1. СИБИРСКИЙ ГОСУДАРСТВЕННЫЙ УНИВЕРСИТЕТ
ПУТЕЙ СООБЩЕНИЯ (НИИЖТ)
Новосибирск 2009
Е.А. СТУЧИНСКАЯ, Е.Н. МАТВИЕНКО, Т.А. АРКАНОВА
ENGLISH
FOR CONTRACTING
IN INTERNATIONAL TRADE
АНГЛИЙСКИЙ ЯЗЫК
В КОНТРАКТНОМ ДЕЛЕ
Рекомендовано УМО по образованию в области финансов, учета
и мировой экономики в качестве учебного пособия для студентов,
обучающихся по специальности «Мировая экономика»
3. 3
Contents
Предисловие..................................................................................................................................................... 5
Unit 1. INTERNATIONAL TRADE ................................................................................................................ 6
Text 1.1. Forms of International Business......................................................................................................... 7
Text 1.2. Approaches to Doing Business .......................................................................................................... 7
Text 1.3. Reasons for and Advantages of International Trade .......................................................................... 8
Text 1.4. The Document in Which International Trade Transactions Are Reflected ........................................ 8
Text 1.5. The Case for Free Trade................................................................................................................... 12
Text 1.6. Trade Based on Absolute Advantage: Adam Smith......................................................................... 13
Text 1.7. Trade Based on Comparative Advantage: David Ricardo................................................................ 14
Text 1.8. Relative Price ................................................................................................................................... 15
Text 1.9. Controlling International Trade........................................................................................................ 18
Text 1.10. Methods of Controlling International Trade................................................................................... 20
Text 1.11. The General Agreement on Tariffs and Trade (GATT) ................................................................. 22
Unit 2. METHODS OF FOREIGN TRADE. INTERMEDIARIES INVOLVED .......................................... 27
Text 2.1. Direct and Indirect Ways of Trade................................................................................................... 28
Text 2.2. Functions of Agents and Distributors............................................................................................... 31
Text 2.3. Specific Features of Joint Ventures.................................................................................................. 35
Unit 3. COMMERCIAL ACTIVITIES AND TYPES OF CONTRACTS...................................................... 41
Text 3.1. Foreign Trade Activities................................................................................................................... 42
Text 3.2. Countertrade..................................................................................................................................... 42
Text 3.3. Disposal of Countertraded Goods .................................................................................................... 45
Text 3.4. Other Forms of Basic Activities....................................................................................................... 46
Text 3.5. Licence Agreements......................................................................................................................... 50
Text 3.6. Types of Contracts ........................................................................................................................... 53
Text 3.7. Steps to Conclude the Contract of Sale............................................................................................ 54
Text 3.8. Main Characteristics of the Contract of Sale.................................................................................... 55
Unit 4. TERMS OF DELIVERY..................................................................................................................... 65
Text 4.1. International Transportation............................................................................................................. 65
Text 4.2. Development of Incoterms............................................................................................................... 66
Text 4.3. Structure of Incoterms...................................................................................................................... 70
Text 4.4. Mode of Transport and the Appropriate Incoterms 2000................................................................. 75
Unit 5. TERMS OF SHIPMENT..................................................................................................................... 82
Text 5.1. General Considerations about Transportation of Cargoes Abroad................................................... 83
Text 5.2. Transportation of Goods................................................................................................................... 83
Text 5.3. Difficulties in the World Sea Transportation ................................................................................... 86
Text 5.4. The Freight Market and Different Types of Chartering ................................................................... 87
Text 5.5. Charter Parties and Other Shipping Contracts.................................................................................. 93
Text 5.6. Export Documents............................................................................................................................ 96
Text 5.7. Documents of Dispatch.................................................................................................................... 97
Text 5.8. Bill of Lading (B/L) ......................................................................................................................... 97
Text 5.9. Types of Invoices and Certificate of Origin..................................................................................... 99
Unit 6. PACKING AND MARKING............................................................................................................ 105
Text 6.1. The Essence of Packing and Marking ............................................................................................ 106
Text 6.2. Functions and Tasks of Packing..................................................................................................... 107
Text 6.3. Loading and Unloading.................................................................................................................. 111
Text 6.4. Recent Developments in Packing and Carrying Goods.................................................................. 115
Text 6.5. Packing and Marking Regulations ................................................................................................. 117
Unit 7. PAYMENT IN INTERNATIONAL TRADE................................................................................... 123
Text 7.1. How to Avoid Hazards in International Transactions .................................................................... 123
Text 7.2. Currency and Financial Terms of the Sales Contract..................................................................... 126
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Text 7.3. Two Methods to Effect Payment.................................................................................................... 128
Text 7.4. Bills of Exchange ........................................................................................................................... 129
Text 7.5. Letter of Credit............................................................................................................................... 131
Unit 8. FORCE MAJEURE AND INSURANCE ......................................................................................... 138
Text 8.1. Force Majeure Circumstances........................................................................................................ 138
Text 8.2. Why to Insure................................................................................................................................. 142
Text 8.3. Marine losses.................................................................................................................................. 144
Text 8.4. Principles of Insurance................................................................................................................... 145
Text 8.5. Insurance Policies........................................................................................................................... 145
Unit 9. CLAIMS ANS SANCTIONS. ARBITRATION............................................................................... 151
Text 9.1. Application of National and International Legislation in Arbitration ............................................ 152
Text 9.2. Infringement of Liabilities ............................................................................................................. 153
Text 9.3. The Seat for Arbitration ................................................................................................................. 157
Text 9.4. Establishment of the Arbitration Procedure in Russia.................................................................... 158
Appendix 1. SUPPLEMENTARY READING.............................................................................................. 165
Appendix 2. CONTRACTS .......................................................................................................................... 180
Appendix 3. CASE STUDY ......................................................................................................................... 188
Appendix 4. TESTS AND READING COMPREHENSION........................................................................ 206
GLOSSARY.................................................................................................................................................. 218
REFERENCES.............................................................................................................................................. 227
5. 5
ПРЕДИСЛОВИЕ
В последнее время резко возросло число предприятий и организаций, принимающих участие
в экономическом, производственном и научно-техническом сотрудничестве с партнерами из
зарубежных стран. Это означает, что во внешнеэкономическую деятельность вовлекается все
большее количество специалистов различных отраслей народного хозяйства. Таким образом,
особую актуальность приобретают вопросы профессиональной компетенции этих специалистов в
области внешних экономических связей.
Понятие «внешнеэкономическая деятельность» охватывает самые разнообразные сферы
деятельности, такие как общий маркетинг и технику проведения внешнеторговых операций,
финансирование и рекламу, умение вести переговоры и разбираться в деталях внешнеторгового
контракта и т.п. Компетентность специалиста и определяется, прежде всего, глубиной его знаний в
этих областях, а также умением использовать их в конкретной деятельности.
Целью данного пособия является приобретение студентами определенных профессиональных
компетенций, а именно, навыков использования английского языка в профессиональной
деятельности: чтение и перевод источников информации на английском языке, связанных с
характером предстоящей профессиональной деятельности (профессиональная научная литература,
газетно-журнальные статьи и материалы Интернета), анализ прочитанного, выборка необходимого
материала, обобщение и применение этой информации в практической деятельности. Аутентичные
тексты пособия, система упражнений и контрольно-тестовые задания помогают в достижении этой
цели.
Пособие состоит из девяти уроков (Units), четырех приложений (Appendices) и глоссария
(Glossary). Для лучшей ориентации в учебном материале и облегчения работы преподавателей и
студентов с данным пособием все уроки имеют четкую унифицированную структуру:
• каждый урок предваряется вопросами дискуссионного характера, целью которых является
проверка уже имеющихся знаний и развитие речевых навыков;
• все уроки разделены на смысловые блоки (Reading), каждый из которых содержит
упражнение по введению основной терминологии (Key concepts and terms), тексты для чтения и
задания по контролю понимания прочитанного (Concept check);
• после каждого блока следуют упражнения на отработку и закрепление лексического
материала (Language study);
• все тексты блоков предваряются предтекстовыми заданиями, направленными на развитие
умений извлекать основную смысловую информацию;
• раздел урока, предназначенный для формирования навыков и умений работы с
внешнеторговым контрактом купли-продажи (Contracting), знакомит с основным содержанием
типового контракта купли-продажи и направлен на развитие навыков и умений чтения, понимания и
обсуждения соответствующей теме урока статьи контракта купли – продажи (Units 3–9);
• раздел урока, содержащий соответствующий тематике урока текст на русском языке для его
изложения на английском языке (Rendering), направлен на практическое применение
сформированных речевых навыков и умений при работе с текстами профессиональной тематики.
