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Foreign Trade
Foreign trade is nothing but trade between the different countries of the world. It is also called as International trade, External trade or Inter-Regional trade. It consists of imports, exports and entrepot. The inflow of goods in a country is called import trade whereas outflow of goods from a country is called export trade. Many times goods are imported for the purpose of re-export after some processing operations. This is called entrepot trade. Foreign trade basically ta es place for mutual satisfaction of wants and utilities of resources. This happens under what in economic terms is called the law of comparati!e cost or ad!antage. Further, the price at which goods are traded between two countries depends on the extent and sufficiency of demands for the goods to be imported and exported" this is expressed in economic terms as the law of reciprocal demand.
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Division of Labour and Specialisation Foreign trade leads to di!ision of labour and specialisation at the world le!el. )ome countries ha!e abundant natural resources. They should export raw materials and import finished goods from countries which are ad!anced in s illed manpower. This gi!es benefits to all the countries and thereby leading to di!ision of labour and specialisation.
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Optimum Allocation and Utilisation of esources *ue to specialisation, unproducti!e lines can be eliminated and wastage of resources a!oided. In other words, resources are channelised for the production of only those goods which would gi!e highest returns. Thus there is rational allocation and utili+ation of resources at the international le!el due to foreign trade.
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E"ualit# of $rices %rices can be stabilised by foreign trade. It helps to eep the demand and supply position stable, which in turn stabilises the prices, ma ing allowances for transport and other mar eting expenses.
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Availabilit# of &ultiple '(oices Foreign trade helps in pro!iding a better choice to the consumers. It helps in ma ing a!ailable new !arieties to consumers all o!er the world.
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Ensures *ualit# and Standard +oods Foreign trade is highly competiti!e. To maintain and increase the demand for goods, the exporting countries ha!e to eep up the ,uality of goods. Thus ,uality and standardised goods are produced.
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aises Standard of Livin- of t(e $eople Imports can facilitate standard of li!ing of the people. This is because people can ha!e a choice of new and better !arieties of goods and ser!ices. -y consuming new and better !arieties of goods, people can impro!e their standard of li!ing.
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+enerate Emplo#ment Opportunities Foreign trade helps in generating employment opportunities, by increasing the mobility of labour and resources. It generates direct employment in import sector and indirect employment in other sector of the economy. )uch as Industry, )er!ice )ector .insurance, ban ing, transport, communication/, etc.
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0acilitate Economic Development Imports facilitate economic de!elopment of a nation. This is because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and ser!ice sector.
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Assistance durin- 2atural 'alamities *uring natural calamities such as earth,ua es, floods, famines, etc., the affected countries face the problem of shortage of essential goods.
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&aintains 4alance of $a#ment $osition E!ery country has to maintain its balance of payment position. )ince, e!ery country has to import, which results in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange.
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4rin-s reputation and (elps earn +ood5ill 1 country which is in!ol!ed in exports earns goodwill in the international mar et. For e.g. 2apan has earned a lot of goodwill in foreign mar ets due to its exports of ,uality electronic goods.
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$romotes 6orld $eace Foreign trade brings countries closer. It facilitates transfer of technology and other assistance from de!eloped countries to de!eloping countries. It brings different countries closer due to economic relations arising out of trade agreements. Thus, foreign trade creates a friendly atmosphere for a!oiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themsel!es.
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Letter of Credit
4etter of 5redit is an important document in international trade. It is for safety and security of the exporter as regards payment for the goods to be exported. 4etter of 5redit can be defined as 6an underta ing by importer7s ban stating that payment will be made to the exporter if the re,uired documents are presented to the ban 6. -efore executing an export order, the exporter of goods desires to ha!e ade,uate proof regarding the credit worthiness of the importer. It is issued by the ban .in the importer7s country/ in fa!our of the foreign supplier, it contains a guarantee or an underta ing by one ban that the bill of exchange drawn on the importer will be honoured on presentation to the extent of the amount specified in the letter. 4etter of 5redit may also be issued on the strength of the business of the importer with the ban . The 4etter of 5redit also contains certain conditions such as date of bill, date for shipment, shipment by appro!ed !essels with appro!ed flags pac ing, etc. The ad!antages of the letter of credit to the exporters are many such as&#. Exporter gets safety and security of payment for the goods exported. '. The exporter gets discounting facility from the ban . (. It enables the exporter to ta e more initiati!e in promoting exports and earns foreign exchange for his country.
