INTERNATIONAL

TRADE
PRACTICES

INCOTERMS
Standard trade definitions
Used in International Sales Contract
Devised & published by International
Chamber of Commerce (ICC) in 1936
(1st version)
Indicate each contracting partys
costs, risks & obligations with regard
to delivery of goods

INCOTERMS - LIMITATIONS
No guideline in the following cases:
Determine how title of goods will be transferred
Specify details of transfer, transport or delivery of
the goods
Define the remedies for breach of contract

In case of a dispute, courts & arbitrators will

look at:
1. The Sales Contract, 2. Who has possession of the
goods & 3. what payment (if any) has been made.

MOST COMMONLY USED

INCOTERMS
FOB (Free On Board)
Buyer bears risk (loss or damage) & cost of transport

CIF (Cost, Insurance & Freight)

Seller bears cost of transport (including insurance) &
Buyer bears the risk

CFR (Cost & Freight)

Seller bears cost of transport only
Buyer arranges & bears cost of insurance
Buyer bears risks due to damage or loss during transport

Modus Operandi

X-BORDER TRADE
BUYER

SELLER

X-BORDER TRADE
IMPORTER

EXPORTER

RISKS

RISKS

QUALITY
QUANTITY
TIME

PAYMENT/AGREEMEN
T FOR PAYMENT

X-BORDER TRADE
IMPORTER

BANK

EXPORTER

PROMISE TO PAY IF
QUALITY/QUANTITY
TERMS SATISFY

BANK

X-BORDER TRADE
IMPORTER

BANK

EXPORTER

LETTER OF CREDIT
[SIGHT/TENURE]

BANK

X-BORDER TRADE
IMPORTER

EXPORTER

DOCUMENTS
BANK

[Bill s of Exchange, Bill of Lading,

Airway/Shipment Challan etc.]

Physical Delivery
of Goods

BANK

X-BORDER TRADE
IMPORTER

BANK
Match Documents with
LC
If Yes, ask Importer to
PAY [now, for Sight LC or
by maturity of tenure, for
Tenure LC
If No, Inform exporters

EXPORTER

BANK

X-BORDER TRADE
IMPORTER

Domestic
currency
(X)
BANK

EXPORTER

Outward
Remittance
Foreign
Currenc
y (Y)

Inward
Remittance
Foreign
Currenc
y (X)

Domesti
c
BANK currenc
y (Y)

X-BORDER TRADE
IMPORTER

BANK

EXPORTER

Inward
Remittance
Foreign
Currenc
y (X)

BANK
EEFC
ACCOUN
T

RISK ASSESSMENT OF IB

Product Life Cycle International

Markets

Market requirement & product

characteristics

Cost components of consumer

product

INTERNATIONAL
TRADE
Issues

POWER EQUATION
Primary, Secondary & Tertiary Products
Balance between supply & demand is not even
Fair Trade vs Free Trade
Dumping

Developed Countries
The strategies of Transnational Corporate for Technology creation and outward foreign direct
investment (FDI) to access resources and markets.
Export-oriented (specially output of Manufacturing Sector)
Higher bargaining power in trade negotiations

Developing/underdeveloped Countries
Over-dependent on limited export goods
Price/demand depends on International Environment
For example, the island nation of St Lucia, in the Caribbean, depends heavily on one cash crop,
bananas, while Zambia relies on the export of copper. If the crop fails, or the price of the mineral
drops, the economies of these nations suffer. As a result, many primary-producing nations import
far more goods than they export, leading to a trade deficit with the rest of the world. Conversely,
most secondary- and tertiary-producing nations maintain healthy trade surpluses.

INTERNATIONAL CARTELS
OPEC (1960) by 13 oil producing nations
Achieved great success in the 1970s when it restricted oil
production, thereby raising the price.
In recent years, OPEC has had less success because oilproducing countries outside the organisation, such as Norway
and Britain, have set their own prices and levels of supply.

A similar cartel, Geplacea, operates between 23 sugarproducing nations.

Negative impact:
Cartels impede the free movement of goods and services
around the world by erecting artificial barriers to trade.
As a result, the volume of world trade is reduced

REGIONAL COMMON
MARKETS
To reduce barriers between member states to trade
in both goods and services
European Union (EU), which began when six European
nations pooled their coal and steel industries in 1951. It has
since grown to become a massive free trade union
comprising 15 of the richest nations in western and
southern Europe.
North American Free Trade Agreement (NAFTA), established
in 1994 by Canada, the USA, and Mexico,
Caribbean Community and Common Market (CARICOM), set
up by 13 Caribbean nations in 1973.
The General Agreement on Trade and Tariffs (GATT) is the
international treaty which preceded the WTO's formation; it
began in 1947.

