What is international trade?
International trade means buying and selling goods and services across the boundaries of countries. When India sells goods to another country, it is an export. When India buys goods from another country, it is an import. If goods are imported and then sent to a third country, it is called entrepot trade (re-export).
Countries trade because each has different land, climate, skills and machines. So no country can make everything cheaply. Each makes what it is good at and buys the rest.
Why is it harder than home trade?
- Long distance, so shipping takes time and costs more.
- Different money (currency), so prices change with the exchange rate.
- Different laws, customs duties, languages and habits.
- More risk: the buyer is far away and hard to check.
- Many government rules and documents.
Ways to enter a foreign market (in brief)
A firm can simply export and import, or go further: contract manufacturing, licensing or franchising, a joint venture with a local firm, or a fully owned subsidiary.
Benefits of international trade
Benefits to the nation
- Foreign exchange: exports earn foreign money, which pays for imports we need, like oil and machines.
- Better use of resources: each country makes what it does best.
- Growth and jobs: more demand means more factories and more work.
- Higher living standards: people get more kinds of goods at fair prices.
Benefits to firms
- Higher profits: prices abroad can be higher.
- Use of extra capacity: a factory that makes more than the home market needs can sell the rest abroad.
- Growth prospects: new markets when the home market is full or slow.
- Better business vision: firms learn and plan for the long term.
Export procedure step by step
- Receive an enquiry and order: the buyer asks for prices; the exporter sends a proforma invoice (a price quote with details); the buyer sends an order (indent).
- Check the buyer's ability to pay: usually the exporter asks for a letter of credit from the buyer's bank. This is the bank's promise to pay.
- Get licence and IEC: register with export councils and get an Import Export Code (IEC) number from the DGFT.
- Get pre-shipment finance: a bank loan to buy raw material and make the goods.
- Make goods and get them inspected: goods are made as per the order; some goods need a quality check and an inspection certificate.
- Customs clearance: file the shipping bill; customs checks and allows the goods to go.
- Shipment: goods go on the ship; the captain's mate gives a mate's receipt; the shipping company gives the bill of lading. Goods are insured.
- Get payment: the exporter sends the documents through the bank; the buyer's bank pays and the buyer gets the papers to claim the goods.
Import procedure step by step
- Trade enquiry: find sellers and ask for prices and terms.
- Get import licence and IEC: check the goods may be imported and get an IEC number.
- Arrange foreign exchange: apply to a bank to buy the foreign currency needed.
- Place an order (indent): send the order with quantity, quality, price and delivery terms.
- Get a letter of credit: the importer's bank sends it to the exporter as a promise of payment.
- Arrange finance: keep money ready to pay when the goods arrive.
- Receive shipment advice and documents: pay (or accept the bill of exchange) and collect the documents from the bank.
- Customs clearance and release: file the bill of entry, pay import duty, and take the goods from the port.
Documents used in international trade
Related to the goods
- Commercial invoice: the seller's bill with quantity, price and total.
- Packing list: what is inside each box.
- Certificate of origin: says which country the goods come from (helps get lower duty).
- Inspection certificate: says the goods passed a quality check.
Related to shipment
- Shipping bill: main paper to get customs permission to export.
- Shipping order: tells the ship's captain to take the goods.
- Mate's receipt: given by the ship's officer once goods are loaded.
- Bill of lading: given by the shipping company; it is a receipt, a contract to carry goods and proof of ownership. For air it is the airway bill.
- Marine insurance policy: covers loss at sea.
Related to payment
- Letter of credit: the importer's bank promises to pay the exporter.
- Bill of exchange: an order to the importer to pay a set amount.
- Bank certificate of payment: shows payment has been received.
Import side
- Bill of entry: filed with customs to clear imported goods.
- Import general manifest and dock challan: list of cargo and dock charges.
WTO: meaning and objectives
The World Trade Organization (WTO) is a world body that makes and runs rules for trade between countries. It began on 1 January 1995 and took the place of GATT (1948). Its office is in Geneva. India is a founder member.
Objectives of the WTO
- Cut tariffs (import taxes) and other trade barriers.
- No discrimination: treat all members in the same way.
- Settle trade disputes between members fairly.
- Raise living standards, jobs and incomes.
- Help developing and poor countries get a fair share of trade.
- Use world resources in a sustainable (long-lasting) way and protect the environment.
- Cover services and intellectual property, not only goods.
Try it at home
Pick five things in your kitchen or bag. Read the labels and find where each was made. Mark which ones India imported. Then guess one thing India exports that you use (like tea or rice).
Key formulas and definitions
- Export = selling goods/services to another country
- Import = buying goods/services from another country
- Entrepot trade = import, then re-export to a third country
- Letter of credit = bank's promise to pay the exporter
- Bill of lading = receipt + contract + title to goods sent by sea
- WTO = 1 January 1995, replaced GATT (1948)
Worked examples
1. A Tiruppur garment firm gets an order from Germany. What should it ask for first to feel safe about payment?
A letter of credit from the German buyer's bank. It is the bank's promise to pay once the correct documents are shown, so the risk of non-payment falls.
2. India buys crude oil and exports software services. Show how trade helps India here.
Software exports earn foreign exchange (dollars). These dollars pay for crude oil imports that India cannot produce enough of. Each side does what it does best.
3. Goods are loaded on a ship in Mumbai. Which two documents come right after loading, and who gives them?
First the mate's receipt, given by the ship's officer. Then the shipping company gives the bill of lading in exchange for the mate's receipt.
4. A Delhi firm imports machines. Put these in order: bill of entry, indent, letter of credit, trade enquiry.
Trade enquiry → indent (order) → letter of credit → bill of entry (at customs when goods arrive).
Common mistakes
- Mixing up mate's receipt and bill of lading: the mate's receipt comes first; the bill of lading is given later by the shipping company.
- Thinking the shipping bill is for imports. The shipping bill is for exports; the bill of entry is for imports.
- Saying the WTO started in 1948. That was GATT; the WTO began in 1995.
- Thinking the letter of credit is sent by the importer himself. It is issued by the importer's bank.