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Section 1  Introduction to International Trade
1. The Brief Introduction to International Trade
¡¡¡¡Trading is one of the most basic activities of mankind. It has existed in every society, every part of the world, and in fact every day since the caveman came into being. International trade is a business which involves the crossing of national borders. It not only includes international trade and foreign manufacturing, but also encompasses the growing services industry in areas such as transportation, tourism, banking, advertising, construction, retailing, wholesaling and mass communications. It includes all business transactions that involve two or more countries. Such business relationship may be private or governmental. In the case of private firms the transactions are for profit. Government-sponsored activities in international business may or may not have a profit orientation.
¡¡¡¡In order to pursue any of these objectives, a company must establish international operational forms, some of which may be quite different from those used domestically. The choice of forms is influenced not only by the objective being pursued, but also by the environments in which the forms must operate. These environmental conditions also affect the means of carrying out business functions such as marketing. At the same time, the company operating internationally will affect to a lesser degree, the environment in which it is operating.
2. The Characteristics of Merchandise Import & Export
¡¡¡¡The fundamental characteristic that makes international trade different from domestic trade is that international trade involves activities that take place across national borders. Special problems may be arisen in international trades that are not normally involved when trading at home.
¡¡¡¡(1) The complexity of the law and stipulations. When dealing in international trade (exporting and importing), a businessman has to face a variety of conditions which differ from those to which he has grown accustomed in the domestic trade. The fact that the transactions are across national borders highlights the differences between domestic and international trade. Generally, there are certain differences which justify the separate treatment of international trade and domestic trade. The exporter should investigate their political, financial and economic conditions; their policies, laws and regulations governing foreign trade, foreign exchange control, customs tariffs and commercial practices; their foreign trade situation (the structure, quantity, volume of exporting and importing commodities, trading partners and trade restrictions, etc.). All of these factors exert a great impact upon the choice of a new market.
¡¡¡¡(2) The complexity of business system. Control and communication systems are normally more complex for foreign than for domestic operations. Risk levels might be higher in foreign markets. The risks include political risks (of the imposition of restrictions on imports, etc.), commercial risks (market failure, products not appealing to foreign customers, etc.), financial risks (of adverse movements in exchange rates, high rates of inflation reducing the value level of a company¡¯s working capital, and so on), and transportation risks.
¡¡¡¡(3) The complexity of business circumstance. Information on foreign countries needed by a particular firm may be difficult to obtain. International managers need a broader range of management skills than do managers who are only concerned with domestic problems.
¡¡¡¡(4) The complexity of politics and economy. Foreign currency transactions will be necessary. Exchange rate variations can be very wide and create problems for international trade. It is more difficult to observe and monitor trends and activities (including competitors¡¯ activities) in foreign countries. Foreign traders must be aware of the differences in culture, monetary conversion and trade barriers because they often bring about conflicts in international trade.
3. The Risks of Merchandise Import & Export
¡¡¡¡(1) Risk of credit. Trading with other countries is not the same as within one¡¯s own country. Both exporters and importers face risks in export and import transactions because they will inevitably experience the possibility that the other party may not fulfill the contract.
¡¡¡¡For exporters, they are likely to take the risks of buyer default while customers might not pay in full of the goods. There are several reasons for this£ºthe importers might go bankrupt; a war might break out or the importers¡¯ government might ban trade with the exporting country; or they might ban imports of certain commodities. Moreover, the importers might run into difficulties getting the foreign exchange to pay for the goods, or they are even not reliable and simply refuse to pay the agreed amount of money.
¡¡¡¡For importers, they may face the risks that the goods will be delayed and they might only receive them a long time after paying for them. This may result from port congestion or strike. Delays in fulfillment of orders by exporters and difficult customs clearance in the importing country can cause loss of business. There is also risk that the wrong goods might be sent.
¡¡¡¡(2) Risk of transportation. The export or import trade is subject to many risks. Fire, storm, collision, theft, leakage, explosion, etc., more can be added to this list. Every year, a certain amount of cargo was destroyed or damaged by perils of the sea in transit, but which particular cargo it could not be anticipated. All cargo owners take the risks of loss through the perils. However, foreign traders can insure themselves against many of these risks.
¡¡¡¡(3) Risk of exchange rate. In trading, how and when a seller can get payment for the goods sold is a key problem that concerns him most, and particularly in foreign trade, an exporter has to secure payment from an importer who may live on the other side of the globe. This evidently enhances the uncertainty of payment. Merely for this reason, the finance for export trade is more complicated than that of home trade. To add to the complexities, various countries use different kinds of money, and unstable political and economic conditions may at certain times make trade with certain countries a very risky business. Therefore, in negotiating payment terms for export goods in a sales contract the elements of time, place, mode and currency are usually under careful consideration. The only difference is that each currency¡¯s value is stated in terms of other currencies. EUR have value in US dollars, which have a value in Britain pounds, which have a value in Japanese yen. These exchange rates change every day and are constantly updated in banks and foreign exchange offices around the world.
