Q.3 Explain the meaning of the term ‘trade liberalization’ and advantages.

Also, identify
some commonly observed mistakes in international trade
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Trade Liberalization is the removal or reduction of restrictions or barriers on the free
exchange of goods between nations. This includes the removal or reduction of both tariff
(duties and surcharges) and non-tariff obstacles (like licensing rules, quotas and other
requirements). The easing or eradication of these restrictions is often referred to as
promoting "free trade."
The Benefits of Trade Liberalization
Policies that make an economy open to trade and investment with the rest of the world
are needed for sustained economic growth. The evidence on this is clear. No country in
recent decades has achieved economic success, in terms of substantial increases in living
standards for its people, without being open to the rest of the world. In contrast, trade
opening (along with opening to foreign direct investment) has been an important element
in the economic success of East Asia, where the average import tariff has fallen from 30
percent to 10 percent over the past 20 years.
Opening up their economies to the global economy has been essential in enabling many
developing countries to develop competitive advantages in the manufacture of certain
products. In these countries, defined by the World Bank as the "new globalizers," the
number of people in absolute poverty declined by over 120 million (14 percent) between
1993 and 1998.
There is considerable evidence that more outward-oriented countries tend consistently to
grow faster than ones that are inward-looking. Indeed, one finding is that the benefits of
trade liberalization can exceed the costs by more than a factor of 10. Countries that have
opened their economies in recent years, including India, Vietnam, and Uganda, have
experienced faster growth and more poverty reduction. On average, those developing
countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than
those that did not.
Freeing trade frequently benefits the poor especially. Developing countries can ill-afford
the large implicit subsidies, often channeled to narrow privileged interests that trade
protection provides. Moreover, the increased growth that results from free trade itself
tends to increase the incomes of the poor in roughly the same proportion as those of the
population as a whole. New jobs are created for unskilled workers, raising them into the
middle class. Overall, inequality among countries has been on the decline since 1990,
reflecting more rapid economic growth in developing countries, in part the result of trade
liberalization.
The potential gains from eliminating remaining trade barriers are considerable. Estimate
of the gains from eliminating all barriers to merchandise trade range from US$250 billion
to US$680 billion per year. About two-thirds of these gains would accrue to industrial
countries. But the amount accruing to developing countries would still be more than
twice the level of aid they currently receive. Moreover, developing countries would gain
more from global trade liberalization as a percentage of their GDP than industrial
countries, because their economies are more highly protected and because they face
higher barriers.
Although there are benefits from improved access to other countries’ markets, countries
benefit most from liberalizing their own markets. The main benefits for industrial
countries would come from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of manufacturing and agriculture.
The group of low-income countries, however, would gain most from agricultural
liberalization in industrial countries because of the greater relative importance of
agriculture in their economies.
Mistakes:
· Failure to obtain export counselling and to develop a master international marketing
plan before starting an export business:
· Insufficient commitment to overcome the initial difficulties and financial requirements
of exporting:
· Failure to have a solid agent and or distributor’s agreement:
· Blindly chasing orders from around the world
· Failure to understand the connection between country risk and the probability of getting
export financing
· Failure to understand Intellectual Property Rights (IPR):
· Insufficient attention to marketing and advertising requirements:
· Lack of attention to product adaptation and preparation needs
· Failure to obtain legal advice
· Failure to understand export licensing requirements

Product Life-Cycle Theory

The product life-cycle theory is an economic theory that was developed by Raymond
Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed
pattern of international trade. The theory suggests that early in a product's life-cycle all
the parts and labor associated with that product come from the area in which it was
invented. After the product becomes adopted and used in the world markets, production
gradually moves away from the point of origin. In some situations, the product becomes
an item that is imported by its original country of invention.[1] A commonly used example
of this is the invention, growth and production of the personal computer with respect to
the United States.

The model applies to labor-saving and capital-using products that (at least at first) cater to
high-income groups.

In the new product stage, the product is produced and consumed in the US; no export
trade occurs. In the maturing product stage, mass-production techniques are developed
and foreign demand (in developed countries) expands; the US now exports the product to
other developed countries. In the standardized product stage, production moves to
developing countries, which then export the product to developed countries.

