International Trade

The history of trade is largely the history of civilization. First it was what we call barter, a simple exchange of goods. Goods like cloth and glass beads were taken to distant places and exchanged for things like oriental spices. Sometimes this was a dangerous and risky business.

International trade has now developed into an intricate mechanism of transactions. Today trade is not confined to visible exports and imports of goods but also includes invisible items like services, transportation, insurance, expenditure by tourists, etc.

Countries usually specialize in certain products and commercial activities. This specialization depends on such factors as differences in climate, natural resources, labour force skills and technology. These special conditions give one country an advantage over others in producing certain goods or services.

A country has a comparative advantage in a certain product if it is produced more efficiently and at lower cost. Nations usually specialize in those goods and services in which they have the greatest comparative advantage and exchange their surplus for things they need and want but do not produce themselves.

When countries engage in international trade they express their agreement to specialize in order to produce more of certain goods or services. Countries that trade can together produce more goods and services than they could in the absence of trade.

The balance of trade indicates the difference between the total value of a country’s imports and exports of visible items (goods). The balance of trade is an important part of the balance payments, which also includes invisible items and capital transfers from one country to another. If the total value of the goods imported (visibles) is higher than that of the goods exported, the balance of trade is bad (adverse or unfavourable), that is to say it shows a deficit. If the reverse case is true, the balance of trade is good or favourable and it shows a surplus. Invisible items can cover the deficit of the balance of trade and as a result the country will have a favourable balance of payments.

What a country can achieve in international trade is shown by the terms of trade. The terms of trade are the rate at which a country’s exports are exchanged for its imports. Terms are said to be good or favourable to a country when the prices of its expoits are high in relation to the prices of its imports, and bad or unfavourable when the reverse is the case. The terms of trade become even more favourable if the demand for a country’s exports increases, or if the demand for its imports decreases, for then its import prices will fall and its export prices will rise, and it will be able to receive a greater volume of imports for a given volume of exports. On a global scale imports must equal exports, since every good exported by one country must be imported by another.

Means of Payment in Foreign Trade

Means of payment (also called method of settlement) is the instrument by which payment is made. Among numerous instruments we distinguish between payment in cash, by cheque (A.E. check), bank transfer, SWIFT, draft, bank money order, telegraphic transfer (TT), mail transfer (MT), Bill of Exchange. Generally speaking, means of payment is the instrument of payment where certain instructions are written.

The simplest way is to pay in cash that is money in coins or not This, however, is very rarely used in foreign trade. A cheque is a written order by a person (a drawer) to a bank (a drawee) to pay a certain sum money from the person's bank account to another person (a payee Payments of large sums of money are usually made by cheque rather the cash and the drawer of the cheque will wish to make sure the cheque does not fall into wrong hands.

A cheque made out as payable on demand (an open cheque) can cashed or negotiated by any person who holds it. To minimize such possible loss it is usual to cross the cheque. A crossed cheque can only paid into a bank account. The crossing is two parallel lines placed across the cheque with or without the words “not negotiable” or “a.c.” - “pay only” or “and company”. This is called a general crossing. A special crossing is the one where the words are added to general crossing specifying the bank at which the cheque is to be presented.

A Bill of Exchange is an unconditional order in writing addressed by one person to another and signed by the person giving it, requiring the person to whom it is addressed to pay on demand (a sight draft) or at a fixed or determined future date (a term draft) a certain amount of money to a specified person or to the bearer. A Bill of Exchange is sometimes called a draft, especially if payment is made from one bank to another. It is often used in foreign trade. The buyer signs an agreement to pay on the due date by writing across the face of the bill the word “accepted” together with his name and the name of his bank, where the amount will be paid. The terms of payment of the bill may be 50, 60, 90 days after sight (D/S). In some countries three extra days are allowed for payment. They are called “days of grace”.

The person drawing the bill is called the drawer, the person upon whom it is drawn (to whom it is addressed) is called the drawee, who becomes acceptor after he has accepted the bill. Here is an example of the Bill of Exchange.

$ 580.57 Due 11th May, 2003 London 8th February, 2003
STAMP
Three months after date, pay to our order the sum of five hundred and eighty dollars and fifty seven cents for value received.
To Messers. A. White behalf of & Co. Ltd.	For and Smith & Co.,
(Signatures)

If the drawee is willing to pay, he signs across the face of the bill: Accepted Payable at the Sheffield City Bank, Ltd.

White & Co.

When payment is made through a post office (which does not very often happens in international trade) money orders are used, either TT or MT.

