Foreign Trade - An Introduction


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In this presentation we will deal with “Trade Finance”, where in we will talk about Methods and Types of Trading, Trade Contracts and Agreements, Trade Zone and role of financial institutions and banks in the Trading Business.
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Foreign Trade - An Introduction

  1. 1. Foreign Trade Foreign Trade-Meaning Balance of Trade Balance of Payments-Meaning-Accounting Foreign Contracts International Trade Agreement/Institutions Methods of Foreign Trade Banking Facilities Role & Objectives of Exim Bank Free Port/Free Trade Zone Off-Shore Banking Operations European Currency UnitForeign Trade Trade Finance Chapter 01
  2. 2. Introduction and Meaning The foreign trade of a country refers to its import and export of merchandise from and to other countries under contract of sale. No country in world produces all the commodities it requires. The commodities which country produces in surplus, it exports, while those producing in deficit, it imports. In short, foreign trade refers to Exchange of goods and services between two or more different countries. Such trade is also known as International Trade.Foreign Trade Trade Finance Chapter 01
  3. 3. Features and TypesForeign Trade is having following features. Involvement of different monitory units. Imposition of restrictions in import and export. by various countries. Imposition of restrictions on release of foreign currencies existence of multiple regulation.Foreign Trade is of 2 type:- a) Import b) Export Foreign Trade Trade Finance Chapter 01
  4. 4. Features and Types If the seller is abroad and the buyer is in the homecountry, exchange of goods between them is calledImport. If the seller is in home country and the purchaser isabroad, the Trade between them is called Export. Aforeign trade can be further classified in to two accordingto visibility. a) Visible b) Invisible. A trade which can seen i.e. exchange of goods,merchandise is a visible trade. Where as, exchange ofservices between the purchaser and seller is invisibletrade i.e. technical know-how, insurance etc. Foreign Trade Trade Finance Chapter 01
  5. 5. Dumping When goods are sold in foreign market withoutcontract of sale it is known as dumping. The dumping hasfollowing types.1) Sporadic 2) Predatory 3) Persistent 4) Reversedumping. When manufacturer wants to dispose of goods inforeign market at low price, without harming its normalmarket, the dumping is sporadic. To gain access in foreign market by selling goods atloss and to drive out the competitors refers to predatorydumping. When a producer consistently sells at a lower price inone market than in another, it is called persistent dumping. When manufacturer sells goods abroad at a higherprice than at home, the practice followed is called reversedumping. Foreign Trade Trade Finance Chapter 01
  6. 6. Balance of Trade Balance of trade refers to as the difference betweena country’s import of merchandise and its exports thereof.This is also called the net difference between the value ofcommodities imported and exported. Balance of trademay be positive, surplus or negative deficit depending onsituation of net position. The positive, surplus position occur when exportexceeds import and when import exceeds export thebalance of trade is said to be deficit or negative. Foreign Trade Trade Finance Chapter 01
  7. 7. Causes of Reduction/Enhancement in Balance of Trade There are two main factors for variation in balance of tradeposition. a) External Factors. b) Internal Factorsa)External Factors: • The sudden rise in price of essential commodities like edible oil, drugs, medical equipments. Etc. • Position of world • Wide inflation or recession. • Trade restrictions imposed by the developed countriesb) Internal Factors: • Domestic shortage of industrial and agricultural products. • Absence of high technology. • Inadequate knowledge of export market. • Neglect of export profitability. Foreign Trade Trade Finance Chapter 01
  8. 8. Corrective Measures To come out of unfavorable trade position,following corrective measures are required; • Export Promotion: By keeping quality & price competitive • Import Restriction: By imposing heavy tax & duty in import • Finance: By borrowings overseas. • Monitory Measures: By putting restriction on bank’s credit. • Fiscal Measures: By curtailing public expenditure • Devaluation: By devaluating country’s official rate of exchange Foreign Trade Trade Finance Chapter 01