WTO

Started in 1995
Consists of 157 countries
Approx 75% are developing countries
Emanated from 1986-94 Uruguay Round
negotiations, and earlier negotiations in
GATT (General Agreements on Tariff and
Trade)
Core consists of legal agreements, signed
by bulk of world trading organizations
Director general-------Pascal Lamy

Objectives
Organization for liberalizing cross
country trade
Forum for Govt to negotiate trade
agreements & settle disputes in trade
Producers of goods, services etc to
conduct business smoothly
Allows Govt to meet social and
environmental objectives

Fundamental Principles
Trade without discrimination
Most Favoured Nation(MFN)
Countries cannot discriminate between
trading partners
Exceptions allowed, eg. Raising trade
barriers for countries following unfair trade
practice, give developing countries special
access to markets

National treatment
Equal treatment to foreign and local trade

Fundamental Principles
Freer trade
Lowering of trade barriers
Lowering of custom duties
Restricting import bans

Progressive liberalization
Developing countries given longer
turnaround time

Fundamental Principles
Predictability and stability
Promise to stick to arguments
Encourage investment
Create jobs
Improve market security for traders

Promoting fair competition

Eg. Antidumping policies

Fundamental Principles
Encouraging development and
economic reform
Time flexibility for developing countries
Special assistance
Trade concessions
Eg. Developed countries allow duty free
imports from least developed countries

Fundamental Principles
Absolute advantages: produce a good
using less resources than another
country.
For example if one unit of labour in Scotland
can produce 80 units of wool or 20 units of
wine; while in Spain one unit of labour
makes 50 units of wool or 75 units of wine,
then Scotland has an absolute advantage in
producing wool and Spain has an absolute
advantage in producing wine.

Fundamental Principles
Comparative advantages: only to be able to make something at
a lower cost, in terms of other goods sacrificed, to oneself to gain
from trade.
For example if 1 unit of labour in the Singapore can produce 100 units of
electronics and 60 units of textiles, as compared to India where 1 unit of
labour can produce 50 units of electronics and 50 units of textiles, then
Singapore has the absolute advantage in both items. However, it would be
better for Singapore to produce electronics and import textiles from India.
This is because the labour that would have gone into textiles can be diverted
to electronics where Singapore is comparatively better. The effective labour
wage rate would be lower in India and hence keeps textile cost lower.

This also explains why a CEO should hire a driver as well as typist
even if he may be a better driver and typist than those he hires

Understanding the
Organization
Run by member govts, power not
delegated to board of directors
Highest authorityministerial
conference
2nd level
General council
Dispute settlement body
Trade policy review body

All consist of all WTO members

Understanding the
Organization
3rd level
Council for trade in goodsgoods
council
Council for trade in servicesservices
council
Council for Trade in Intellectual Property
rightsTRIPS

4th level
Each council has subsidiary bodies

Pro-WTO
Key to economic growth, as it provides
the correct stable macroeconomic
environment
Focused on developing countries
Developing countriescomparative
advantage in labour. Developed
countriesadvantage in capital and
technology, liberalization helps
Inefficiencies of developed countries
publicized

Pro-WTO
Hindrance due to less bargaining power
of developing countries overcome
Can be addressed as they form majority
and can negotiate in blocks
Commitment mechanism provided to
govt helps in overcoming domestic
pressure against liberalization
Developing countries with less
retaliating power can address through
WTO

Pro-WTO
Withdrawal of concession allowed for
compensating losses for developing
countries
Legalization makes it difficult for interest
groups to demand protectionism if WTO
rules against it
Developed countries have interest in the
services sector of developing countries,
WTO regulations can prevent exploitation

Anti-WTO
Protectionism in developed countries
still continue
Special and Differential Treatment (STD)
rule conflicts with non-discrimination
rule
Interest groups oppose trade reforms,
especially in corrupt political scenario
Beneficiaries of protectionism more
organized than the traders

Anti-WTO
Developing countries lack capabilities to
perform obligations
Developing countries not compatible
with the pace and degree of
liberalization
More serious due to single undertaking
principle
Increased legalization costs tilt decisions
in favour of developed countries

Anti-WTO
Increased legalization costs allow
increased influence of organized
groups in developing countries
Least developed countries lack
effective representation
Other reforms associated with trade
reforms
Danger from regional agreements

Anti-WTO
Although regional agreements are allowed,
they are in conflict with MFN principle
Conflicts due to regional agreements
outside WTO dispute settlement
mechanism
Membership in regional agreements
decrease incentive to participate in WTO
SDT produce conflict among recipient and
non-recipient countries

Anti-WTO
SDT used as bargaining chips by the
developed countries
Trade barriers of developed countries
disproportionately target developing
countries
WTO rules for harmonization pose
constraint to diverse needs of a
developing nation

To Conclude
Intention justified
Challenges still exist in the integration
of developing countries in the trade
regime
Still the best forum to address trade
related concerns of developing countries
Revision of rules and principles needed
in sync with the changing needs of the
world economy

Thank You!!!
&

All the Best!!!