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Meaning
*ocumentary 5redit is an International trade procedure in which the credit worthiness of an importer is substituted by the guarantee of a ban for specific transaction. 9nder documentary credit arrangement .also called as letter of credit arrangement/ a ban .usually in the importer:s country/ underta es to pay for a shipment, pro!ided the exporter submits the re,uired documents .such as clean bill of lading, certificate of insurance, certificate of origin/ within a specific period.
Definition
1 *ocumentary 5redit .*5/, or 4etter of 5redit .45/, .they are one and the same/, is a legally binding underta ing gi!en by a -an on behalf of its customer, in fa!or of a third party, to ma e payment to him .the third party/, the stated sum of money against submission of the re,uired documents, as per the terms of the *ocumentary 5redit.
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appointed by the Issuing -an or 45 applicant. Its primary responsibility is to authenticate the 45 to ensure that the 45 comes from genuine source. E. 'onfirmin- 4an7 1 5onfirming -an .normally also the 1d!ising -an / is the ban that adds its own underta ing to pay the 45 beneficiary if all terms and conditions of the credit are complied with. )uch underta ing is in addition to that gi!en by the Issuing -an at the re,uest of the Issuing -an . The 5onfirming -an will only confirm an 45 upon satisfactory
e!aluation on the conditions of the Issuing -an and its domicile country. 0. 2ominated 4an7 1 =ominated -an is a ban authorised by the Issuing ban in the credit to pay, negotiate, issue a deferred payment underta ing or accept drafts under the 45. If the 45 does not specify a =ominated -an , the 45 is deemed as freely negotiable and any ban s that recei!e documents from the 45 beneficiary are ,ualified to be a =ominated -an . 1 =ominated -an is not responsible to pay under the credit unless it has added its confirmation to the credit. In such a case, it will become a 5onfirming -an . +. 2e-otiatin- 4an7 1 =egotiating -an is the ban that examines the drafts and@or
documents presented by the 45 beneficiary and gi!es !alues to such drafts and@or documents. =egotiation could be in the form of purchasing or agreeing to purchase the drafts and@or documents presented.
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eimbursin- 4an7 1 Reimbursing -an is the paying agent appointed by the Issuing -an to honour claims submitted by the nominated or negotiating ban .
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&ate;s eceipt Mate7s Receipt is a receipt issued by 5aptain @ Master @ Mate of the ship. The Mate of the ship after recei!ing the goods on the board and after inspection of the goods issues this receipt. The loading of the goods on the ship is possible only after presentation of 7shipping order7. Mate7s receipt contains details regarding name of ship, date on which the goods are loaded, description of goods, numbers and mar s on the pac ages, conditions of cargo, etc. This receipt is issued to the exporter who has to present the mate7s receipt in the office of shipping company by which he will get bill of lading. Mate Receipt may be clean or ,ualified. It is ,ualified if there is some defect in the cargo loaded on the ship, in such case the captain ma es ad!erse remar on the receipt. In case of clean receipt, the cargo in good condition and the ad!erse remar is not mentioned. The bill of lading is always prepared on the basis of mate7s receipt. In short mate7s receipt is an ac nowledgement of the receipt of goods on board of the ship. #3 $ % a g e
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4ill of Landin-ill of lading is one important shipping document necessary and useful in export-import trade transactions. It is a document issued by the shipping company after the shipment of goods. In simple, -ill of lading is a contract between the exporter or the shipper and the shipping company for the carriage of gods from the port of loading to the port of destination. -ill of lading is a document to title of goods and is transferable by endorsement and deli!ery. Dence, it is a semi-negotiable instrument. The bill of lading is prepared on the basis of mate7s receipt. The importer has to produce this receipt for securing the deli!er of goods. The bill of landing contains following information&#. =ame and address of the exporter and the shipper. '. =ame and address of shipping company. (. =ame and address of importer or agent. 0. Euantity, weight and !alue of goods sent. 3. %lace of loading and port of destination. 8. *ate of loading of goods on the ship. ;. Mar description and number of pac ages. ?. %ort at which the goods are to be discharged. A. Freight paid or to be paid. #>. )ignature of the issuing authority with date. ##. 1ny other rele!ant details. Important functions of bill of landing are as follows&#. It is useful to the importer for obtaining deli!ery of goods from the shipping company and port authorities.