  9. 9. Balance of Payment:- Meaning, Accounting The balance of payment of a country refers to, a systematicrecord of all trade transactions, visible and invisible imports andexports during a given period. The balance of payment is adifference between international transfer of funds for a country’simports and exports of goods and services for certain period. Theaccounting of balance of payment has two types viz. currentaccount and capital account. According to sec. 2(J) FEMA Act, 1999 Current Accountincludes private and government merchandise, invisible items like,Foreign trade, Services, Short term banking, etc. While the capital account transactions includes private longand short-term assets, banking transactions and official loans,amortization, IMF and reserves and monetary gold contingentliabilities [sec. 2(e)] Foreign Trade Trade Finance Chapter 01
  10. 10. Balance of Payment The study of balance of payment can besummarized as below:Definition: The balance of payment of a country is asystematic record of all transactions between residents ofthat country and the residents of foreign countries duringgiven period of time.Contents: It includes, Merchandise, visible and invisibletrade, Errors and Omission to strike a balance betweentwo sides of accounts.Use: The most important use is, it is guide forGovernment in framing it’s monetary, fiscal, exchangeand other policies. Foreign Trade Trade Finance Chapter 01
  11. 11. Balance of PaymentBroad Division: It is broadly divided into • Balance of payments on current account and • Balance of payments on capital accountBalances within the total: For the purpose of analysis theitems are divided into five;a) Trade Balance b) Current Account Balancec) Basic Balance d) Net Liquidity Balancee) Official transaction Balance. Foreign Trade Trade Finance Chapter 01
  12. 12. Disequilibrium In balance of payments, debit and credit itemsseldom balance. As a result, the balance of payment iseither in surplus or in deficit. When a country happens tohave a surplus balance in balance of payment over theyears, inflows of foreign capital take place, for that therates of interest are high and also there is confidence inthe country’s currency. The confidence in country’scurrency refers to no devaluation of that country’scurrency is apprehended. When, on the other hand, acountry has a deficit or unfavorable balance of paymentits foreign exchange resources get depleted. Foreign Trade Trade Finance Chapter 01
  13. 13. Correcting the Deficit As said earlier, if country has an president deficit,following corrective measures are to be taken by it’sGovernment•Import Curtail : When imports are restricted, the position improves. But it has to be used wisely.•Export Promotion :By way of packing credit facility, export bill purchase, insurance cover etc.•Monetary Measures :By raising the (SLR) Statutory Liquidity Ratio / or by open market operations by the Central Foreign Trade Bank. Finance Trade Chapter 01
  14. 14. Correcting the Deficit•Fiscal Measures : These relate to a government’s revenue and expenditure and include budgeting for a surplus.•Devaluation : This refers to a reduction by the government in the country’s official rate of exchange between it’s own currency and other currencies. Foreign Trade Trade Finance Chapter 01
  15. 15. Foreign Contracts Goods are traded between two countries under contracts ofsale / purchase which contains price, mode of delivery etc. Theforeign contracts can be studied by following points :•Mode of Delivery : The delivery may be actual or constructive.As the name suggest, actual delivery mean physical delivery ofgoods to buyer. In constructive type not the physical but thedocuments are handed over to the buyer. In foreign trade thedelivery is always constructive.•Mode of Payment : Following are different types of payments :a) OD / DP : Payment on Demand/Payment against Documents.b) DA : Documents delivered after Acceptance through Bill of Exchange.c) VP / CoD : Value Payable/ Cash on Delivery both these terms related to post parcel delivery. Foreign Trade Trade Finance Chapter 01
  16. 16. Foreign Contracts Freight and Insurance : In foreign trade in case offreight and insurance certain abbreviations are used as: 1. c.i.f. : Refers to the amount of insurance, freight are included in invoice or contract of sale / purchase. 2. c. & f. : Stands for cost and freight, mean that when goods shipped under c.i.f. contract, freight should be prepaid. 3. f.o.b. : These letter stands for free on board. In this buyer names the vessel and specifies the date of delivery. 4. f.a.s. : This means free alongside ship and imply that seller is responsible for the delivery of goods within specific time. Foreign Trade Trade Finance Chapter 01