Пособие содержит четыре приложения и глоссарий:
• приложение 1 (Supplementary reading) предлагает дополнительные тексты для чтения на
английском языке, связанные с основными текстами пособия и расширяющие содержание курса;
• приложение 2 (Contracts) содержит образцы внешнеторгового контракта купли-продажи на
русском и английском языках;
• приложение 3 (Case study) представляет реальные внешнеэкономические проблемные
ситуации, позволяющие решать предлагаемые проблемы компаний, использовать полученные
знания о внешнеэкономической деятельности и контрактном деле при анализе ситуаций, а также
развивать коммуникативные навыки в процессе презентации материала;
• приложение 4 (Tests and reading comprehension) содержит тесты (Tests) на контроль
усвоенного понятийно-терминологического аппарата уроков и тестовые задания (Reading
comprehension) на проверку пройденного материала, а также навыков понимания текстов и умения
извлекать из них необходимую информацию.
Глоссарий учебного пособия способствует закреплению и активизации профессиональной
лексики.
Авторы
6. 6
Unit 1
INTERNATIONAL TRADE
DISCUSSION
1. We are all traders. Do you agree? Does it sound good?
2. What do people trade? What are you trading now?
3. Why and how do people trade?
4. Do you agree with the following statements?
• “Smart nations try to get the most back from what they sell”.
• “The cheaper imports are the better off the nation is”.
• “Inflows of money tend to equal outflows”.
READING
WHY INTERNATIONAL TRADE ARISES
Key concepts and terms
Match up the terms on the left with the definitions on the right.
1) trade a) a system of organising the manufacture of an article in a series of
separate specialised operations, each of which is carried out by a
different worker or group of workers, region or country, leading to
interdependence
2) supply b) the benefit that could have been gained from an alternative use of the
same resource
3) demand c) the factors which make it possible for larger organisations or
countries to produce goods or services more cheaply than smaller ones
4) specialisation d) the act of buying and selling goods and services either on the
domestic (wholesale and retail) markets or on the international (import
and export) markets
5) opportunity cost e) a certificate of creditorship or property carrying the right to receive
interest or dividend, such as shares or bonds
6) economy of scale f) that part of the balance of payments composed of the balance of trade
and the invisible balance
7) real asset g) the amount of a commodity that producers are willing and able to
offer for sale at a specified price
8) security h) the amount of a commodity that consumers are willing and able to
purchase at a specified price
9) current account i) an identifiable asset, such as a building, machinery and equipment,
patents and trade marks in contrast to financial liabilities
10) portfolio
investment
j) money that people or companies of one country invest in another by
buying property, building factories, buying businesses, etc., thus
acquiring the right to control property abroad
11) foreign direct
investment
k) the difference over a given time between total payments to foreign
nations (arising from imports of goods and services and transfers
abroad of capital, interest, grants, etc.) and total receipts from foreign
nations (arising from exports of goods and services and transfers from
abroad of capital, interest, grants, etc.)
12) balance of trade l) investment that provides a yield but does not provide the right to
control property; capital employed for the purchase of bonds and shares
13) balance of
payments
m) the difference in value between total exports and total imports of
goods
7. 7
14) capital account n) differentiation and specialisation of labour
15) labour division o) that part of a balance of payments composed of movements of
capital and international loans and grants; a record of international
exchanges of assets and liabilities
16) foreign exchange p) foreign bills and currencies
Text 1.1. Study the brief description of the five forms of world business, which link the national
economies, forming the global economy. Elicit more information about them from your fellow-students.
Forms of International Business
International trade An exchange of goods, results of intellectual labour, services and work
force on the international level. International trade is the most ancient
and important form of the world business. At the heart of international
trade lies the tendency of the world economy to use the results of the
international division of labour most efficiently. This leads to
specialisation of countries in the production of a particular good. So, the
main reason for people and nations to trade is the benefit derived from
specialisation. Another one is the difference in technology. Technology
refers to the techniques used to turn resources (labour, capital, land) into
outputs.
International production
cooperation
Production relations for joint activities in terms of international labour
division. Joint ventures and multinationals are the examples of this
form. Nowadays employing foreign assets is widely spread: selling and
purchasing patents and licences, employing foreign technologies,
trademarks and brands, franchising, transfer of know-how, etc.
International services Economic goods which do not take a tangible and storable form but
bring benefit to the consumer. They include consulting, transport,
insurance, scientific and technical, tourist and other services.
International finance and
credit relations
World business related to the operations with money and securities.
International investments The activity based on international capital transfer from one country to
another aiming at profit gaining and social effect. There are direct
investments acquiring the right of ownership and portfolio investments.
Text 1.2. Read the text and discuss the difference between “cowboy capitalism” and “global
village” approaches to doing business both internally and externally.
Approaches to Doing Business
Economist Kenneth Boulding uses the term ‘cowboy capitalism’ to describe the American
economy of yesterday. He compares yesterday’s capitalism to the early American West. The land was
so rich and the resources so vast that people could abuse their environment with impunity. They could
cut down trees, kill buffalo, and plow the grass land. And if erosion began to take the land or the
animals got sparse, the answer was easy: move on to a virgin territory, and leave the worn-out land
behind. There was always more over the horizon.
There is nothing we can do to change the past and Boulding’s cowboys are now gone. Boulding
says that the time of cowboy capitalism is also gone. The cowboy capitalist cannot operate successfully
without a vast world of untapped markets. And it is easy to see that the untapped markets are getting
fewer and fewer, faster and faster. The time for quick and dirty profits has run out.
Another term to describe our world became popular in the 1960s. We are on ‘spaceship Earth’,
according to some writers. All persons are part of one survival system, hurtling through space together.
Each one's actions affect everyone else on the spaceship. We can no longer afford to use up resources.
We must recycle them and use them again.
Almost everything being said about natural resources in our crowded times is also true for
international business practice. Business people of the international global village must recognize that
8. 8
the time of cowboy capitalism is over. The abuse of any part of the world’s environment must be seen as
hazardous to the progress of all our fellow travellers on ‘spaceship Earth’. This new awareness must
accompany the learning of world trade concepts. International marketing is no longer a matter of
language, distance, and politics. International trade demands a place in the education of all business
people who mean to survive in the global market.
Texts 1.3. Read the text and explain how and why international trade arises.
Reasons for and Advantages of International Trade
International trade arises simply because countries differ in their demand for goods and in their
ability to produce them.
On the demand side, a country may be able to produce a particular good but not in the quantity it
requires. The USA, for instance, is a net importer of oil. On the other hand, Kuwait does not require all
the oil it can produce. Without international trade most of its deposits would remain untapped.
On the supply side, resources are not evenly distributed throughout the world. One country may
have an abundance of land; another may have a skilled labour force. Capital, oil, mineral deposits,
cheap unskilled labour and a tropical climate are other factors possessed by different countries in
varying amounts.
Nor can these factors be transferred easily from one country to another. Climate, land and
mineral deposits are obviously specific. Labour is far more immobile internationally than within its
own national boundaries. Capital, too, moves less easily; exchange controls, political risks and simple
ignorance of possibilities may prevent investors from moving funds abroad.
Because factors are difficult to shift, the alternative – moving goods made by those factors – is
adopted. What happens is that countries specialise in producing those goods in which they have the
greatest comparative advantage, exchanging them for the goods of other countries.
International trade has the following advantages.
1) It enables countries to obtain the benefits of specialisation.
Specialisation by countries improves their standard of living. It is obvious that without
international trade many countries would have to do without certain products. Britain, for instance, has
no gold or aluminum, and Sweden has no oil. More important, many goods can be enjoyed which if
produced at home would be available only to the very wealthy, for instance, bananas, spices, oranges
and peaches in Britain. But this benefit can be applied generally to all imports. The law of comparative
costs shows that, provided countries differ in the relative costs of producing certain goods, they can
probably gain by specialisation and trade. The law of comparative costs merely shows how two
countries can specialise to advantage when their opportunity costs differ.
2) By expanding the market, international trade enables the benefits of large-scale production to be
obtained.
Many products, e.g. computers, pharmaceuticals, aircraft and cars, are produced under conditions
of decreasing cost. Here the home market is too small to exploit fully the advantages of large-scale
production. This applies particularly to small countries such as Switzerland. In such cases international
trade lowers costs. So, the economy of scale implies a fall in average costs resulting from an increase
in the scale of production.
3) International trade increases competition and thereby promotes efficiency in production.
Any restriction of the market makes it easier for one seller to gain control. In contrast,
international trade enhances competition. A government must always consider the risk of a monopoly
developing when it gives protection to the home industry by tariffs, etc.
4) International trade promotes beneficial political links between countries. Examples of this are
the European Community (EC), and with the Commonwealth trade is still an important link.