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'ertificate of Ori-in 5ertificate of Crigin is an important shipping document sent by the exporter alongwith the other document to the importer. This document is showing or gi!ing the information of the fact that the goods which are exported are manufactured in a particular country i.e. the document certifies that certain goods are manufactured within a specific country only. It is a proof about the origin of goods exported. This certificate is generally issued by the 65hamber of 5ommerce6 or 6Export %romotion 5ouncil6 or 6Trade 1ssociation6 or 6)uch Cther recognised body6 on behalf of Fo!ernment. It is issued to the exporter. It is !ery useful document to sa!e custom@import duties. 1s a general rule the rate of import duty is not same for imports from all countries. The goods imported from some other countries are sub<ect to less import duty. Thus, to get the benefit of sa!ing import duty the importer can use the 5ertificate of Crigin, because the go!ernment of importing country grants concession in import duty to the importer on the basis of certificate of origin.
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'onsular Invoice 5onsular In!oice is an important document used in foreign trade. It is issued by the Trade consulate of the importing country stationed in the exporters country. 5onsular is a go!ernment officer ha!ing office in other countries. This document is also obtained by the exporter and is sent to the importer along with other shipping documents. This in!oice is also useful for #; $ % a g e
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4ill of Entr# -ill of entry is a document re,uired in case of import of goods. It is li e shipping bill in case of exports. 1 -ill of Entry is the document testifying the fact that goods of the stated !alue and description in specified ,uantity are entering into the country from abroad. The customs office supplies this form which is prepared in triplicate. Three different colours are used to prepare bill of entry. Cne copy is retained by custom department, other is retained by port trust and the third is ept by the importer. The bill of entry is di!ided into three classes&#. Entry for duty free goods. '. Entry of goods which are meant for consumption at home. (. Entry for goods to be re-exported. In India, all these entries are on the same form. The contents of -ill of Entry are&#. =ame and address of importer. '. Import 4icense number of importer. #? $ % a g e
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Doc7;s eceipt *oc authorities issue doc 7s receipt once the goods are stored in the sheds at the doc s. The 5learing and Forwarding agent clears the documents from the customs authorities. Then he approaches the %ort Trust authorities and obtains the 5arting Crder. The 5arting Crder is the permission to cart the goods inside the doc s. The goods are then brought inside the doc s. The goods may be loaded immediately on the ship. Many-a-times immediate loading on ship is not possible. The goods are then stored in sheds at the port or doc s. The doc authorities then issues the doc receipt as an ac nowledgement for goods recei!ed in sheds.