  17. 17. International Trade Institutions Following chart represents some of the International TradeInstitutions / Agreements : Let’s look each of above in brief. EEC G.A.T.T. UNCTAD International Trade Agreements ACU OPEC Petro Dollars Foreign Trade Trade Finance Chapter 01
  18. 18. G.A.T.T. G.A.T.T. is the abbreviation of the GeneralAgreement on Tariff and Trade, which was signed atGeneva by 23 countries in 1947, effective January 1948.It is a world organization designed to bring aboutmaximum possible rate of growth in world trade byreducing tariff barriers among members countries. Itbelieves in negotiation and throughout it, GATT worksfor reduction of barriers of trade. In 1967, the negotiationround called, Kennedy Round was the biggest ever tariffcutting deed. In September 1986, ministers of 100countries got together in Uruguay and began 8th round ofnegotiation.Foreign Trade Trade Finance Chapter 01
  19. 19. G.A.T.T. The round of talks concluded on 15th December,1993. The concerned matters are :•Reducing specific trade barriers and improving marketaccess.•Strengthening G.A.T.T. disciplines.•Trade Related Intellectual Property Rights (TRIPs).•Trade Related Investment Measures (TRIMs).•Trade in Service. Mr. Arthur Dunkel, former Director General ofG.A.T.T. submitted comprehensive document which iscommonly known as, Dunkal Proposal on December 20th1991. India signed this Pact on 15/4/1994 along with 124other countries.Foreign Trade Trade Finance Chapter 01
  20. 20. EEC and UNCTADThe European Economic Community (EEC) : TheEuropean community also referred as the European CommonMarket (ECM) come into being with Treaty of Rome in 1957,by six countries viz. France, Germany, Italy, Belgium,Holland and Luxembourg. The treaty provides free movementof goods, service and capital amongst member countries.United Nations Conference on Trade and development(UNCTAD) : This is a forum of the United NationsOrganization, aiming at international economic co-operationin the areas of trade and aid. The UNCTAD is held every fouryears to seek ways to end disparities between the rich andpoor nations. There have been so far four conferences. So for,the success of such meetings in achieving its objectives hasbeen very limited.Foreign Trade Trade Finance Chapter 01
  21. 21. OPEC & Petro DollarsOrganization of Petroleum Export Countries (OPEC): The organization, which consist of Iraq, Iran, SaudiArabia, UAR, Kuwait, Libya, Nigeria etc. aims atprotecting the interest of the member countries bycontrolling the prices of petrol and petroleum products.Petro Dollars :The accumulation of currencies at thedisposal of the oil exporting countries of Western Asiaand other places, have been invested by the ownercountries with American banks and / or in shares inmultinational concerns in the U.S.A. Such deposits indollars in the U.S.A. are referred to as oil or petro dollars. Foreign Trade Trade Finance Chapter 01
  22. 22. Asian Clearing UnionAsian Clearing Union (ACU) : It was established on 9thDecember 1947 by Reserve Bank of India, the Bangladesh Bank,the Bank Markazi of Iran, the Nepal Rastra Bank, the State Bank ofPakistan and the Central bank of Sri Lanka as the foundermembers. In April 1977, the union of Burma Bank joined theUnion. It’s headquarters are at Teheran, Iran and its operations areconducted by Board of Directors and a manager. The objectives ofthis union are,•To facilitate payments for current international transactions withinthe ESCAP region.•To reduce / eliminate use of extra regional currencies to settletransactions by promoting the use of the participants currencies.•To contribute to the expansion of trade and promotion of monetarycooperation among the countries of the area.Foreign Trade Trade Finance Chapter 01
  23. 23. ACU and India Since 1984, all eligible payments between Indiaand other member countries except, Nepal, to be settledthrough the ACU. The payments excluded are as below :•Travel•Contracts made from an International FinancialInstitution like world bank.•Deferred payments facilities extended by one membercountry to another member country.Payments between India and Nepal are not eligible to besettled through ACU. Foreign Trade Trade Finance Chapter 01
  24. 24. Benefits of ACUThe advantages of ACU can be summarized as below : Appreciable savings of the liquid foreign exchange reserves. Reduction of the working balances in the foreign exchange. Saving in the cost of settlement. Curtailment of the time needed before for settlement of transactions by the elimination of the intermediary correspondents in London or New York. Foreign Trade Trade Finance Chapter 01