Text 1.4. Read the text and spell out the purpose of the balance of payments.
The Document in Which International Trade Transactions Are Reflected
International trade transactions are exposed in the balance of payments. The balance of
payments is an overall statement of a country’s economic transactions with the rest of the world over
some period, often a year. It is the net result of all transactions, including trade in goods, between one
9. 9
country and all others. A table of the balance of payments shows amounts received from foreign
countries and amounts spent abroad. If receipts exceed spending, a country has a balance surplus. On
the contrary, if spending exceeds receipts, a country has an adverse balance. There are a great many of
transactions with ‘invisible’ items, such as trade in services (sales of services to non-residents and
purchases of services from non-residents: services of airlines and shipping, hotels and other tourist
facilities, banking, insurance, tourism, medical services and education, and various forms of
consultancy) and ‘visible’ items which are exports and imports of goods that have to be physically
transported between countries.
The balance of payments record or account is conventionally divided into the current account
and the capital account. The current account records payments and receipts for immediate transactions,
such as the sale of goods and rendering of services. Consequently, it is subdivided into the
merchandise, or visible account (often also termed the trade account or balance of trade), comprising
the movement of goods; and invisible account, comprising the movement of services, transfers and
investment income. Services comprise transport, travel, banking, insurance, broking and other
activities. Transfers include money movement for the transmission of legacies, pensions and other
non-commercial items. Investment income consists of the interest, profits and dividends deriving from
capital placed abroad.
The current account is contrasted with the capital account, where transactions do not involve
income or expenditure, but change the form in which assets are held. Receipt of a loan, for example, is
not income, but exchange of cash now for a promise to repay, usually with interest, in the future. The
capital account shows money movements not immediately devoted to trade, such as investments; it is a
record of international exchanges of assets and liabilities. This account is normally subdivided into
long-term and short-term capital, the former relating to capital employed for investment purposes, the
latter to bank advances, trade credit and the like. Long-term capital is again subdivided into foreign
direct investment (FDI) capital, or capital employed for the establishment of commercial premises and
industrial plant; and portfolio investment capital, or capital employed for the purchase of bonds and
shares.
FDI implies the acquisition of real assets abroad. This may be done by remitting money abroad
to be spent on acquiring land, mines, or machinery, or buying existing foreign businesses. With FDI,
the right to control property is acquired. Portfolio investments do not provide the right to control
property; they only give a profit or yield.
The third element in the balance of payments is changes in official foreign exchange reserves.
Such reserves are liquid assets held by a country’s government or central bank for the purpose of
intervening in the foreign exchange market. These include gold or convertible foreign currencies, for
example, US dollars for countries other than the United States, and government securities
denominated in these currencies.
Concept check
1. Complete the table with details about the five forms of international business.
Forms of International Business
1) International trade 2) 3) 4) 5)
a) the oldest form of
international business
a) a) a) a)
b) b) b) b) b)
… … … … …
2. Fill in the table with specific features of “cowboy capitalism” and “spaceship Earth/global
village” and describe these concepts.
“cowboy capitalism” “spaceship Earth/global village”
1) 1)
2) 2)
… …
10. 10
3. Read each statement and decide if it is true or false according to Text 1.3. Explain your point
of view.
1) Supply and demand are primary factors that give rise to international trade.
2) All production factors are internationally mobile.
3) Specialisation of a country can be explained by different opportunity costs.
4) International trade may either enable or disable favourable political relations between
countries.
5) It is more problematic for bigger countries to enjoy the pluses of large-scale production.
6) Protection of home industries enhances competition.
7) Without specialisation certain products would be accessible only to the rich.
4. Use the words in the box to complete the table. Use a dictionary for help.
barriers dumping protectionism quotas open borders tariffs
laissez-faire deregulation strategic industry liberalise subsidise
infant industries restrictions customs
In favour of free trade Against free trade
1) open borders 1) barriers
2) 2)
… …
5. Discuss the following questions.
1) Is free trade always a good thing?
2) Do you think it leads to the creation of jobs, or to unemployment? Why?
3) Should certain industries be protected? If so, which and why?
6. Complete the chart with the three parts in the balance of payments and their details. Describe
the balance of payments.
7. “Exports are good for a country. Imports are bad for a country.” Do you agree with this
statement?
11. 11
LANGUAGE STUDY
1. Find in Texts 1.1–1.4 the English equivalents for the following word combinations and parts
of sentences.
Выгода, извлекаемая из специализации; принимать материальную форму; использование
зарубежных технологий; безнаказанно злоупотреблять окружающей средой; стали редкими;
неосвоенные рынки; перевод денежных средств; способствует получению выгод от
крупномасштабного производства; ограничение рынка; показаны в платёжном балансе;
получение ссуды; приобретение реальных активов; положительное сальдо баланса;
отрицательное сальдо баланса.
2. Match the terms on the left with their definitions on the right.
1) surplus a) a non-trading business asset of a relatively permanent nature, such
as plant, fixtures, or goodwill
2) capital asset b) a particular product or a characteristic that serves to identify a
particular product
3) brand c) lay out (money or capital in an enterprise, esp. by purchasing
shares) with the expectation of profit
4) franchising d) an excess of receipts over payments on the balance of payments
5) invest e) an excess of revenues over outlays and expenses in a business
enterprise over a given period of time, usually a year; the monetary
gain derived from a transaction
6) profit f) the provision of goods or services to meet customer or consumer
needs
7) marketing g) an arrangement in which a company gives a business the right to
sell its goods or services in return for payment or a share of the profits
8) adverse balance h) an excess of payments over receipts on the balance of payments
3. Find the words in Text 1.3 which mean the following.
1) To spread throughout a space or area.
2) The price paid or required for acquiring, producing, or maintaining something, usually
measured in money, time, or energy; expense or expenditure.
3) The quality or state of being efficient; competence.
4) A level of subsistence or material welfare of a community, class, or person.
5) To provide someone with adequate power, means, opportunity, or authority to do
something; to make possible.
6) Affluent; rich.
7) Lack of knowledge, information, or education.
8) A tax levied by a government on imports or occasionally exports for purposes of
protection, support of the balance of payments, or the raising of revenue.
4. Replace the italicised words in the sentences below with the words and word combinations in 1
and 2.
1) Nowadays, you can hardly imagine a serious business which would feel certain that it
could use the resources with no unpleasant consequences.
2) All McDonald’s restaurants operate globally on the principle of authorization granted by
the head manufacturing enterprise to a distributor to market the manufacturer's products.
3) Unfortunately, limited use was made of the new piece of the equipment imported.
4) Fixed assets, such as plant and equipment, buildings, securities, etc. are more or less
liquid, i.e. they can be sold relatively easily.
5) A company can devote big sums of money to foreign companies expecting a huge return
derived from the amount contributed.
6) Previously unused resources have been recently developed and extracted.
7) Reserves have to be drawn up to meet a passive or unfavourable balance of payments.
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8) An active balance is an indicator of a country’s successful performance.
9) The purchase of real assets in a foreign country is often made by transmitting money
abroad.
10) Using foreign know-how relieves nations of spending huge funds on R&D.
READING
THEORIES OF FREE INTERNATIONAL TRADE
Key concepts and terms
Match up the terms on the left with the definitions on the right.
1) input a) a basic idea in the Theory of International Trade, that the highest
world production of all kinds of goods and services will be reached
if each country or region puts most of its efforts into producing the
things which it is best fitted to produce
2) relative price b) a resource required for industrial production, such as capital
goods, labour services, raw materials, etc.
3) absolute advantage c) an axiom of some political economists, deprecating interference
of government by attempts to foster or regulate commerce,
manufactures, etc.
4) comparative advantage
(comparative cost principle)
d) the price of a commodity such as a good or service in terms of
another, i.e. the ratio of two prices
5) laissez-faire e) a progressive increase in the general level of prices brought
about by an expansion in demand or the money supply
(demand-pull inflation) or by autonomous increases in costs
(cost-push inflation)
6) free trade f) the advantage that one country or part of a country possesses
over others because it has natural supplies of raw materials, power,
labour, etc. which enable it to make a certain product more cheaply
7) inflation g) a policy of unrestricted foreign trade, with no tariffs or subsidies
on imports or exports, and no quotas or other trade restrictions
8) welfare h) a measure of the relative size of two classes expressible as a
proportion
9) ratio i) prosperity and well-being in general
Text 1.5. Read the text and explain the following concepts: a) division of labour; b) absolute
advantage; c) comparative advantage.