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'ommercial Invoice 5ommercial in!oice is a basic export document. It contains all the information, which is re,uired for preparation of all other documents. It is the exporter7s bill for goods which the importer has to pay. 5ommercial in!oice contains the following information&#. =ame and address of exporter and importer. '. *escription of goods .weight, ,uality, ,uantity, rate, etc./ (. Galue of goods after discount, if any. 0. =et amount payable by the importer. 3. Terms and 5onditions of sale
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Cther details of shipment to be included are&#. =ame of ship on which goods are loaded. '. 4etter of 5redit =umber. (. 4icense number of exporter. 0. -ill of lading number. 3. %ac aging )pecifications. 8. )hipping terms and 5onditions, etc. The accounting document claiming payment from the buyer. =ormally an export in!oice would include& )eller:s name and address -uyer:s name and address Issue *ate In!oice =umber )hipping mar s and numbers Term of )ale& e.g. FC-, etc. )hipping information Info re,uired by 4@5 5ountry of Crigin 4@5 number Merchandise description, %.C. number, unit price, and total price Info re,uired by 4@5
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'onsular Invoice : <isaed Invoice For exchange control and balance of payments reasons, some countries do not allow the import of merchandise unless accompanied by a certificate issued by one of its officials in the exporter:s country. These '> $ % a g e
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Insurance $olic# O 'ertificate E!ery export sale should be co!ered by insurance. Bho pro!ides the co!erage depends on the I=5CTERM used. Insurance co!erage on exports is a complicated issue that we cannot fully co!er on this site. For more information on export insurance, we suggest that you contact your business insurance agent or freight forwarder as to who can pro!ide insurance on an as needed basisH or Iby blan et policyH on an annual basis.
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'ertificates When a letter of credit calls for a document to be issued as a certificate, that document must be signed. Certificates come in a many different forms depending on the product and the country of destination. L/Cs often require that certificates be issued by reputable third party inspection surveyors such as the ociete !enerale de urveillance " ! # or the $ %epartment of &griculture. 't is important to remember that each certificate required by an L/C (ill increase the cost of goods sold. ome of the most common certificates are discussed belo(. 5ertificates should always be issued before the goods are shipped. 5ertificates issued after the goods arri!ed in the country of import defeat the purpose of the letter of credit. 1. 'ertificate of Ori-in 1 signed statement certifying the country of origin of the goods being sold is sometimes re,uired by regulation in the buyer:s country. This document may be as simple as a certificate signed by '# $ % a g e
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$ac7in- List 1 mirror of the merchandise co!ered by the in!oice, the pac ing list omit prices, but itemi+es the merchandise by number of cartons, pac ages, etc., and the contents of each. It generally does not ha!e to be signed unless called for in the 4@5.
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Conclusion
-an s, as facilitators of international trade and commerce ha!e been ser!ed well by the mechanism of the *ocumentary 5redit. The beauty of these credits is that they pro!ide appropriate protection, as re,uired, by the seller, buyer, the seller7s -an , and the buyer7s -an , while extracting their share of responsibility under the transaction. The *5s ha!e acted as a sort of bridge between buyers and sellers of goods and ser!ices, based in different countries, bringing them together, through the agency of the -an s. )ince they came into being in #A((, *5s ha!e no doubt played a significant role in cross border trade, o!ercoming the barriers of language, customs and practices, currencies, etc. 1nd last, but not the least, they are an important source of business and re!enues to the 5ommercial -an s, and are expected to grow e!en more in importance, in the coming years. It could be concluded that documentary credit is a reliable and con!enient instrument of international settlement. Dowe!er, we ha!e to agree with those !iews expressed in legal literature that this type of payment is complicated and expensi!e. The application of credit in export-import operations is complicated both in legal as well as economic terms. If se!eral ban s participate in a settlement by credit, ultimately the purchaser of the credit will ha!e to reimburse the costs of all the authori+ed ban s. 9sually, the cost for each operation, such as the opening of credit, sending a letter of ad!ice, confirmation, the examination of documents en!isaged by the credit to name but some of the procedures is determined in the form of a fixed interest on the amount of credit for any operation. It is also noteworthy that the ad!antage of credit is directly lin ed with the rele!ant experience of the participating ban s in this field and with the existence of a wide networ of correspondent ban s. 9nder these circumstances operations are less complicated.
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Bibliography
%ersonal =otes of )J25. *ocumentary 5redit Cperations -oo .
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