INTERNATIONAL TRADE FINANCE

UNIT I
Author
T.Sownthariya MBA.,(Ph.D.)
Assistant Professor,
Department of Management Studies,
K.L.N college of Engineering
Madurai
 International Trade Meaning

• International trade is exchange of capital, goods, and services across

international borders or territories.

• International trade refers to trade between the residence of two

different countries, each country functions on their autonomous state
with set of regulations and currency.
 Most Exported From India
• Petroleum products
• Jewellery
• Automobile
• Machinery
• Bio-chemicals
• Pharmaceuticals
• Cereals
• Iron and steel
• Textile
• Electronics
 Need for international trade
• Large scale production
• Geographic factors
• Occupational distribution
• Means of Transportation
• Compensation the production
Need for foreign trade
• All nations of the world have to depend on the other nations as it
cannot produce every things by itself in a lower cost.
• A country may get the resources and manpower to produce all types of
commodities but it may be able to get that commodity at a cheaper rate
from the other nation who specializes in the production of that
commodity.
• Similarly, a country may produce some goods at a cheaper rate than
the other nation and may try to export it to other nations at a higher
rate if there is a surplus.
 Basic International or Foreign Trade

• Foreign trade is based on the theory of comparative cost advantage.

• It states that every nation exercises certain kinds of benefits from the
production of a particular type of commodity whose resources are
exclusively available in that nation or available in other nations in very
less amounts.
 Advantages
• Increased revenues
• Decreased competition
• Longer product lifespan
• Easier cash-flow management
• Better risk management
• Benefiting from currency exchange
• Access to export financing
• Disposal of surplus goods
• Enhanced reputation
• Opportunity to specialize
Disadvantages of International Trade

• Shipping Customs and Duties

• Language Barriers
• Cultural Differences
• Servicing Customers
• Returning Products
• Intellectual Property Theft
 Difficulties in International Trade
• Distance
• Different languages
• Risk in transit
• Lack of information about foreign businessman
• Import and export restrictions
• Study of foreign markets
• Problems in payments
• Intense competition
 Balance of Trade
The balance of trade is the difference between the value of a country's
imports and exports for a given period.
The balance of trade is the largest component of a country's balance of
payments.
Economists use the BOT to measure the relative strength of a country's
economy. The balance of trade is also referred to as the trade balance or
the international trade balance.
Factors that can Affect the Balance of
Trade Include
• The cost of production (land, labor, capital, taxes, incentives, etc.) in the
exporting economy vis-à-vis those in the importing economy;
• The cost and availability of raw materials, intermediate goods and other
inputs;
• Exchange rate movements;
• Multilateral, bilateral and unilateral taxes or restrictions on trade;
• Non-tariff barriers such as environmental, health or safety standards;
• The availability of adequate foreign exchange with which to pay for
imports; and
• Prices of goods manufactured at home (influenced by the responsiveness
of supply)
Balance of Payment
(BoP)
 Definition
• “The Balance Of Payments of a country is a systematic record of all
economic transactions between the ‘residents’ of a country and the rest of
the world”.
• It presents a classified record of all receipts on account of goods exported,
services rendered and capital received by ‘residents’ and payments made by
them on account of goods imported and services received from the capital
transferred to ‘non-residents’ or ‘foreigners’.” – Reserve Bank of India (RBI)
 Importance of BoP
• The BoP is an important indicator of pressure on a country’s foreign
exchange rate .

• The BOP helps to forecast a country’s market potential, especially in the

short run.