¡¡¡¡(4) Risk of politics. The fundamental characteristic that makes international trade different from domestic trade is that international trade involves activities that take place across national borders. Special problems may arise in international trades that are not normally involved when trading at home. Before abusinessman starts an export transaction, he has to acquire a good knowledge of the foreign market to which his products are sold. Whether his products are marketable there or not is a key question to him. What about the competitors there? What about the economic, financial, and political stability of importing country? In addition, the local laws and regulations governing foreign trade, customs tariffs, port facilities, commercial practices, etc. ¡ª all these the exporter should also have a profound grasp of if he expects to trade smoothly and successfully.
¡¡¡¡(5) Risk of business cheats. In foreign trade, it is ideal that the seller delivers the goods conforming to the contract in respect of quality, specification, quantity and packaging, and hands over the documents concerning the goods at the right time and place stipulated in the contract. And the buyer makes payment for the goods and takes delivery of them in the same manner specified in the contract. However, there always exists a gap between the ideal and the reality. Complains or claims, sometimes, still arise in spite of well planned and careful work in the conformance of a contract. In practice, it is not infrequent that the exporter or the importer neglects or fails to perform any of his obligations, thus giving rise to breach of contract and various trade disputes, which, subsequently, leads to claim, arbitration, or even litigation.
¡¡¡¡(6) Risk of law system. How to determine the nature of breach of contract and the ways of remedies differs in laws from country to country. To sum up, the methods may be, generally, classified into two types£ºone is based on the clauses of the contract; the other on the basis of the degree of breach of contract.
¡¡¡¡The laws of some countries, like Britain, stipulate that if any party to a contract violates the fundamental and substantive clauses, the breach is called ¡°breach of condition¡±. For example, the quality and quantity of the goods delivered by the seller don¡¯t conform to stipulations of contract, or the goods are not delivered according to the stipulated in the contract, etc. In these cases, the injured party is entitled to discharge the contract and raise claim against the other party. If the violated clauses are minor ones, such a breach is called ¡°breach of warranty¡±.
¡¡¡¡United Nations Convention on Contracts for the International Sales of Goods classified ¡°breach¡± into ¡°fundamental breach¡± and ¡°non-fundamental breach¡±. A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. If such detriment to the other party is not so substantial, then the breach of the contract is non-fundamental. If a breach of contract by a party is fundamental, then the injured party shall have the right to cancel the contract and recover damages from the party in breach. If a breach of contract by a party is non-fundamental, then the injured part is entitled to recover damages from the party in breach, but can not cancel the contract.
¡¡¡¡Since the interpretations and stipulations for breach of contract and its consequences differ in laws from country to country or in international practices, it is important and necessary for us to get familiar with them. Only in this way can we stipulate the claim clauses in import or export contracts properly and execute them smoothly in practice.
4. The benefits of International Trade
¡¡¡¡The gains from trade depend upon the basis for the trade. Where trade is based on production specialization in countries according to the Law of Comparative Advantage, the gains from trade are due to the benefits to consumers (or industrial users) of purchasing low-priced imports and the benefits to export products of a wider market for their products and favorable international prices. Where trade is based upon consumer preferences and the existence of differentiated products, the gains from trade accrue as the benefits to consumers of an increased variety of products from which to choose. An additional benefit to consumers in this latter case may also accrue if the market power of local firms is reduced and imports make pricing and other aspects of market conduct more competitive.
¡¡¡¡To sum up, the international trade can bring the following benefits.
¡¡¡¡(1) Cheaper goods or services. Countries trade with each other because there is a cost advantage. And it is this cost advantage of the supplying country that enables an importer to buy certain goods or services of the same quality at lower prices. Furthermore, competition in the world market would tend to make prices even lower.
¡¡¡¡(2) Greater variety. As no nation has all the commodities or services that it needs, undoubtedly, trade means countries can provide a wider variety of products for their consumers and thus help to improve the living standards of the people.
¡¡¡¡(3) Wider market for the supplying country. International trade can greatly expand the market, which enables the suppliers to take advantage of economies of scales. With the increasing number of trading partners, suppliers can also get more profits.