The Case for Free Trade
The case for specialisation and trade between countries stems from two important economic
principles, the benefits of the division of labour and the principle of comparative advantage. The
benefits of the division of labour suggest that if each of the world’s countries with its own endowment
of both natural or ‘God-given’ resources such as soil, climate and minerals, and ‘man-made’ resources
such as capital, know-how and labour skills, specialises in ‘what it does best’, total world output or
production can be increased compared to a situation without specialisation.
By engaging in trade, a country can escape the constraints of limited natural resources and small
domestic markets. By importing raw materials, energy, foodstuffs and manufactured consumer goods,
the country's industries can produce, and its residents can enjoy a range of goods and services which its
own resource base would not allow. Likewise, access to the wider world market can allow the country's
industries to benefit from long production runs and economies of scale in a way that would not be
possible if the country relied solely on the domestic market.
A country possesses an absolute advantage in an industry if it is technically more efficient at
producing a good or service than other countries, i.e. if it produces a greater output from given inputs
or resources. An absolute advantage must not be confused with the rather more subtle concept of a
13. 13
comparative advantage. A comparative advantage is measured in terms of an opportunity cost, or what a
country gives up when it increases the output of an industry by one unit. The country which gives up the
least other goods when increasing output of a commodity by one unit possesses a comparative
advantage in that good.
Text 1.6. Read the text and discuss A. Smith’s contribution into international trade
development.
Trade Based on Absolute Advantage: Adam Smith
Smith started with the simple truth that for two nations to trade with each other voluntarily, both
nations must gain. If one nation gained nothing or lost, it would simply refuse to trade. But how does
this mutually beneficial trade take place and from where do these gains from trade come?
According to Adam Smith, trade between two nations is based on absolute advantage. When
one nation is more efficient than (or has an absolute advantage over) another in the production of one
commodity but is less efficient than (or has an absolute disadvantage with respect to) the other nation
in producing a second commodity, then both nations can gain by each specialising in the production of
the commodity of its absolute advantage and exchanging part of its output with the other nation for the
commodity of its absolute disadvantage. By this process, resources are utilised in the most efficient
way and the output of both commodities will rise. This increase in the output of both commodities
measures the gains from specialisation in production available to be divided between the two nations
through trade.
For example, because of climatic conditions, Canada is efficient in growing wheat but
inefficient in growing bananas (hot houses would have to be used). On the other hand, Nicaragua is
efficient in growing bananas but inefficient in growing wheat. Thus, Canada has an absolute advantage
over Nicaragua in the cultivation of wheat but an absolute disadvantage in the cultivation of bananas.
The opposite is true for Nicaragua.
Under these circumstances, both nations would benefit if each specialised in the production of
the commodity of its absolute advantage and then traded with the other nation. Canada would
specialise in the production of wheat (i.e. produce more than needed domestically) and exchange some
of it (surplus) for bananas grown in Nicaragua. As a result, both more wheat and more bananas would
be grown and consumed, and both Canada and Nicaragua would gain.
In this respect, a nation behaves no differently from individuals who do not attempt to produce
all the commodities they need. Rather, they produce only that commodity which they can make most
efficiently and then exchange part of their output for the other commodities they need or want. As a
consequence, total output and the welfare of all individuals are maximised.
Thus, while the mercantilists believed that one nation could gain only at the expense of another
nation and advocated strict government control of all economic activity and trade, Adam Smith (and
the other classical economists who followed him) believed that all nations would gain from free trade
and strongly advocated a policy of laissez-faire (i.e. as little government interference with the
economic system as possible). Free trade would cause world resources to be utilised most efficiently
and would maximise world welfare. There were to be only a few exceptions to this policy of laissez-
faire and free trade. One of these was the protection of industries important for national defense.
In view of this, it seems paradoxical that today most nations impose many restrictions on the
free flow of international trade. Trade restrictions are invariably rationalised in terms of national
welfare. In reality, trade restrictions are advocated by the few industries and their workers who are
hurt by imports. As such, trade restrictions benefit the few at the expense of the many (who will have
to pay higher prices for competing domestic goods).
R e m e m b e r !
Country A has an absolute advantage over Country B in the production of a good when Country A can
produce a unit of the good with fewer resources than can Country B. Trade can be mutually beneficial even if
one country has an absolute advantage in the production of all goods.
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Text 1.7. Read the text and discuss D. Ricardo’s contribution into international trade
development.
Trade Based on Comparative Advantage: David Ricardo
Theory of Comparative Advantage
In 1817 Ricardo published his Principles of Political Economy and Taxation, in which he
presented the law of comparative advantage. According to the law of comparative advantage, even if
one nation is less efficient than (has an absolute disadvantage with respect to) the other nation in the
production of both commodities, there is still a basis for mutually beneficial trade. The first nation
should specialise in the production and export of the commodity in which its absolute disadvantage is
smaller (this is the commodity of its comparative advantage) and import the commodity in which its
absolute disadvantage is greater (this is the commodity of its comparative disadvantage).
Note that in a two-nation, two-commodity world, once it is determined that one nation has a
comparative advantage in one commodity, then the other nation must necessarily have a comparative
advantage in the other commodity.
Comparative advantage must not be confused with absolute advantage. A country possesses an
absolute advantage in producing a good or service if it can produce more of the good from given
factors of production or inputs than any of its competitors. Comparative advantage, by contrast, is
measured by what a country gives up in terms of other goods, when it produces a particular good or
service. The country which gives up the least other goods when it increases production of a particular
good possesses the comparative advantage in that good. It is quite possible for a country to have an
absolute disadvantage in the production of a good, while still enjoying a comparative advantage.
How the Comparative Advantage Rule Works?
To illustrate the principle of comparative advantage and to explain how the principle can work
to make trade efficient, a simplified model of the world economy has been constructed, by assuming
just two imaginary countries, Atlantis and Pacifica, each with just two units of resource (for example,
man-years of labour) that can produce just two commodities, guns or butter.
Each unit of resource, or indeed a fraction of each unit (because resources or inputs are assumed
to be divisible), can be switched from one industry to another if so desired in each country. Suppose
that in each country the production possibilities are such that one unit of resource can produce:
In Atlantis: 4 guns and 2 tons of butter
In Pacifica: 1 gun and 1 ton of butter
Quite clearly, in terms of technical efficiency, Atlantis is ‘best at’ – or has an absolute advantage
in – producing both guns and butter, but it only possesses a comparative advantage in gun production.
The opportunity cost of producing one extra gun in Atlantis is half a ton of butter sacrificed, whereas
Pacifica would have to forego a whole ton of butter. But what about butter production? When increasing
its butter output by one ton, Atlantis gives up two guns. By contrast, Pacifica would only have to give up
one gun to produce an extra ton of butter. Thus, Pacifica possesses a comparative advantage in butter
production even though it has an absolute disadvantage in both products.
When one country possesses an absolute advantage in both industries, as in the example above,
its comparative advantage will always lie in producing the good in which its absolute advantage is
greatest. Similarly, the country that is absolutely worst at both activities will possess a comparative
advantage in the industry in which its absolute disadvantage is least.
Developing the model a little further will show that specialisation, in accordance with the
principle of comparative advantage, can lead to gains in total output and, hence, to an efficiency gain.
If no specialisation occurs and each country devotes one unit of resource to each industry, total
production will be:
5 guns and 3 tons of butter.
Now if each country completely specialises in producing the good in which it possesses a
comparative advantage, total production becomes:
8 guns and 2 tons of butter.
With complete specialisation, production of one good (guns) has risen, production of the other
(butter) has fallen, which does not represent a net gain in output. However, it is possible to devise a
system of partial specialisation which will meet the condition for an efficiency gain: specialisation
15. 15
should result in at least as much of one good and more of the other, compared to when there is no
specialisation. For example, Pacifica could completely specialise, but Atlantis could devote just
enough resources (half a unit) to ‘top up’ butter production from 2 to 3 tons. Atlantis’s remaining one
and a half units of resource could then be directed into gun production to produce 6 guns. The total
production would now be:
6 guns and 3 tons of butter.
Since at least as much butter and more guns are now produced compared to the earlier
‘self-sufficient’ situation, quite clearly specialisation in accordance with the principle of comparative
advantage has led to an increased output and, hence, an efficiency gain, which in this context means
increased output produced from the same total resources.
R e m e m b e r!
Specialisation and trade depend on comparative, not absolute, advantage. A nation is said to have a
comparative advantage in those products where its efficiency relative to other nations is highest. Trade can be
mutually beneficial if a country specialises in the products where it has a comparative advantage and imports the
products where it has a comparative disadvantage.
If markets are relatively free and competitive, producers will automatically be led to produce in
accordance with comparative advantage. If a country has a comparative advantage in the production of a certain
good, it will turn out – after the price of the good in various countries is equalised and the total world output of
the good equals the total world demand – that this country is an exporter of the good under free trade.