The model demonstrates dynamic comparative advantage. The country that has the
comparative advantage in the production of the product changes from the innovating
(developed) country to the developing countries.
Product life-cycle
There are five stages in a product's life cycle:

• introduction
• growth
• maturity
• saturation
• decline

The location of production depends on the stage of the cycle.

Stage 1: Introduction

New products are introduced to meet local (i.e., national) needs, and new products are
first exported to similar countries, countries with similar needs, preferences, and incomes.
If we also presume similar evolutionary patterns for all countries, then products are
introduced in the most advanced nations. (E.g., the IBM PCs were produced in the US
and spread quickly throughout the industrialized countries.)

Stage 2: Growth

A copy product is produced elsewhere and introduced in the home country (and
elsewhere) to capture growth in the home market. This moves production to other
countries, usually on the basis of cost of production. (E.g., the clones of the early IBM
PCs were not produced in the US.) The Period till the Maturity Stage is known as the
Saturation Period.

Stage 3: Maturity

The industry contracts and concentrates—the lowest cost producer wins here. (E.g., the
many clones of the PC are made almost entirely in lowest cost locations.)

Stage 4: Saturation

This is a period of stability. The sales of the product reach the peak and there is no further
possibility to increase it. this stage is characterised by:

♦ Saturation of sales (at the early part of this stage sales remain
stable then it starts falling).
♦ It continues till substitutes enter into the market.
♦ Marketer must try to develop new and alternative uses of product.

Stage 5: Decline
Poor countries constitute the only markets for the product. Therefore almost all declining
products are produced in developing countries. (E.g., PCs are a very poor example here,
mainly because there is weak demand for computers in developing countries. A better
example is textiles.)

Note that a particular firm or industry (in a country) stays in a market by adapting what
they make and sell, i.e., by riding the waves. For example, approximately 80% of the
revenues of H-P are from products they did not sell five years ago. the profits go back to
the host old country.

WTO

he World Trade Organization (WTO) is an organization that intends to supervise and

liberalize international trade. The organization officially commenced on January 1, 1995
under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade
(GATT), which commenced in 1948. The organization deals with regulation of trade
between participating countries; it provides a framework for negotiating and formalizing
trade agreements, and a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements which are signed by representatives of member
governments and ratified by their parliaments.[4][5] Most of the issues that the WTO
focuses on derive from previous trade negotiations, especially from the Uruguay Round
(1986–1994).

The organization is currently endeavoring to persist with a trade negotiation called the
Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance
equitable participation of poorer countries which represent a majority of the world's
population. However, the negotiation has been dogged by "disagreement between
exporters of agricultural bulk commodities and countries with large numbers of
subsistence farmers on the precise terms of a 'special safeguard measure' to protect
farmers from surges in imports. At this time, the future of the Doha Round is
uncertain."[6]

The WTO has 153 members,[7] representing more than 97% of the world's population[8],
and 30 observers, most seeking membership. The WTO is governed by a ministerial
conference, meeting every two years; a general council, which implements the
conference's policy decisions and is responsible for day-to-day administration; and a
director-general, who is appointed by the ministerial conference. The WTO's
headquarters is at the Centre William Rappard, Geneva, Switzerland.

Functions of WTO
Among the various functions of the WTO, these are regarded by analysts as the most
important:
 • It oversees the implementation, administration and operation of the covered
agreements.[28][29]
• It provides a forum for negotiations and for settling disputes.[30][31]

Additionally, it is the WTO's duty to review and propagate the national trade policies,
and to ensure the coherence and transparency of trade policies through surveillance in
global economic policy-making.[29][31] Another priority of the WTO is the assistance of
developing, least-developed and low-income countries in transition to adjust to WTO
rules and disciplines through technical cooperation and training.[32]

The WTO is also a center of economic research and analysis: regular assessments of the
global trade picture in its annual publications and research reports on specific topics are
produced by the organization.[33] Finally, the WTO cooperates closely with the two other
components of the Bretton Woods system, the IMF and the World Bank.[30]

Principles of the trading system

The WTO establishes a framework for trade policies; it does not define or specify
outcomes. That is, it is concerned with setting the rules of the trade policy games.[34] Five
principles are of particular importance in understanding both the pre-1994 GATT and the
WTO:

1. Non-Discrimination. It has two major components: the most favoured nation

(MFN) rule, and the national treatment policy. Both are embedded in the main
WTO rules on goods, services, and intellectual property, but their precise scope
and nature differ across these areas. The MFN rule requires that a WTO member
must apply the same conditions on all trade with other WTO members, i.e. a
WTO member has to grant the most favorable conditions under which it allows
trade in a certain product type to all other WTO members.[34] "Grant someone a
special favour and you have to do the same for all other WTO members."[35]
National treatment means that imported goods should be treated no less favorably
than domestically produced goods (at least after the foreign goods have entered
the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical
standards, security standards et al. discriminating against imported goods).[34]
2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may
arise because of the MFN rule, and a desire to obtain better access to foreign
markets. A related point is that for a nation to negotiate, it is necessary that the
gain from doing so be greater than the gain available from unilateral
liberalization; reciprocal concessions intend to ensure that such gains will
materialise.[36]
3. Binding and enforceable commitments. The tariff commitments made by WTO
members in a multilateral trade negotiation and on accession are enumerated in a
schedule (list) of concessions. These schedules establish "ceiling bindings": a
country can change its bindings, but only after negotiating with its trading
partners, which could mean compensating them for loss of trade. If satisfaction is
 not obtained, the complaining country may invoke the WTO dispute settlement
procedures.[35][36]
4. Transparency. The WTO members are required to publish their trade
regulations, to maintain institutions allowing for the review of administrative
decisions affecting trade, to respond to requests for information by other
members, and to notify changes in trade policies to the WTO. These internal
transparency requirements are supplemented and facilitated by periodic country-
specific reports (trade policy reviews) through the Trade Policy Review
Mechanism (TPRM).[37] The WTO system tries also to improve predictability and
stability, discouraging the use of quotas and other measures used to set limits on
quantities of imports.[35]
5. Safety valves. In specific circumstances, governments are able to restrict trade.
There are three types of provisions in this direction: articles allowing for the use
of trade measures to attain noneconomic objectives; articles aimed at ensuring
"fair competition"; and provisions permitting intervention in trade for economic
reasons.[37] Exceptions to the MFN principle also allow for preferential treatment
of developed countries, regional free trade areas and customs unions.[citation needed]

GATT
The General Agreement on Tariffs and Trade (typically abbreviated GATT) was
negotiated during the UN Conference on Trade and Employment and was the outcome of
the failure of negotiating governments to create the International Trade Organization
(ITO). GATT was signed in 1947 and lasted until 1993, when it was replaced by the
World Trade Organization in 1995. The original GATT text (GATT 1947) is still in
effect under the WTO framework, subject to the modifications of GATT 1994.[1]

GATT and the World Trade Organization

Main article: Uruguay Round

In 1993, the GATT was updated (GATT 1994) to include new obligations upon its
signatories. One of the most significant changes was the creation of the World Trade
Organization (WTO). The 75 existing GATT members and the European Communities
became the founding members of the WTO on 1 January 1995. The other 52 GATT
members rejoined the WTO in the following two years (the last being Congo in 1997).
Since the founding of the WTO, 21 new non-GATT members have joined and 29 are
currently negotiating membership. There are a total of 153 member countries in the
WTO.

Of the original GATT members, Syria[4][5] and the SFR Yugoslavia has not rejoined the
WTO. Since FR Yugoslavia, (renamed to Serbia and Montenegro and with membership
negotiations later split in two), is not recognised as a direct SFRY successor state;
therefore, its application is considered a new (non-GATT) one. The General Council of
WTO, on 4 May 2010, agreed to establish a working party to examine the request of
Syria for WTO membership.[6][7] The contracting parties who founded the WTO ended
official agreement of the "GATT 1947" terms on 31 December 1995. Serbia and
Montenegro are in the decision stage of the negotiations and are expected to become the
newest members of the WTO in 2012 or in near future.