The credit card is becoming a very important means of payment in consumer transactions and is replacing the cheque in the everyday payments. It first appeared in the USA and is now spreading throughout the world. The best known credit cards in use are Barclay Cards, Access Cards, Diners Club Cards, American Express Cards, Eurocard/Mastercard, Visa Cards. A special kind of credit card is the

Methods of Payment in Foreign Trade

Compared to selling in the domestic market, selling abroad can create extra problems. Delivery generally takes longer and payment for goods can take more time. So exporters need to take extra care in ensj^rtng that prospective customers are reliable payers and payment is received as quickly as possible. Payment for export depends on the conditions outlined in the commercial contract with a foreign buyer. There are internationally accepted terms designed to avoid confusion about costs and price (Incoterms). The way exporters choose to be paid depends on a number of factors: the usual contract terms adopted in the buyer's country; what competitors may be offering; how quickly funds are needed; the availability of foreign currency to the buyer and, of course, whether the cost of any credit can be afforded by the importer (the buyer) or the exporter (the seller).

There are several basic methods of payment providing various degrees of security for the exporter and the importer.

Payment in advance (Cash with order)

The best possible method of payment for the exporter is payment in advance. Cash with order (CWO) avoids any risks on small orders with new buyers and may even be asked before the production begins. However this form is rare since it means that the buyer is extending credit to an exporter; In addition the importer may run a risk that the goods will not be despatched in accordance with the contract terms. Nevertheless, provision for partial advance payment in the form of deposits (normally between 10 per cent and 20 per cent of the contract price) or progress payments at various stages of manufacture is often included in the contract terms.

Variation of this form is cash on delivery (COD), where small value goods are sent by Post Office parcel post and are released only after payment of the invoice plus COD charges.

Open account

Payment on open account offers the least security to an exporter. The goods and accompanying documents are sent directly to the importer who has agreed to pay within a certain period after the invoice date - usually not more than 180 days. There are various ways in which the importer can send money to his supplier under open account and he may wish to choose the means to be used, for example payment by cheque, by telegraphic transfer (TT), by International Money Order, etc.

The open account method is increasingly popular within the EEC because it is simple and straightforward.

Documentary Bill of Exchange

This is a popular method as it offers benefits for both the exporter and the importer. The main advantage for the importer is that he does not need to make payment until his exporter has dispatched the goods. The advantage for the exporter is that there are legal procedures for recovering money against bill of exchange and, if the goods are sent by sea, he is able to control them through the documents of title to the goods until the importer has agreed to make payment. Documentary bill of exchange is a demand for payment from the exporter. He will draw it up on a special printed form and forward it to his bank together with the documents relating to the transaction. These may include the transport document proving that the goods have been dispatched. The exporter’s bank will send the bill and documents to the importer’s bank “for collection”. The importer’s bank will notify him of the arrival of the documents and will release them to the importer provided that: a) he pays the amount of the bill in full if it is the sight draft, or b) if the bill is a term draft, the importer “accepts” it, i.e. signs across the bill his agreement to pay the amount in full on the due date.

Documentary Letter of Credit (L/C)

The Irrevocable Letter of Credit is the most commonly used method of payment for imports. The exporter can be sure that he will be paid when he dispatches the goods and the importer has proof that the goods have been dispatched according to his instructions.

The “letter” is an inter-bank communication. The two banks take full responsibility that both shipment and payment are in order. The banks deal only in documents and are not obliged to inspect the actual goods. This is how the system works.

• The importer and exporter agree a sales contract and the terms of the Documentary Credit.

• The importer asks his bank to open a Documentary Credit in the exporter’s favour.

The importer's bank (the issuing bank) issues a L/C saying, “We, the bank, promise that we will pay you when you submit certain documents that prove that you have shipped the goods as agreed upon in the sales contract”. The L/C specifies the documents to be submitted, the shipping requirements and the expiry date. The issuing bank sends a L/C to a bank in the exporter's country (the advising bank). The issuing bank arranges with the advising bank to pay the exporter after the documents have been presented.

• The exporter prepares the documents, usually an invoice, a bill of lading, an insurance policy, a packing

list and a certificate of origin, then makes a shipment. Then the exporter draws a draft (Bill of Exchange), attaches the

documents to it and presents everything to the advising bank for payment.

• The advising bank examines the documents. If everything is in order the bank pays the draft presented by the exporter and sends the documents to the issuing bank.

• The issuing bank notifies the importer that the documents are at his disposal. The bank releases the documents -as soon as the importer has paid and the importer may receive the goods.

There is a great variety of international trade relations, so there are different kinds of L/C. But all have the same function: to provide a safe and trusted method of payment between importer and exporter.