Introduction To International Trade Lesson 1

Welcome
to the International Trade module
Introduction
Overview of the learning outcome
Outline of the content of each lesson
General definition
Dr. Heinz Willand Niederkrüchten / Germany

What belong to International Trade?
Questions
Why you have chosen this International trade module?

What you expect from this course?
Who has experience in Export or Import business?
Learning outcomes
you will have by the end of the course an overall

understanding of International Trade i.e. how import and
export businesses operates
you will know the most common documents required in

import and export transactions
you will have developed the ability to assess and apply

customs regulations to concrete trade cases
Core text books
Carl A. Nelson
Import/Export: How to Get Started in International Trade
Paperback by McGraw-Hill Professional; 4 Fourth Edition (2009)
ISBN: 978-0-07-148255-4
Further readings:
Johnson, Thomas
Export/Import: Procedures & Documentation,
Fourth Edition Amacom; 4 Rev Ed edition (1 Jun 2002)
Belay Seyoum
Export-Import Theory, Practices, and Procedures
International Business Press (April 2002)
Course content
1. General definitions and understanding of International Trade

and the Import / Export business
2. Foreign organization structures of Import / Export firms
3. Channels of distribution
4. Planning and preparations for import/export operations
5. International trade logistics and transportation
6. International pricing and terms of sales
7. Sales contracts
Course content
8. Documentation, risk and insurance

9. Methods of payment
10. Counter trade
11. Trade finance
12. International trade regulations
13. Selecting import / export products and suppliers
14. The entry process of import / export business
Table of contents
1. Lesson
Introduction
Overview of the learning outcome
Outline of the content of each lesson
General definitions of International Trade
What is trade?
2. Lesson
International Trade Organizations and Integrations / Unions
Import / Export
Foreign organization structures
Export operation process
3. Lesson
International commercial terms (Incoterms 2010)
Table of contents
4. Lesson
Key points of a profitable International Trade strategy
4.1 Terminology
Glossary
4.2 Research
What product / service (selecting process)?
What contacts?
Do you need research?
Import check list
Export check list
Define your Bottom line
Table of contents
5. and 6. Lesson
Price calculations
Request for quotation (RFQ)
Cost elements
Pro forma invoice (Quotation)
Pricing model and cost elements
Import / Export working sheet
7. Lesson
Financing
Various methods of payment
Letter of credit (L/C)
8. Lesson
International Trade contracts and forms
Basic elements of International Trade contracts
Important International Trade forms
Table of contents
9. Lesson
Foreign Business
Import from the USA
Export to the USA
European business
Business with Russia
Business with China
10. to 13. Lesson

Marketing plan / Business plan
Set up your own business
14. Lesson
Keys for International Trade success
Summary
1. General understanding of Import / Export
Why companies get into International Trade?
1. Import bring big profits
2. Export make big profits

Why it is important for the government too?
The government can generate taxes!!!
The economies of the world are independent

people of each nation rely on people of other nations to
exchange goods, services, ideas
and free trade creates jobs!!!
New jobs will reduce the unemployment rate!!!
Many things changed during the last decades,

but one thing has not changed and will never change
“world trade success will go to those individuals

who are best prepared for it”
Including having an understanding of products,

services, markets, suppliers, distribution,
documentation, regulations, financial tools and other
aspects of the world trade too numerous to mention
1. General definition
What is trade?
Trade is what we call, when people buy and sell things

A producer might sell items or provide a service,
and a customer pays them for it
“This is trade”
Trade refers to buying and selling of goods and services for

money or money's worth
It involves transfer or exchange of goods and services for
money or money's worth
The manufacturer or producer produces the goods,

then they move on to the wholesalers, then to the retailers and
finally to the ultimate consumer
What is trade?
Trade is essential for satisfaction of human wants

Trade is conducted not only for the sake of earning profit;
Trade also provides services to consumers
Trade is an important social activity because the society needs

uninterrupted supply of goods forever increasing and
ever changing but never ending human wants
Trade has taken birth with the beginning of human life and
shall continue as long as human life exists on the earth
It enhances the standard of living of consumers
Thus we can say that trade is a very important social activity

What is trade?
Trade is the transfer of ownership of goods and services from

one person or entity to another by getting something in
exchange from the buyer
A network of available customer or future customer that

allows trade is called
“Market”
The original form of trade was barter,

the direct exchange of goods and services without money
Trade between two traders is called bilateral trade,
while trade between more than two traders is called
multilateral trade
What is trade?
Trade originated with the start of communication in

prehistoric times
Trading was the main facility of prehistoric people,
who bartered goods and services from each other
before the innovation of the modern day currency
Peter Watson dates the history of long-distance commerce

from circa 150.000 years ago
In the mediterranean region the earliest contact between

cultures were of members of the species
homo sapiens,
at a time beginning 35-30.000 BC
What is trade?
Trade (commerce)
takes place when one party (company) produce and
exchange goods and services for currency or
for goods and services offered by another party
International Trade
is the exchange of goods and services
It takes place across national boundaries
What is International Trade?