Text 1.8. Read the text and discuss the philosophy of relative price with your partner.
Relative Price
Relative Price versus Nominal Price
In order to understand whether it is worth selling or purchasing a certain product or to conclude
that trade in it does not seem reasonable altogether, the concepts of relative and nominal prices are to
be spotlighted.
The difference between a nominal price and a relative, or real price, (as an exchange ratio) is
often made. The nominal price is the price quoted in money while the relative or real price is the
exchange ratio between real goods regardless of money. The distinction is made to make sense of
inflation. When all prices are quoted in terms of money units, and the prices in money units change
more or less proportionately, the ratio of exchange may not change much. In the extreme case, if all
prices quoted in money change in the same proportion, the relative price remains the same, regardless
of inflation.
The relative price is the price of a commodity such as a good or service in terms of another, i.e.
the ratio of two prices. In essence, the relative price is an opportunity cost, that is, what must be given
up in exchange for the good or service that is being purchased. Thus, microeconomics can be seen as
the study of how economic agents react to changes in relative prices.
How Relative Price Works
Trade between countries takes place only when it is mutually beneficial for the parties involved,
i.e. each party gets an advantage. Here a problem arises: when it is better to buy, when to sell and
when trade does not make sense at all. To solve this problem, let us look at the simplified (and
hilarious!) example of trade between … Earth and Mars (Can you imagine!?). The two planets
produce both food and clothes. (Fantastic! Martians also need food and wear clothes similar to ours!)
Let us assume that on the Earth one unit of food is $20 (P1) and one unit of clothes is $10 (P2).
Since the relative price is P1/P2, then 20/10 = 2. This is the price of food in relation to clothes.
On Mars one unit of food is 6 blops (what a strange name did Martians invent for their
currency!) and clothing is 2 blops. So, 6/2 = 3. This is the price of food in relation to clothes on that
remote planet.
Should Earthlings trade? Should they buy food from Martians? The answer is ‘No’. We’d better
sell our food and abandon production of clothes, because 2 units of clothes mean 1 unit of food, our
food could be sold for 6 blops. How should Earthlings spend money? They should buy clothes from
Mars, and they will buy 3.
16. 16
Now the situation on Mars has changed. The price of food is 4 blops and the price of clothes is
2 blops, the relative price is 4/2 = 2, the same as ours. In this case trade does not make sense at all,
because there are no benefits for any party!
The situation changes again: food on Mars is 2 blops and a unit of clothes is also 2 blops. In this
case 2/2 = 1. Now, this is the relative price of food on Mars. Should Earthlings buy food from
Martians? The answer is ‘Yes’!
A conclusion is to be made: it does not matter which way the relative price differs; what matters
is that they do differ for the trade to take place. There is almost always a price difference in different
countries (and on different planets!) because of the distinction in relative costs of products, tastes or
resources.
R e m e m b e r !
• A nation should sell those goods that other nations value at a higher relative price.
• A nation should buy (visa versa) those goods that other nations value at a lower price.
This truth summarises the fundamental economic laws proposed by Adam Smith and David Ricardo.
Concept check
1. Choose the correct statements. Explain your point of view.
1) The examples of man-made resources are soil and mineral deposits.
2) International labour division increases the total world output.
3) The smaller the domestic market, the more benefits it provides to local manufacturers.
4) An absolute advantage is similar to an opportunity cost.
5) A comparative advantage is similar to an opportunity cost.
6) Opportunity cost is measured in terms of what a country will gain when it increases the
output of an industry by one unit.
2. Summarise the main points of A. Smith’s theory (Text 1.6) according to the following
questions.
1) What is the main reason for a country to refuse from trade?
2) How can gains from specialisation be measured?
3) What should Canada and Nicaragua specialise in? Why?
4) What does ‘specialisation’ mean?
5) In what way can national and individual behaviours be compared?
6) What does a policy of laissez-faire mean?
7) What are the disadvantages of imposing trade barriers?
3. Summarise the main points of D. Ricardo’s theory (Text 1.7) according to the following
questions.
1) What does the law of comparative advantage state?
2) What is the underlying difference between absolute and comparative advantages?
3) Why is it beneficial for Pacifica (an imaginary country) to specialise in butter production
regardless of having absolute disadvantages in both products?
4) What do the self-sufficient situation and the complete specialisation illustrate?
5) Why does the partial specialisation lead to an overall efficiency gain?
4. What are nominal and relative prices? Why is distinction made between them? Is it
misleading?
5. Explain the significance of the relative price in deciding whether it is worth buying or selling
a certain product, or ignoring both options for a country (see the example of trade between Earth and
Mars in Text 1.8).
6. Do you agree with the following statements? Give your reasons.
1) The relative price for the same commodity being equal in two countries, trade in this
commodity does not make sense.
17. 17
2) Specialisation is beneficial only for one of the parties involved.
3) Mercantilists favour government interference into economy and trade.
4) Most industries in each country gain from imposing trade barriers.
5) A country should import commodities of its comparative disadvantage.
6) A country should export commodities of its comparative disadvantage.
7) It is quite unthinkable for a country to have an absolute disadvantage in the production of
a commodity, whilst still enjoying a comparative advantage.
7. Complete the following sentences.
1) The case for specialisation and trade between countries results from…
2) Importing raw materials, energy, foodstuffs and manufactured consumer goods, a country
and its residents can have…
3) If a country relied only on the domestic market, …
4) What a country gives up when it increases the output of an industry by one unit is …
5) In the exceptional case, if all prices quoted in money change in the same proportion, …
6) Even as the real price remains exactly the same, …
7) A nation should sell those goods that …
8) A nation should buy those goods that …
9) As soon as it is determined that one nation has a comparative advantage in one
commodity, then the other nation must necessarily have …
10) Trade restrictions are backed up by …
11) When one country has an absolute advantage in both industries, its comparative
advantage will always lie …
LANGUAGE STUDY
1. Match the words on the left with their definitions on the right.
1) endowment a) any part or subdivision
2) self-sufficient b) the planting, tending, improving, or harvesting of crops or plants
3) fraction c) the source of income with which an institution, a country, etc., is
granted
4) cultivation d) a person who resides in a place
5) resident e) able to provide for or support oneself without the help of others
6) curve f) produced in, or involving one's own country or a specific country
7) domestic g) a continuously bending line that has no straight parts
8) output h) on (one's) own initiative or responsibility
9) voluntarily i) the amount produced, as in a given period; the material produced,
manufactured, yielded, etc.
2. Match the verbs on the left with their synonyms on the right.
1) stem a) shift or change the direction of something
2) devise b) have
3) switch c) arise or develop
4) possess d) work out
5) measure e) disconcert
6) confuse f) support
7) advocate g) use
8) utilize h) calculate
3. Replace the italicised words in the sentences below with the correct form of the words in 1 and 2.
1) The allowance was enough to support the company for a month.
2) The concepts of absolute and comparative advantages are not to be mixed up.
3) The internal market accounts for most of the company's income.
18. 18
4) The (impossible) situation in which a country is completely self-dependent and has no
foreign trade is called autarky.
5) A substantial part of the nation is concerned with eliminating of all trade barriers which
may increase unemployment.
6) Some companies willingly help the needy through establishing charitable funds.
7) Nobody was quite ready for such a massive harvest which was due to special tillage
techniques.
8) The partners managed to make up such a project that led to mutual benefits.
READING
PROTECTIONISM
Key concepts and terms
Match up the terms on the left with the definitions on the right.
1) tariff а) a theory, or a policy, of defending the producers in a country from
foreign competition in the home market by the imposition of such
discriminating duties on goods of foreign production that will restrict or
prevent their importation
2) dumping b) a tax levied by a government on imports or occasionally exports for
purposes of protection, support of the balance of payments, or the raising
of revenue
3) protectionism c) any legal stoppage of commerce; a government order prohibiting the
departure or arrival of merchant ships in its ports
4) quota d) selling goods abroad at (or below) cost price
5) embargo e) a financial aid supplied by a government, as to industry, for reasons of
public welfare, the balance of payments, etc.
6) subsidy f) a prescribed number or quantity, as of items to be manufactured,
imported, or exported, immigrants admitted to a country, or students
admitted to a college
7) revenue g) faulty, unequal, or unfair distribution (as of wealth, business, etc.)
8) maldistribution h) the income accruing from taxation to a government during a specified
period of time, usually a year
9) cartel i) involving more than two nations or parties
10) multilateral j) a collusive international association of independent enterprises formed
to monopolise production and distribution of a product or service, control
prices, etc.