¡¡¡¡(4) Economic growth. International trade has become more and more important as it can lead to the full utilization of otherwise underemployed domestic resources. That is, through trade, a developing nation can move from an inefficient production point inside its production frontier, with trade. For such nations, trade would represent a vent for surplus, or an outlet for its potential surplus of agricultural commodities and raw materials. In addition, by expanding the size of the market, trade makes possible division of labor and economies of scale. This is especially important and has actually taken place in the production of light manufactures in such small economic units as Taiwan, Hong Kong, etc. Apart from that, international trade is the vehicle for the transmission of new ideas, new technology, and new managerial and other skills. Finally, international trade is an excellent antimonopoly weapon because it stimulates greater efficiency by domestic producers to meet foreign competition. This is particularly important to keep low the cost and price of intermediate or semi-finished products used as inputs in the domestic production of other commodities.
Section 2  Reasons for International Trade
1. Resources Reasons
¡¡¡¡Some countries in the world have certain conditions or resources that provide them with a basis for international trade. Illustrations include favorable climate conditions and terrain, natural resources, skilled workers, and capital resources.
¡¡¡¡(1) Favorable climate conditions and terrain. Some countries have year-round or seasonal weather conditions that make them ideally suited for the raising of particular crops. For example, Colombia and Brazil have just the right climate for growing coffee beans. The United States, with the exception of Hawaii, does not. Therefore, the United States must import coffee. On the other hand, the United States grows so much wheat that it is able to export wheat to other nations abroad. Thus, climate and terrain help determine some of the goods a nation can produce and trade internationally.
¡¡¡¡(2) Natural resources. If a country has an abundance of natural resources, it is common to find some of these resources being exported. Among developing countries raw materials may be sold before being processed. Tin from Bolivia and oil from some of the Middle East countries are examples. On the other hand, in many highly industrialized nations raw materials are often sold in finished form. For example, the United States sells its iron ore in the form of steel products, such as automobiles and machinery. Yet, regardless of how they are sold, raw materials play a major role in determining a country¡¯s involvement in international trade.
¡¡¡¡(3) Skilled workers. If a nation hasa great many skilled workers, it can produce sophisticated equipment and machinery, such as computers, jet aircraft, and electric generators. The United States, Japan and Western European countries are illustrations. On the other hand, some nations have basically unskilled work forces and must confine their activities to the manufacture of simple products. Ethiopia, Uganda, and Guinea are illustrations. The skill of a country¡¯s work force helps determine what it will be able to produce and trade with other countries.
¡¡¡¡(4) Capital resources. Another important factor in international trade is that of capital resources. These include things such as plant, machinery, and equipment. The more capital resources a nation has, the better its chance to free its workers from manual jobs and allow them to work on more important tasks. In these countries, while the machines do the busy work people concentrate their attention on ¡°think¡± jobs, such as developing technological breakthroughs that will result in a higher standard of living for the nation. Poor countries, of course, lack these capital resources and must rely heavily on manual labor and on certain goods from other countries.
2. Economic Reasons
¡¡¡¡With the development of manufacturing and technology, there has been another reason, i.e. economic benefit, for nations to trade. It has been found that a country benefits more by producing goods it can make most cheaply and buying those goods that other countries can make at lower costs than by producing everything it needs within its own border. This is often explained by the theory of comparative advantage, also called the comparative cost theory, which was developed by David Ricardo, John Stuart Mill, and other economists in the nineteenth century. The theory emphasizes that different countries or regions have different production possibilities. Trade between countries can be profitable for all, even if one of the countries can produce every commodity more cheaply. As long as there are minor, relative differences in the efficiency of producing a commodity, even the poor country can have a comparative advantage in producing it.
¡¡¡¡Comparative advantage has directed countries to specialize in particular products and to mass-produce. For example, the United States is relatively more efficient than Europe in producing food (using one third the labor). Thus, while the United States has an absolute advantage in both forms of production, its efficiency in food production is greater. Consequently, a great deal of clothing is exported from Europe to the United States.
3. Diversification Reasons
¡¡¡¡Companies usually prefer to avoid wild swing in their sales and profits; so they seek out foreign markets and procurement as a means to this end. Some film companies have to smooth their yearlong sales somewhat because the summer vacation period (the main season for children¡¯s film attendance) varies between the northern and southern hemispheres. These companies have also been able to make large television contracts during different years for different countries. Many other firms take advantage of the fact that the timing of business cycles differs among countries. Thus while sales decrease in one country that is experiencing recession, they increase in another that is undergoing recovery. Finally, by depending on supplies of the same product or component from different countries, a company may be able to avoid the full impact of price swings or shortages in any country that might be brought about, for example, by a strike.
4. Expanding Sales Reasons
¡¡¡¡Sales are limited by the number of people interested in a firm¡¯s products and services and by customers¡¯ capacity to make purchases. Since the number of people and the degree of their purchasing power are higher for the world as a whole than for a single country, firms may increase their sales potentials by defining markets in international terms. Ordinarily, higher sales mean higher profits.