In most countries, such trade represents a significant share of the
gross domestic product (GDP)
While International Trade has been present throughout much of
history (Silk road, Amber road),
it’s economic, social, and political importance has been on the rise
in recent centuries
Industrialization, advanced transportation, globalization,

multinationaliszation, and outsourcing are all having a
major impact on the International Trade system
Increasing International Trade is crucial to the continuance of
globalization
Without International Trade, nations would be limited to the goods
and services produced within their own borders
International Trade is, in principle,

not different from domestic trade
as the motivation and the behavior of parties involved in a trade
do not change fundamentally regardless of whether trade
is across a border or not
The main difference is that international trade is typically more

costly than domestic trade
The reason is that a border typically imposes additional costs such

as tariffs, time costs due to border delays and costs associated with
country differences such as language, the legal system or culture

International Trade allows us to expand our markets for both goods
and services that otherwise may not have been available to us
It is the reason why you can pick between a Japanese,
German or American car
International Trade is the place of greater competition and

more competitive pricing
The competition result in more affordable products for
the consumer
The exchange of goods also affects the economy of the world as
dictated by supply and demand, making goods and services
obtainable which may not otherwise be available to
consumers globally
Where importers and exporters trade?

The place is the international market or
Global market
What is Global trade?

A special form of International Trade
Globalism is driven by changes in the market place
as well as by government policy
Global trade allows wealthy countries to use their resources

whether labor, technology or capital - more efficiently
Because countries are endowed with different assets and

natural resources (land, labor, capital and technology)
Some countries may produce the same good more efficiently and
therefore sell it more cheaply than other countries
If a country cannot efficiently produce an item,
it can obtain the item by trading with another country that can
International Trade not only results in increased efficiency but also

allows countries to participate in a global economy,
encouraging the opportunity of foreign direct investment (FDI),
which is the amount of money that individuals invest into
foreign companies and other assets
In theory, economies can therefore grow more efficiently and

can more easily become competitive economic participants
Benefits of International Trade
Our economic prosperity as a nation depends upon

our success in the international marketplace
We live in a global economy and

it's no longer possible to do business in isolation
Exports bring much-needed foreign exchange and

International Trade also create jobs
What is trade?
Trade (commerce)
takes place when one party (company) produce and
exchange goods and services for currency or
for goods and services offered by another party
International Trade
is the exchange goods and services which takes place
across national boundaries
Exports
are the goods and services sold by individuals or nations
Imports
are the goods and services purchased
What is trade?
What is Wholesale trade?
Wholesale trade is defined as the sale of goods or

merchandise to retailers, to industrial, commercial,
institutional, or other professional business users, or
to other wholesalers and related subordinated services
What is Retail trade?
Retail trade consists of the sale of goods or

merchandise from a very fixed location,
such as a department store, boutique or kiosk, or
by mail, in small or individual lots for
direct consumption by the purchaser
What is Foreign trade?

What is Export?
Exporting can be a profitable way of expanding your business,
spreading your risks and reducing your dependence on the local market
International research shows that, on average, exporting companies are

more profitable than their non-exporting counterparts
Exporting exposes you to new ideas, management practices, marketing

techniques, and ways of competing that you wouldn’t have experienced
by staying at home
All this considerably improves your ability to compete

in the domestic market as well
What is Export?
By going overseas, you can become more efficient and

increase your productivity
Companies who export have better growth prospects,

highly skilled, highly productive staff and
tend to adapt technology and best practice techniques faster
Even if you have a limited domestic market,

you should consider exporting
Types of Export
Exports are divided into two main categories:

direct
and
indirect exports
Merger
Franchising
Joint Venture
Manufacture under License
Types of Export
Joint Venture
A company enters into an arrangement with a company
overseas to set up a third business entity, the joint venture
company, which will be responsible for production and/or
distribution of the product or service in the overseas market place
For example, a local German manufacturing company, in

collaboration with a Indian distributor,
may establish a new company (joint venture)
to produce a product and/or distribute it in India
Types of Export
Manufacture under License

A company sells technical know-how to an established manufacturer
overseas who is licensed to produce the product or service in that
country
The overseas licensee may also be appointed to distribute the

product or service or arrange distribution through a separate
organization
For example, a local chemical company grants a license to a

Korean company to reproduce their product in that market
This may or may not include distribution
The benefit of Export
Exporting can also deliver considerable benefit to your business
For instand’s:
expand your business
increase profitability
spread your risks
reduce your dependence on the local market
use excess production capacity
and
buffer against seasonal demand
The benefit of Export