11) conditional k) not absolute; made or granted on certain terms
Text 1.9. Read the text, clear up the reasons for government control of international trade in
the UK and discuss whether they are applicable for most countries.
Controlling International Trade
Reasons for Government Control of Foreign Trade
In general trade is controlled because governments think nationally rather than internationally.
Although people as a whole lose when trade is restricted, those of a particular country may gain.
Many reasons are put forward to justify controls. Occasionally, they have some logical
justification; more usually they stem from sectional interests seeking to gain advantages. We can,
therefore, examine the arguments under three main headings:
1) those based on strategic, political, social and moral grounds;
2) those having some economic basis; and
3) those depending on shallow economic thinking.
19. 19
Non-Economic Arguments
1) To encourage the production of a good of strategic importance
Where a nation is dependent on another for a good of strategic importance, there is a danger of
its supply being cut off in the event of war. Thus, one argument for subsidising aircraft production in
the UK is that it will ensure the survival of technical know-how, plant and skilled labour.
2) To foster closer political ties
As a member of the EC, Britain must impose a common external tariff as part of a movement
towards political as well as economic unity.
3) To prosecute political objectives
Trade can be a weapon of foreign policy, e.g. in the sanctions against Serbia following the
invasion of Bosnia.
4) To promote social policies
Although in the past Britain has subsidised its agriculture mainly for strategic reasons, today the
purposes are basically social – to avoid depression in rural districts.
Economic Arguments Having Some Justification
1) To raise revenue to the budget
2) To improve the terms of trade
The incidence of a selective tax is shared between a producer and a consumer according to the
relative elasticities of supply and demand. A government can therefore levy a tax on an imported good to
improve the terms of trade if demand for the good is more elastic than the supply, for the increase in price is
borne mainly by the producer, while the government has the proceeds of the tax. In practice this requires that
a) the producing country has no alternative markets to which supplies can be easily diverted;
b) its factors of production have few alternative uses; and
c) the demand for the exports of the country imposing the tariff is unaffected by the loss of income
suffered by countries who now find their sales abroad reduced.
3) To protect an ‘infant’ industry
It may be possible to establish an industry if during its infancy it is given protection from
well-established foreign competitors already producing on a large scale. It is argued that eventually the
‘infant’ will be strong enough to compete successfully. Britain’s car industry, for instance, initially
benefited from such protection.
In practice, industries tend to rely on this protection, so that tariffs are never withdrawn; for example,
American duties on manufactured goods imposed in the eighteenth century still persist today. Moreover,
industries are often encouraged because without protection they would have no chance of survival. This
leads to maldistribution of a country’s resources.
4) To enable an industry to decline gradually
Fundamental changes in demand for a good may severely hit an industry. Such, for instance, was the
fate of the British cotton industry in the 1970s. Restrictions on imports can cushion the shock, giving the
industry more time to contract or restructure.
5) To prevent dumping
Goods may be sold abroad at a lower price than in the home market. This may be possible because: a)
producers are given export subsidies; b) price discrimination by a monopoly is possible; or c) it enables the
producer to obtain the advantages of decreasing costs. People in the importing country benefit directly from
the lower prices. If, however, the exporter is trying to establish a monopoly which can be exploited
once home producers have been driven out there is a case for protecting the home market.
6) To correct a temporary balance of payments disequilibrium
Economic Arguments Having Little Validity
1) To retaliate against the tariffs of another country
The threat of a retaliatory tariff may be used to influence another country to modify a restrictive
policy. While this may be successful, it can induce counter-retaliation, with everybody losing.
2) To maintain home employment in a period of depression
Countries may place restrictions on imports to promote employment in the manufacture of
home-produced goods. The difficulty is that other countries retaliate, thereby leading to an all-round
contraction in world trade. GATT was set up to prevent this from happening.
20. 20
3) To protect home industries from ‘unfair’ foreign competition
The demand that British workers must be protected from competition by cheap, ‘sweated’
foreign labour usually comes from the industry facing competition. The argument, however, has little
economic justification. First, it runs counter to the principle that a country should specialise where it
has the greatest advantage. That advantage may be cheap labour. Second, low wages do not
necessarily denote low labour costs. Wages may be low because labour is inefficient through low
productivity. What is really significant is the wage cost per unit of output. Thus, the USA can export
manufactured goods to the UK even though its labour is the most highly paid in the world. The
threatened industry can compete by improving productivity to reduce wage-cost per unit. Third, a tax
on the goods of a poor country merely makes the country poorer and its labour cheaper. The way to
raise wages (and the price of the good produced) is to increase demand in foreign markets. Indeed, if
imports from poor countries are restricted, other help has to be given. They prefer ‘trade to aid’.
Fourth, they have less to spend on Britain’s exports. Fifth, the policy may lead to retaliation or
aggressive competition elsewhere, thereby making it more difficult for the protecting country to sell
abroad. One reason why Japan captured many of Britain’s foreign markets for cotton goods was that
its sales to Britain were restricted by protective barriers. Last, restrictions on competitive imports may
allow domestic firms to raise their prices. If wage increases, exports of goods generally could fall
through higher prices.
While restriction of trade tends to lower living standards, there may be benefits – economic,
political and social. Thus, protection may be given to an industry because home workers cannot adjust
quickly to other occupations or industries. Usually, however, such economic gains are doubtful.
Others cannot be measured, and it has to be left to politicians to decide where the balance of advantage
lies. It must, however, always be remembered that protection creates vested interests opposed to
subsequent removal.
Text 1.10. Read the text about methods of controlling international trade. Can you add any
other protectionist measures?
Methods of Controlling International Trade
Introduction
The economic theory suggests that trade should be as free as possible, for only then can
maximum specialisation according to the law of comparative advantage take place. In practice,
however, all countries follow policies which, to varying degrees, prevent goods from moving freely in
response to differences in relative prices. Methods vary. These may be price-based constraints, like
customs duties and tariffs or government subsidies to certain domestic industries; quantity limits, like
quotas and embargoes; Buyers’ or Sellers’ cartels, like OPEC (Organisation of Petroleum-Exporting
Countries) or the International Sugar Agreement (ISA); limits on foreign direct investment (FDI) entry
and operations; and other non-tariff barriers, like political and administrative constraints (licences and
other documents); financial limits, like exchange control.
Customs Duties and Tariffs
Customs duties, e.g. the common external tariffs of the Common Market, are both revenue-raising
and protective. They become protective when the imported good bears a higher rate of tax than the
similar home-produced good.
Customs duties are duties imposed on imported and exported goods, assessed according to
special customs tariffs. Customs duties are closely connected with the prices of goods and customs
tariffs are, therefore, of greatest interest.
If the customs duties are assessed in proportion to the estimated value of goods, they are ad
valorem duties. If they are imposed according to the weight of goods or according to their quantity,
they are specific duties.
Tariffs can be of various kinds. Revenue tariff (fiscal duties) serves as a source of revenue for
the government. Protective tariff is intended to protect domestic industrial or agricultural production
from foreign competition. Prohibitive tariff is so high that it makes the importation of goods subject to
it practically impossible. Preferential tariff promotes and supports the development of trade between
two countries, the duties on their goods being lower than those on the goods coming from other
countries.
21. 21
Most-favoured-nation (MFN) treatment is a clause in international commercial agreements or
treaties in which tariff privileges accorded by a country to any other are extended to all other countries
with which it signs treaties awarding most-favoured-nation treatment.
Unconditional MFN clauses automatically extend the benefits of tariff concessions to all
countries enjoying MFN status with the tariff-reducing country, whether the concessions are given
freely or reciprocally, that is in return for concessions. Conditional MFN clauses make extension of
the privilege dependent upon the grant of similar concessions by the country benefiting from them.
The customs tariff of a country usually contains two kinds of rates of duty. Autonomous rates of
duty have been established quite independently and are valid in general for all foreign countries.
Conventional rates of duty, on the other hand, have been mutually agreed upon by two (or more) coun-
tries and are lower than the former.
Customs tariff agreements can be bilateral if concluded only between two countries, or
multilateral, if concluded among more than two countries. An example of a multilateral customs tariff
agreement is GATT (the General Agreement on Tariffs and Trade).
Subsidies
Subsidies are a financial aid supplied by a government for reasons of public welfare, the balance
of payments, etc. Subsidies may be given on grounds of income distribution, to improve the income of
producers or consumers. They are not usually efficient for either purpose: even goods consumed
heavily by the poor such as rice in India, are also consumed by the better-off, so that a lot of the
benefit of a subsidy goes to those who do not need it. Similarly, farm subsidies benefit large rich
farmers more than smaller ones. Export subsidies may be paid to increase exports in order to improve
the balance of payments.