Whereas GATT was a set of rules agreed upon by nations, the WTO is an institutional
body. The WTO expanded its scope from traded goods to trade within the service sector
and intellectual property rights. Although it was designed to serve multilateral
agreements, during several rounds of GATT negotiations (particularly the Tokyo Round)
plurilateral agreements created selective trading and caused fragmentation among
members. WTO arrangements are generally a multilateral agreement settlement
mechanism of GATT.[8]

LC

A standard, commercial letter of credit (LC[1]) is a document issued mostly by a

financial institution, used primarily in trade finance, which usually provides an
irrevocable payment undertaking.

The letter of credit can also be payment for a transaction, meaning that redeeming the
letter of credit pays an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a
customer in another. In such cases, the International Chamber of Commerce Uniform
Customs and Practice for Documentary Credits applies (UCP 600 being the latest
version).[2] They are also used in the land development process to ensure that approved
public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a
letter of credit are usually a beneficiary who is to receive the money, the issuing bank of
whom the applicant is a client, and the advising bank of whom the beneficiary is a client.
Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without
prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In
executing a transaction, letters of credit incorporate functions common to giros and
Traveler's cheques. Typically, the documents a beneficiary has to present in order to
receive payment include a commercial invoice, bill of lading, and documents proving the
shipment was insured against loss or damage in transit.

BL

A bill of lading (BL - sometimes referred to as BOL or B/L) is a document issued by a

carrier to a shipper, acknowledging that specified goods have been received on board as
cargo for conveyance to a named place for delivery to the consignee who is usually
identified. A through bill of lading involves the use of at least two different modes of
transport from road, rail, air, and sea. The term derives from the verb "to lade" which
means to load a cargo onto a ship or other form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading is
evidence of the contract of carriage of goods and it serves a number of purposes:
 • It is evidence that a valid contract of carriage, or a chartering contract, exists, and
it may incorporate the full terms of the contract between the consignor and the
carrier by reference (i.e. the short form simply refers to the main contract as an
existing document, whereas the long form of a bill of lading (connaissement
intégral) issued by the carrier sets out all the terms of the contract of carriage);
• It is a receipt signed by the carrier confirming whether goods matching the
contract description have been received in good condition (a bill will be described
as clean if the goods have been received on board in apparent good condition and
stowed ready for transport); and
• It is also a document of transfer, being freely transferable but not a negotiable
instrument in the legal sense, i.e. it governs all the legal aspects of physical
carriage, and, like a cheque or other negotiable instrument, it may be endorsed
affecting ownership of the goods actually being carried. This matches everyday
experience in that the contract a person might make with a commercial carrier like
FedEx for mostly airway parcels, is separate from any contract for the sale of the
goods to be carried; however, it binds the carrier to its terms, irrespectively of
who the actual holder of the B/L, and owner of the goods, may be at a specific
moment.

The BL must contain the following information:

• Name of the shipping company;

• Flag of nationality;
• Shipper's name;
• Order and notify party;
• Description of goods;
• Gross/net/tare weight; and
• Freight rate/measurements and weighment of goods/total freight

While an air waybill (AWB) must have the name and address of the consignee, a BL may
be consigned to the order of the shipper. Where the word order appears in the consignee
box, the shipper may endorse it in blank or to a named transferee. A BL endorsed in
blank is transferable by delivery. Once the goods arrive at the destination they will be
released to the bearer or the endorsee of the original bill of lading. The carrier's duty is to
deliver goods to the first person who presents any one of the original BL. The carrier
need not require all originals to be submitted before delivery. It is therefore essential that
the exporter retains control over the full set of the originals until payment is effected or a
bill of exchange is accepted or some other assurance for payment has been made to him.
In general, the importer's name is not shown as consignee. The bill of lading has also
provision for incorporating notify party. This is the person whom the shipping company
will notify on arrival of the goods at destination. The BL also contains other details such
as the name of the carrying vessel and its flag of nationality, the marks and numbers on
the packages in which the goods are packed, a brief description of the goods, the number
of packages, their weight and measurement, whether freight costs have been paid or
whether payment of freight is due on arrival at the destination. The particulars of the
container in which goods are stuffed are also mentioned in case of containerised cargo.
The document is dated and signed by the carrier or its agent. The date of the BL is
deemed to be the date of shipment. If the date on which the goods are loaded on board is
different from the date of the bill of lading then the actual date of loading on board will
be evidenced by a notation the BL. In certain cases a carrier may issue a separate on
board certificate to the shipper.