• Changes in a country’s BOP may signal the imposition or removal of controls

over payment of dividends and interest, license fees, royalty fees, or other
cash disbursements to foreign firms or investors.
 Contents of BoP
• Current account
• Capital account
• Financial account
• Net errors and omissions account
• Reserves and related items: official reserve
account
B of P
A. Current Account
A. Net exports/imports goods&services (Balance of Trade)
B. Net Income (investment income from direct portfolio investment plus
employee compensation
C. Net transfers (sums sent home by migrant abroad)
B. Capital Account
Capital transfers related to purchase and sale of fixed assets such as real estate
C. Financial Account
A. Net foreign direct investment Basic Balance = A+B+C
B. Net portfolio investment
C. Other financial items
D. Net Errors and Omissions Overall Balance = A+B+C+D
Missing data such as illegal transfers
E. Reserves and Related Items
Changes in official monetary reserves including gold and foreign exchange reserves
Σ (A:E) = Overall Balance
 1.Current account
• Net export/import of goods (trade balance)
• Net export/import of services
• Net income (investment income from direct and portfolio investment
plus employee compensation)
• Net transfers (sums sent home by migrants and permanent workers
aboard, gifts, grants and pensions)
 2.Capital account
• Capital transfers related to the purchase and sale of
fixed assets such as real estate
 3.Financial account
•Net foreign direct investment
•Net portfolio investment
•Other financial items
 4.Net errors and omissions
account
•Missing data such as illegal
transfers
 5.Reserves and related items: official
reserve account

• Changes in official monetary reserves including gold,

foreign exchange, and IMF position.
General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) is

a legal agreement between many countries, whose overall purpose was
to promote international trade by reducing or eliminating trade barriers
such as tariffs or quotas.
 World Trade Organization
The World Trade Organization (WTO) is the only global
international organization dealing with the rules of trade between
nations. At its heart are the WTO agreements, negotiated and signed by
the bulk of the world’s trading nations and ratified in their parliaments.
The goal is to ensure that trade flows as smoothly, predictably and freely
as possible.
 World Trade Organization
Formation 1 January 1995; 24 years ago (1995-01-01)

Type International trade organization

Purpose Reduction of tariffs and other barriers to trade

Headquarters Centre William Rappard, Geneva, Switzerland

Region served Worldwide

Membership 164 member states
Official language English, French, Spanish
Director-General Roberto Azevêdo

Budget (approx. 209 million US$) in 2018.

Staff 640
Website www.wto.org
 Agreements fall into six main parts:

• The Agreement Establishing the WTO

• The Multilateral Agreements on Trade in Goods
• The General Agreement on Trade in Services
• The Agreement on Trade-Related Aspects of Intellectual Property
Rights
• Dispute settlement
• Reviews of governments' trade policies
 Functions
• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations
 Principles of the trading system
• Non-discrimination.
two major components:
The Most Favoured Nation (MFN) Rule, And
The National Treatment Policy.
• Free trade gradually through negotiation.
• Predictability.
• Promoting fair competition
• Encouraging development and economic reform
 Agreements

• Agreement on Agriculture
• General Agreement on Trade in Services
• Agreement on Trade-Related Aspects of Intellectual Property Rights
• Agreement on the Application of Sanitary and Phytosanitary
Measures (SPM)
• Agreement on Technical Barriers to Trade (TBT)
• Agreement on Customs Valuation
 India New Foreign Trade Policy (EXIM Policy)
2015-2020

EXIM Policy or Foreign Trade Policy is a set of guidelines and

instructions established by the DGFT (Directorate General of Foreign
Trade) in matters related to the import and export of goods in India.
EXIM Policy is the export import policy of the government that is
announced every five years. This policy consists of general provisions
regarding exports and imports, promotional measures, duty exemption
schemes, export promotion schemes, special economic zone programs
and other details for different sectors. Every year the government
announces a supplement to this policy.
HIGHLIGHTS OF THE FOREIGN TRADE POLICY
2015-2020
A. SIMPLIFICATION & MERGER OF REWARD SCHEMES
Export from India Schemes:
1. Merchandise Exports from India Scheme (MEIS)
• Focus Product Scheme (FPS)
• Focus Market Scheme (FMS)
• Market Linked Focus Product Scheme (MLFPS)
• Agri. Infrastructure incentive scheme
• Vishesh Krishi Gramin Upaj Yojna (VKGUY) Special Agriculture And Village
Industry Scheme
2. Service Exports from India Scheme (SEIS)
B. BOOST TO "MAKE IN INDIA"
C. TRADE FACILITATION & EASE OF DOING BUSINESS
Online filing of documents
Online inter-ministerial consultations
Simplification of procedures/processes, digitisation and e-governance
e-Commerce Exports
Duty Exemption