  25. 25. Euro Money It is a monetary system of eleven Europeancountries, which started it’s functioning since January1999. This is third strong currency after dollar (U.S.).This is the money against which there is neither goldbanking nor any natural government. Some of thecountries who’s joint efforts make this are, Italy,Germany, Belgium, Finland, Ireland etc. Other 5mentioned nations not yet joined the Euro due toeconomic and political reasons are Great Britain,Denmark, Egypt, Sweden and France.Foreign Trade Trade Finance Chapter 01
  26. 26. Conditions for Euro Money Agreement Following are some of the conditions for thisagreement : The countries have to keep their Budget deficit, below 3% of G.D.P. i.e. Gross Domestic Product. Countries should have government debts below 60% of GDP. Inflation should not exceed 1.5%. Rate of interest should not be more than 2%. Foreign Trade Trade Finance Chapter 01
  27. 27. Foreign Trade : Methods Goods may be traded or exchanged betweenexporter and importer in any of the three ways :a)On Open Account Basis : Where the credit status ofimporter is high, the goods are sent direct to him inanticipation of payment in due course. Export on thisbasis is not permissible in India.b)Under Bill of Exchange : The exporter may draw billsof exchange on the importer for the value of the exportsand collect the bills through bank.c)Under Letter of credit : The exporter may agree toexport the goods only against a letter of credit opened inhis favour.Foreign Trade Trade Finance Chapter 01
  28. 28. Banking Facilities Banks can render assistance to Indian merchantsand manufacturers already engaged in or intending toenter in foreign markets in following ways : • Bank can provide credit worthiness and status reports. • Bank can assist to Indian exporter who wish to go abroad for export promotion, business tour etc. • Bankers can, when required provide the name, address of foreign firms which may be interested in joint ventures in India. • For importers bank can collect import bills drawn on them and arrange remittance. • For exporters bank may render agency service. • Bankers also provide to importers and exporters information about exchange control regulation, import license procedures to be followed etc. Foreign Trade Trade Finance Chapter 01
  29. 29. Role of Exim Bank Exim Bank is short form of Export Import bank ofIndia. It is a public sector bank established on January 1st1982 with authorised share capital of Rs.200 crores. Themain objects of Exim Bank are :•Provide financial assistance to exporters.•Promoting foreign trade of India.•Coordinating the working of institutions engaged infinancing export and import.•Assist Indian Joint Ventures in third world.•Concentrate on medium and long term finance.Foreign Trade Trade Finance Chapter 01
  30. 30. Functions of Exim BankFollowing are some of the functions of Exim bank : To provide financial assistance to exporters and importers. Granting loans and advances in and outside India. Refinancing usance export bills of banks. Granting obligation, jointly with banks on behalf of project exporters engaged in the execution of construction and turnkey contracts abroad. To act as a principal financial institution for coordinating the working of other institutions.Foreign Trade Trade Finance Chapter 01
  31. 31. Objectives : Exim Bank Following are some of the objectives which havebeen setup before exim bank : Granting loans and advances in India solely or jointly with commercial banks. Granting loans and advances outside India. Issuing bid-bonds and guarantees and other facilities in India or abroad. Selling or discounting of export bills in the world market. Maintaining of foreign currency accounts.Foreign Trade Trade Finance Chapter 01
  32. 32. Objectives : Exim Bank Undertaking and financing of research, surveys etc. Providing technical, administrative and financial assistance. Planning, promoting, developing and financing export oriented business, industries. Financing export of machinery and equipment on lease basis. Granting loans and advances to Indian joint Ventures abroad.Foreign Trade Trade Finance Chapter 01