¡¡¡¡There are still some other reasons for international trade. Some nations are unable to produce enough products of a certain item. Thus they have to import some to satisfy a large domestic demand. Moreover, the preference for innovation or style also leads to international trade, which makes available a greater variety of products and offers a wider range of consumer choice of a certain product. Finally, some nations of the world trade with others mainly for political reasons. In those cases, more considerations are given to political objectives rather than economic motivation.
Section 3  International Trade Restrictions
1. Reasons for Restricting Free Trade
¡¡¡¡Though free trade is encouraged in international business world, trade protectionism or restrictive measure is being adopted by a great number of countries, due to different kinds of reasons or considerations. The most popular arguments for restricting free trade among nations are usually summed up as follows£º
¡¡¡¡(1) To protect home industries. Supporters of this argument claim that any country should protect its own industries from foreign competition; if its own industries fail, jobs will be lost. Such a law is the ultimate in protecting home industries.
¡¡¡¡(2) To protect infant industries. This argument holds that it is important to protect new industries within the country from more mature foreign competitors, at least until the new domestic industries can grow and become effective competitors.
¡¡¡¡(3) To provide national security through self-sufficiency. Clearly, a nation¡¯s security considerations may affect its policies regarding free trade. In countries where intense nationalism exists, people feel that the country should not be dependent on other nations for its standard of living or its security.
¡¡¡¡(4) To provide for a favorable balance of trade. This argument supports the idea that a nation must have a favorable balance of trade each year. It views that the accumulation of foreign trade credit as the ideal goal of all foreign trade. But, as we have noted, foreign trade is a two-way street. Nations must export to be able to import. No nation can continue for long to have an unfavorable balance of trade without dire result on its own monetary system. Nations that regularly have a favorable balance of trade help to cause problems for other nations.
¡¡¡¡(5) To protect wages and the standard of living. This argument is a favorite among labor groups, which are seen as threat to their wages when consumers are allowed to buy similar products made abroad by cheaper labor. This argument overlooks the fact that the high wages have developed because of greater productivity among the workers. Productivity is the result of labor skills, technology, and capital equipment.
2. Methods of Restricting Free Trade
¡¡¡¡Protectionist measures often by governments are also barriers to trade, and typical examples are tariffs and quotas.
¡¡¡¡(1) Tariffs. Tariff barriers are the most common form of trade restrictions. A tariff is a tax levied on a commodity when it crosses the boundary of a customs area which usually coincides with the area of a country. A customs area extending beyond national boundaries to include two or more independent nations is called a customs union. According to the time of collection, duties can be divided into import duty and export duty. Import duty is collected when goods are imported, and export duty is collected when goods are exported in order to control the export of anything with national importance. Besides regular import duty, importers might have to pay import surtax, too. Generally speaking, import surtax is additional to import duty, is temporary in coping with international payment difficulties, maintaining balance of trade and preventing dumping, and is discriminatory against a particular country.
¡¡¡¡Import surtax has three forms.
¡¡¡¡¡ª Countervailing duty is collected against bounty or grant during production, transport and export, etc., for it is unfair for importers to get the exports subsidized by the government.
¡¡¡¡¡ª Anti-dumping duty is collected when the importing country believes that there is a dumping (a not universally defined concept that can mean the selling price in a foreign country is below domestic selling price, world market price or production cost). Before the duties are imposed, the country must show that its domestic industry has suffered ¡°material¡± injury by dumped imports.
¡¡¡¡¡ª Variable levy is collected at the difference between world market prices and the support prices for domestic producers to make the imported commodities.
¡¡¡¡According to the methods in which tariffs are collected, there are types of duties. Specific duty is collected per physical unit¡ªaccording to weight, volume, measurement and quantity, etc. Ad valorem duty is collected according to value or price, i.e., at a percentage of the price. Mixed or compound duty is collected according to either specific duty or ad valorem duty first, then the other. An alternative duty is collected whichever the higher between specific duty and ad valorem duty.
¡¡¡¡The duties discussed above are not independent of each other, i.e., a duty can be an import, a protective and a compound duty at the same time.
¡¡¡¡(2) Non-tariff barriers. In addition to tariffs, countries also use other methods to make import more difficult. These methods, collecting no tariffs, are called non-tariff barriers.
¡¡¡¡i. Quotas or quantitative restriction. Quotas or quantitative restriction are the most common form of non-tariff barriers. A quota limits the imports or exports of a commodity during a given period of time. The limits may be in quantity or value terms, and quotas may be on a country basis or global, without