While countries which subscribe to the General Agreement on Tariffs and Trade (GATT)
cannot follow a policy of ‘dumping’ exports by giving direct subsidies, the volume and pattern of
international trade may be influenced indirectly by other means, e.g. government assistance to the
shipbuilding industry. Less obviously, welfare benefits, e.g. child-benefits and income supplements
which keep down labour costs, may give one country a price advantage over another.
Quotas
In the context of international trade a quota is a prescribed number or quantity, as of items to be
manufactured, imported, or exported. A quota may be set as a minimum or a maximum. A quota for
jobs for disadvantaged groups, or for compulsory deliveries by former planned economy farmers to
state marketing organisations, would be a minimum. A limit to imports of cars, or quantity of milk
sold under the Common Agricultural Policy (CAP) in the European Union, would be a maximum. In
each case it would be argued that any objective achieved by a quota system could be achieved at lower
cost by use of the price mechanism, through an appropriate tax or subsidy. The use of quotas tends to
inhibit competition, directly if quotas are allocated to individual producers, and indirectly, if they are
fixed en bloc (all together), as this encourages the formation of organisations to share out the market.
If demand is inelastic, the increase in price resulting from a customs duty will have little effect
on the quantity imported. Thus, to restrict imports of a good to a definite quantity, quotas must be
imposed. This quantitative limit to imports may be set in terms of value or physical units. A quota in
physical units is liable to lead to a rise in the average price of products imported, as higher-priced
products generally carry a higher profit margin. Compared with duties, quotas have two main
disadvantages.
1) As a result of the artificial shortage of supply, the price may be increased by the foreign sup-
plier or by the importer. Hence, unless the government also introduces price control, they gain at the
expense of consumers.
2) Quotas are usually based on a firm’s past imports, which makes the economy rigid by
penalising the efficient firm wishing to expand.
To avoid having formal quotas imposed, ‘voluntary export restraints’ may be agreed, e.g. on the
import of Japanese cars.
Physical Controls
A complete ban – an embargo – may be placed on the import or export of certain goods. Thus,
narcotics cannot be imported, while the export of some strategic goods to certain countries is
forbidden. An embargo is a prohibition on trading with a country, generally or in some particular
22. 22
goods. A general embargo is intended as an expression of disapproval, for example, of practices such
as apartheid in South Africa; an embargo on particular products is generally based on defence
considerations, to prevent the spread of advanced weaponry, for example, during the Iraq-Iran war in
the 1980s. Similarly, imposing strict technical standards for certain goods or safety norms (e.g. milk),
quarantine and health regulations (e.g. dogs and parrots), as well as the deliberate creation of customs
difficulties and delays make trade in them more difficult.
Exchange Control
Foreign exchange control is a system under which holders of a national currency require official
permission or approval to convert it into other currencies. Exchange control may apply to all holders
of a currency, or some holders, normally non-residents, may be exempt. Where non-residents are
allowed convertibility, exchange control has to be applied to transfers from resident to non-resident
domestic currency bank accounts. Exchange controls can be applied with varying degrees of strictness;
frequently they are much more stringent on obtaining foreign currency for capital account than for
current account purposes.
A tighter check on the amount spent on imported goods can be achieved if quotas are fixed in
terms of foreign currency. This necessitates some form of exchange control. All earnings of foreign
currency and claims to foreign currency have to be handed over to the government and goods can be
imported only under licence. Thus, the government, not the free market, decides the priorities for
imports.
Text 1.11. Read the text and get ready to give a three-minute talk on the historical background
of GATT.
The General Agreement on Tariffs and Trade (GATT)
The General Agreement on Tariffs and Trade, established in 1947, has three major objectives:
1) to reduce existing trade barriers;
2) to eliminate discrimination in international trade; and
3) to prevent the establishment of further trade barriers by getting nations to agree to consult one
another rather than take unilateral action.
It operates as follows. Member nations meet periodically to agree on a round of tariff reductions.
Here the most-favoured-nation principle applies – any tariff concession granted by one country to another
must automatically apply to all other participating countries. Thus, if the EC agrees to reduce its tariff on
American automatic vending machines by 5 % in exchange for a 5 % reduction in the American tariff on
EC man-made fibres, then both concessions must be extended to every other member of the GATT.
Today over one hundred nations subscribe to the GATT. Through the organisation, a progressive
reduction in tariffs has been achieved, and the principle has been established that problems of
international trade should be settled by cooperative discussion rather than by independent unilateral
action. But difficulties have arisen.
1) The principle of reciprocity means that low-tariff countries have to begin from inferior
bargaining positions, and the concessions they can make are thus limited. Such countries may,
therefore, prefer a low-tariff regional arrangement, such as the EC.
2) In certain circumstances the most-favoured-nation principle may deter a country from making
a tariff reduction to another country for the simple reason that it has to be applied to all.
3) The articles of the agreement have had to be waived to allow for special circumstances –
balance-of-payments difficulties, protection of agriculture, and the establishment of 'infant' industries
in less-developed countries and the discriminatory character of the EC.
4) While the GATT has been successful in dealing with tariffs and many physical barriers, it has
been by-passed by the new forms of protection – voluntary agreement restraints, orderly marketing
arrangements, subsidies for special groups of exports, and trading requirements as conditions for
overseas investment.
5) The GATT rules will eventually have to be extended to cover services, which now account
for a quarter of world trade, and intellectual property rights (patents, copyrights and trademarks).
The Uruguay Round, which started in 1986, took seven years to complete, largely because the
USA required reform of the EC’s Common Agricultural Policy to prevent subsidised surplus
produce depressing world prices. The final GATT agreement – including services, copyright, and
investment, as well as trade in goods – was signed in Marrakech in 1994, and the organisation was
23. 23
superseded by the World Trade Organisation. Although consensus was reached on liberalising trade
in services, the less-developed countries would not concede on intellectual property rights.
R e m e m b e r !
Although the WTO’s aim is to promote trade between different countries and to eliminate trade barriers,
protectionism and restrictions are still in existence. The protectionist policy is believed to prevent
unemployment or capital losses in industries liable to competition, etc. via tariffs, import quotas, or voluntary
export restraints, and other non-tariff barriers to trade. Some politicians regard protectionism as desirable for
their own sake; many who do not approve of protection still support it, as they cannot afford to lose the votes or
financial support of those who demand it.
Concept check
1. Look back at Text 1.9, complete the table giving details of each argument for controlling
international trade. Do you agree or disagree with the proposed classification? Why?
Non-economic arguments
Economic arguments having
some justification
Economic arguments having
little validity
1) 1) 1)
2) 2) 2)
3) 3) 3)
4) 4)
5)
6)
2. Complete the flow chart below with methods of protectionism. Describe them.
Price-
based
Barriers to International Trade
Other non-
tariff
barriers
Limits on
FDI
Customs
duties
Subsidies
Quotas
OPEC ISAAd
valorem
RevenueProhibitive
Exchange
control
Political and
administrative
constraints
24. 24
3. Explain the essence of the most-favoured-nation (MFN) regime. What is the difference
between unconditional and conditional MFN clauses?
4. What is the correlation of customs duties and tariffs? Give definitions for both and their
classifications.
5. What were the purposes of the GATT in the past and what are the purposes of the WTO?
6. Read each statement and decide if it is true or false. Discuss them with your partner.
1) Protection of an industry of strategic importance has little economic validity.
2) Politics may influence economic decisions in the sphere of international trade.
3) Protection of infant industries can be economically validated.
4) Maintaining domestic employment in the period of recession may cause a contraction in
world trade.
5) There are many economically valid arguments for protecting home industries from foreign
competition.
6) Subsidies are an efficient tool in increasing customers’ incomes.
7) Quotas may only be established as a maximum.
8) Quotas tend to hinder competition directly and indirectly.
9) An embargo actually means a zero quota.
10) With exchange control, it is the free market that decides the priorities for imports.
11) Deliberate creation of customs difficulties and delays hinders international trade.
12) Many difficulties still exist for GATT member countries.
7. Complete the sentences below.
1) The reasons to defend government controls are …
2) A government can impose a tax on an imported good in order to …
3) Introduction of restrictions on imports enabling an industry to decline gradually can …
4) Dumping may be possible because …
5) The policy of retaliation may be viewed as a vicious circle since …
6) Quotas must be imposed in order to …
7) Factor cost is the value of goods and services at the price received by sellers. This is the
market prices which are …
8) Subsidies may be granted for various reasons, such as…
9) Compared with duties, quotas have two main disadvantages, such as …
10) Foreign exchange control is a system …
8. Write questions, relating to Texts 1.9 and 1.10, to which these could be answers.
1) Unlike quotas, they produce revenue.
2) Unlike tariffs, you know the maximum quantity of goods that will be imported.
