-industrial countries experience growth spurts, typically due to surges in productivity.
As the next slide suggests, this is what we find for a group of developing countries during
such growth spurts (as identified by Hausman, Rodrik and Pritchett). As you can see from
the chart below, savings grows faster than investment during a growth spurt,
Savings-Investment Balances around Growth Spurts:
Non-Industrial Countries 1970-2000
which explains why the current account deficit, narrows.
Another implication is that the correlation between growth and the current account
(alternatively, domestic savings) should be stronger in countries with weaker financial
systems. This is indeed what we find in the 2nd and 3rd columns in the next slide where
countries with indicators of financial development below the median have about twice the
coefficient on the current account as countries with financial development above the
At the micro level, we find that in countries with weaker financial systems, additional
foreign resources do not translate into stronger growth of financially-dependent industries.
Again, this suggests countries with low financial development do not have the absorptive
capacity for foreign savings.
A second explanation of the importance of domestic savings relative to foreign financing
relates to the exchange rate. There is increasing evidence that sustained growth has been
associated with the development of the domestic manufacturing sector which in turn
requires that its competitiveness not be undermined by overvalued exchange rates. We find
evidence that developing countries that rely on foreign capital are more prone to
overvaluation. Thus, our result of a positive correlation between the current account and
growth could be explained as follows: strong capital inflows lead to an overvalued
exchange rate, hurting manufacturing exports, which in turn could reduce long run growth
— perhaps because manufacturing growth is a key stepping stone to development. By
contrast, for industrial countries, we do not find that capital inflows affect the extent of
exchange rate overvaluation, nor do we find that overvaluation has any effect on growth.
Industrial countries seem to have more absorptive capacity for foreign capital.
The next explanation relates to volatility. Capital flows are volatile which in turn lead to
financial crises, setting back sustained growth. We have relatively little to add here except
to note that a number of studies show that there is no systematic correlation between
openness to capital and volatility. Moreover, the volatility argument is not easily squared
with the fact that the negative correlation between capital flows and growth is also present
for sub-Saharan Africa, which relies on official capital that tends to be less volatile than
So, to summarize: The implication of our analysis is that successful developing countries
have been less reliant on foreign capital because of their limited capacity to absorb it. Our
paper suggests that the anomaly of poor countries not attracting capital, or occasionally
even financing rich countries, may not really hurt the former's growth, at least conditional
on their existing institutional and financial structures. Opening up to foreign capital may
not help much unless the domestic financial sector and the tradable sector also develop.
But there is a dilemma for policy makers here. Even though reformers in developing
countries might want to wait to achieve a certain level of financial development before
pushing for financial integration, the prospect of financial integration and ensuing
competition may be needed to spur domestic financial development. One approach worth
considering might be a firm commitment to integrate financial markets at a definite future
date (as China has done in the banking sector in the context of the WTO), thus giving time
for the domestic financial system to develop without possible adverse effects from capital
inflows, even while giving participants the incentive to press for it by suspending the
sword of future foreign competition over their heads. Another possibility is to allow more
outflows in a controlled manner, so that the pressure on the exchange rate from inflows is
Finally, our analysis offers an alternative view of the global current account imbalances
that have built up recently. In the last decade or so, the U.S. has experienced a tremendous
surge in productivity. What is less well known is that non-industrial countries have also
experienced a large surge in productivity. There has indeed been a global productivity
shock, and the resulting pattern of current accounts might reflect the differing patterns of
financial sector development. Countries with strong financial systems have taken
advantage by investing and consuming more, running deficits (the US being the best
example). Countries with relatively weaker financial systems on the other hand have
increased savings and been more conservative on investment, with this tendency
accentuated by the experience of the Asian financial crisis and the indiscriminate lending
and investment leading up to it. Some industrial countries such as a number in the Euro
region have not experienced a similar productivity surge, and thus have been left out of the
Imbalances may therefore be a consequence of deep structural deficiencies, but given these
deficiencies might be an equilibrium outcome. Imbalances will come down as productivity
growth slows in the United States, and consumption and investment adjust in emerging
markets to the higher productivity. Financial sector reform will help here. But there are
risks associated with this equilibrium. When a large country runs a trade deficit of 6
percent of GDP for a long time, it will eventually find financing harder to come by. Poor
countries who have built up large foreign asset holdings run the risk of large exchange
losses at that point. Even if financial markets stay tolerant, protectionist politicians may
pull the trigger. A smooth unwinding is in everyone's interest, and to the extent public
policy can help, a risk management approach suggests it should. One should not confuse
the words "equilibrium", "stability", and "sustainability