  33. 33. Supplier’s Credit It is also called as seller’s credit, under this, fundsare provided on deferred payment terms to Indianexporters of plant, equipment and related services. Thisprogramme covers project export, which could be turnkeyproject or construction projects. The credit is provided by Exim Bank inparticipation with commercial banks where individualcontract value is not more than Rs.3 crores. The exporter is required to submit the projectedquarterly drawal of entire credit amount well in advanceof it’s utilization. ECGC insures the exporters and inmany cases additionally gives the guarantee to thenegotiating bank. Foreign Trade Trade Finance Chapter 01
  34. 34. Buyer’s Credit This credit is extended by exim bank to buyersabroad to enable them to import engineering goods andprojects from India on deferred credit terms. This facilityis to be secured by a letter of credit or bank guarantee orpromissory note from government. Exim Bank directly enter into an agreement withthe overseas borrower outline the terms and conditions ofthe credit covering the export contract.Foreign Trade Trade Finance Chapter 01
  35. 35. Facilities Provided by Exim Bank Following are some of the facilities provided byExim Banks. Consultancy and Technology Services. Overseas Investment Financing Programme. Pre-shipment Credit. Export Oriented Units. Computer Software Exports. Export Marketing Fund. Export Product Development. Project Preparatory services. Foreign Trade Trade Finance Chapter 01
  36. 36. Terms and Conditions Exim Bank has been operating a lendingprogramme subject to following terms and conditions : • The assistance may be direct or may be refinance to a commercial bank. • Commercial banks lending for projects costing up to Rs.2 crores are eligible for refinance. • The assistance rendered is usable for acquisition of fixed asset. • No credit authorization from RBI or any reference to IDBI is necessary. • The rate of interest is currently 9 % p.a. • The loan is repayable in 10 years including moratorium period. Foreign Trade Trade Finance Chapter 01
  37. 37. Free Port / Free Trade Zone A free port is a port declared as such by thegovernment of the country where no quantitativerestrictions on imports into or exports. A free port or a freetrade zone is also conductive to entrepot trade i.e. importsnot for domestic consumption but for re export. In India, the idea of establishing free ports or freetrade zones was first mooted in 1957 by the ExportPromotion Committee. The object behind this wasstimulation of exports. At the moment there are two free trade zones inIndia, one at Kandla in Gujrat and other at Santa Cruz inMumbai. The electronic Export Processing Zone (EEPZ) atSanta Cruz, Mumbai has about 30 units set up in its areaengaged in producing 100% export oriented electronicequipment. Foreign Trade Trade Finance Chapter 01
  38. 38. Off-Shore Banking Off-shore banking is altogether new system of banking.This system is operated through the off-shore banking units ofoverseas banks in under developed countries. The funds of an off-shore banking units are employed in financing capital intensivelocal projects or in turnkey projects undertaken by exporters of thehost country. The profit made out of such banking operations maybe repatriated, usually tax free, to the parent bank. Off-shore baking units are at present operating at Bahrain,Singapore, Hong Kong etc. There are 20 centers in world. Thebenefits to host country of such banking are as below :•Inflow of interest free foreign capital into the country.•Exemption from minimum reserve requirement.•License fees are generally low.•Close proximity to the important loan outlets or deposit sources . Foreign Trade Trade Finance Chapter 01
  39. 39. IBU International Finance Ltd. The first ever international financial organizationsponsored by a corporation of Indian nationalized banks,such as Indian, Bank of Baroda and Union Bank of India.It was established in Hong Kong and started functioningin October 1980. This is a deposit taking organizationwith off-shore and other activities. The organization iseligible to accept deposits of Hong Kong dollars 50,000and above. Foreign Trade Trade Finance Chapter 01
  40. 40. ECU ECU is abbreviation of European Currency Unit. Ithas been recognized as a foreign currency officially byItaly, France, Belgium and Luxembourg and de facto bythe United Kingdom, Eire, Netherlands and Denmarkfrom January 2002. The EUC is a currency basketcomposed according to the ‘open basket’ formula of theeight EMS currencies plus sterling and Greek drachma. There is also an inter-bank deposit market in ECUfor ECU 10 billion or move for maturities up to one yearor more. The ECU is quoted against U.S. dollars andcross rates are calculated against other currencies withvery narrow spreads. Foreign Trade Trade Finance Chapter 01
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