3) Government assistance to a certain industry.
4) Any tariff concession granted by one country to another must automatically apply to all other
participating countries.
5) Less-developed countries.
LANGUAGE STUDY
1. Match the words on the left with their definitions on the right.
1) impose a) take the place of something; displace
2) unilateral b) flexibility; a measure of the sensitivity of demand for and supply of
goods
3) infant c) establish as something to be obeyed or complied with; enforce
4) eliminate d) involving or performed by only one party of several
5) concession e) in an early stage of development; nascent
6) elasticity f) remove or take out; get rid of
7) supersede g) the act of yielding or conceding, as to a demand or argument
8) subscribe h) discourage (from acting) or prevent (from occurring), usually by
instilling fear, doubt, or anxiety
25. 25
9) deter i) relating to government finances, esp. tax revenues
10) retaliate j) a formal agreement or contract between two or more states, such as an
alliance or trade arrangement; the document in which such a contract is
written
11) ad valorem k) a degree, extent, or frequency of occurrence; amount
12) fiscal l) inscribe or sign (one's name, etc.) at the end of a contract, or other
document
13) treaty m) (of taxes) in proportion to the estimated value of the goods taxed
14) reciprocal n) take retributory action, esp. by returning some injury or wrong in
kind
15) incidence o) relating to, or designating something given by each of two people,
countries, etc., to the other; mutual
16) constraint p) freed from or not subject to an obligation, liability, tax, etc.
17) exempt q) compulsion, force, or restraint; restrictive condition
2. Match the words in column 1 with their synonyms (column 2) and antonyms (column 3).
Word Synonym Antonym
1) restrict a) encourage, promote a) unlimit
2) foster b) confine b) demote
3) extend c) superficial, obvious c) urban
4) shallow d) stretch d) profound
5) rural e) mediocre e) shorten, curtail
6) inferior f) intentional f) loose
7) deliberate g) country g) superior
8) tight h) imitation h) flexible
9) artificial i) stiff i) genuine, natural
10) rigid j) enlarge j) shrink, contract
11) expand k) strict k) accidental
12) stringent l) hinder l) imprecise
13) inhibit m) exact m) promote
3. Make up your own sentences with the words, their synonyms and antonyms in 2 to illustrate
them in the context of international trade.
4. Fill in the gaps in the following sentences with the correct form or derivative of the words
given above in 1.
1) The … courtesies enjoyed among our partners during all negotiations benefit us all.
2) … liabilities mean that they affect one party only and do not involve the other party in
reciprocal obligations.
3) After the government increased customs tariffs, their country … by tightening the safety
norms for wines.
4) They signed a … to settle all border disputes by arbitration.
5) The demand for goods is … if it is sensitive to changes in price or other marketing
variables.
6) Nothing will … us from signing this contract with the British partners.
7) Even now, it is impracticable to … all trade barriers in foreign trade.
8) The … of taxation varies from country to country depending on their legislations.
9) An … industry needs protection until it is large enough to achieve the economy of scale
and strong enough to compete internationally.
10) We provided very strong arguments so that our partners agreed to make … .
11) The company was … from paying the profit tax for a year.
26. 26
5. There is a logical connection among three of the four words in each of the following groups.
Which is the odd one out, and why?
1) absolute advantage – barriers – comparative advantages – free trade
2) autarky – countertrade – invisible trade – visible trade
3) balance – deficit – dumping – surplus
4) banking – insurance – merchandise – tourism
5) comparative advantage – protectionism – quotas – tariffs
6) non-tariff barriers – norms – quotes – taxes
7) countertrade – import substitution – infant industries – tariff barriers
8) liberalize – protect – subsidise – substitute
RENDERING
Render the texts about organisations in the field of international relations and trade in English.
1. Основные особенности современного миропорядка.
Современный хозяйственный миропорядок характеризуется двумя основными
особенностями – глобализацией (открытость рынка, либерализация торговли, создание ТНК) и
регионализацией (объединение стран в экономические и таможенные союзы, создание зон
свободной торговли, формирование региональных торгово-экономических блоков). Эти
процессы сопровождаются интернационализацией и интеграцией мировой экономики.
ООН создана в современном виде в 1946 году. ЭКОСОС – Экономический социальный
совет – один из 6 главных органов ООН, координирующий экономические и социальные
вопросы: анализ состояния мирового экономического положения и экономик отдельных стран,
деятельности ТНК, оказание помощи в ликвидации экономических кризисов и др. Имеет
6 региональных комиссий в Европе, Восточной Азии, Африке, Латинской Америке и Западной
Азии с отраслевыми организациями по торговле (ЮНКТАД – United Nations Conference on Trade
and Development, UNCTAD), промышленности (ЮНИДО – United Nations Industrial Development
Organisation, UNIDO), сельскому хозяйству (ФАО – Food Agricultural Organisation, FAO),
окружающей среде (ЮНЕП – United Nations Environment Programme, UNEP), образованию и
культуре (ЮНЕСКО – United Nations Educational, Scientific and Cultural Organisation, UNESCO),
здравоохранению (ВОЗ – World Health Organisation, WHO), помощи детям (ЮНИСЕФ – United
Nations International Children’s Emergency Fund, UNICEF) и др.
2. Мировые финансовые организации.
Международный валютный фонд – МВФ, учреждён ООН, самая крупная в мире
финансовая организация. Основная задача – содействие развитию торговли, стабилизация
международного торгового рынка, предоставление кредитов странам при валютных
затруднениях. Основной учредительный вклад внесён США, поэтому многие решения зависят
от этой страны.
Всемирный банк – ВБ, группа финансовых организаций при ООН. В него входят МБРР –
международный банк реконструкции и развития, МФК – международная финансовая
корпорация, МАР – международная ассоциация развития. Основная деятельность –
предоставление долгосрочных кредитов на конкретные программы при наличии части средств у
кредитуемой страны для данного объекта.
Европейский банк реконструкции и развития – ЕБРР, учреждён Европарламентом стран
ЕС. В него вошли также ряд других стран – США, Япония, Австралия, Канада и др.
3. Всемирная торговая организация.
В 1947 г. рядом государств по инициативе США подписано Генеральное соглашение по
тарифам и торговле – ГАТТ, что явилось в последующем основой создания в 1995 г.
крупнейшей международной организации – ВТО. Основная задача ВТО – обеспечение
благоприятных режимов торговли: либерализация внешнеторговой деятельности стран,
снижение таможенных тарифов, исключение государственного протекционизма экспорта и его
субсидирование, количественных ограничений экспорта-импорта.
4. Международная торговая практика.
Международная торговая практика в современных условиях характеризуется значительной
степенью правовой унификации, которая направлена на то, чтобы устранить коллизии,
27. 27
возникающие между различными правовыми нормами, существующими в национальных
системах права. Прежде всего, это касается практики составления внешнеторговых контрактов, в
частности, международных договоров.
Регулированием международной торговой практики занимаются такие международные
экономические организации, как:
• ЮНСИТРАЛ (United Nations Commission on International Trade Law) — Комиссия ООН по
праву международной торговли;
• УНИДРУА (International Institute for the Unification of Private Law,) — Международный
институт унификации частного права;
• ЮНКТАД (United Nations Conference on Trade and Development, UNCTAD) —
Конференция ООН по торговле и развитию;
• ЕЭК ООН — Европейская экономическая комиссия ООН.
Unit 2
METHODS OF FOREIGN TRADE. INTERMEDIARIES INVOLVED
DISCUSSION
How much do you know about methods of international trade? Discuss the following points with
your partner.
• The role of government in international trade.
• Direct sales versus indirect sales.
READING
METHODS OF FOREIGN TRADE
Key concepts and terms
Match up the words on the left with their definitions on the right.
1) merchandise a) a formal offer to supply specified goods or services at a stated cost
or rate
2) highest bidder b) a gathering of producers of and dealers in a given class of products
to facilitate business
3) auction c) economic activity aimed at profiting from expected changes in the
prices of goods, assets, or currencies
4) commodity exchange d) commercial goods, commodities
5) hedging e) a public sale of goods or property, esp. one in which prospective
purchasers bid against each other until the highest price is reached
6) sample f) activities designed to reduce the risks imposed by other activities
7) speculation g) an investment project where a foreign firm contracts to build a
factory, install equipment and train local labour, and hand it over as a
going concern ready to start production
8) fair h) a number of objects considered together as forming a group or
collection; a consignment of goods
9) tender i) a small part of anything, intended as representative of the whole; a
specimen
10) turnkey project j) a place or institution through which commodities are traded
11) lot k) a price offer of a specified amount in attempting to buy something,
esp. in competition with others as at auction
12) bid l) the company that offers the highest price