The small domestic market may not provide you with the opportunity for
growth that your company needs
You may be manufacturing a specialized product and find there are not
enough customers in your country
You may want to ensure that your product is kept up to date by
exposure to competition in international markets
It's possible to neutralize overseas competitors in the domestic market by
exporting to the overseas competitor's market
One major benefit of exporting is that it provides scope to develop a
company’s strengths and abilities
Selling in an international environment will sharpen your innovative edge
and open up opportunities that might never come your way if
you limit yourself to the home market
Risk of Export
While exporting offers great benefits,

there are also new risks you may not previously have
encountered, that need to be considered
Risks include:
Political Risk
Legal Risk
Financing Risk
Transport Risks
Inadequate Resources
Risk of Export
Political risk
The political stability of your destination country should be
monitored both from a business and personal security perspective
Instability may result in default or blockage of payment or

confiscation of property
The Department of Foreign Affairs and Trade’s

should be consulted in the planning stages and prior to and during
any market visits
Risk of Export
Legal risk
Every country has its own legal systems
Their legislation will affect all aspects of your business
transactions including import procedures, taxation,
employment, intellectual property, currency, contracts and
agency/distributorship arrangements
It is essential to obtain advice from respected legal practitioners in

the countries you are looking at exporting to, or
legal practitioners
familiar with the legal system and laws of your target country
Risk of Export
Financing risk
Sources of financial risk should be fully investigated before
embarking along the export route
Types of financial risk include:

• credit risk
whether the buyer will be able to pay you;
• transfer risk
any economic, political or government restrictions that might
impact on you; and
• exchange risk - fluctuations in exchange rates
Risk of Export
Transport risks
Unless you are providing a service, you are likely to be exposed to
some risks associated with the transport of your goods to their
destination
Risks include damage, loss, theft and, for some products, exposure to
the elements
Correct packaging, storage, distribution channels and insurance can
assist you to minimize your transport risks
Regulations and Quarantine Requirements vary between countries
You need to find out about these requirements upfront
The onus is on you to be aware of all of the requirements to be met at
your destination;
refused entry and shipping back costs will be your part
Risk of Export
Inadequate resources
A business seeking to enter the international marketplace
must ensure that it has adequate resources,
including raw materials, components and human and
financial resources to meet the export requirement
If these resources aren't available and

part of the export work needs to be subcontracted,
the business runs the risk
of losing control of quality or
of spending time and money on constant supervision
What is Export?
The term export is derived from the conceptual meaning as
to ship the goods and services out of the port of a country
The seller of such goods and services is referred to as

an "exporter" who is based in the country of export whereas
the overseas based buyer is referred to as an "importer“
In International Trade, "exports" refers to selling goods and

services produced in the home country to other markets i.e.
any good or commodity, transported from one country to
another country in a legitimate fashion, typically for use in trade
Export goods or services are provided to
foreign consumers by domestic producers
What is Export?
Export of commercial quantities of goods normally requires
involvement of the customs authorities in both the country of
export and the country of import
The advent of small trades over the internet such as through

Amazon and eBay have largely bypassed the involvement of
Customs in many countries because of the low individual values of
these trades
Nonetheless, these small exports are still subject to legal

restrictions applied by the country of export
An export's counterpart is an Import

What is Import?
The term import is derived from the conceptual meaning as

to bring in the goods and services into the port of a country
The buyer of such goods and services is referred to an "importer"

who is based in the country of import whereas the overseas based
seller is referred to as an "exporter“
What is Import?
Thus an import is any good (e.g. a commodity) or service brought in

from one country to another country in a legitimate fashion,
typically for use in trade
It is a good that is brought in from another country for sale
Import goods or services are provided to domestic consumers by

foreign producers
Import in the receiving country is an export to the sending country

What is Foreign trade?

What is a trade cycle?
The alternating periods of expansion and

contraction in the economic activity has been called
business cycles or trade cycles
According to Keynes,
"A trade cycle is composed of periods of good trade,
characterized by rising prices and low unemployment
percentages, shifting with periods of bad trade characterized
by falling prices and high unemployment percentages"

The period of high income, high output and high employment is called
as the Period of Expansion, Upswing or Prosperity
The period of low income, low output and low employment is called
as the Period of Contraction, Recession, Downswing or Depression

The characteristics of trade cycle are:
Movement in Economic Activity

A trade cycle is a wave-like movement in economic activity
showing an upward trend and a downward trend in the economy
Periodical
Trade cycles occur periodically
but they do not show the same regularity
Different Phases
Trade cycles have different phases such as Prosperity,
Recession, Depression and Recovery
Different Types
There are minor and major trade cycles
Minor trade cycles operate for 3-4 years,

while major trade cycles operate for 4-8 years or more
Though trade cycles differ in timing, they have a common

pattern of sequential phases
Duration
The duration of trade cycles may vary from a minimum
of 2 years to a maximum of 12 years

Dynamic
Business cycles cause changes in all sectors of the economy
Fluctuations occur not only in production and income but also
in other variables like employment, investment, consumption,
rate of interest, price level, etc.
Phases are Cumulative

Expansion and contraction in a trade cycle are cumulative,
in effect, i.e. increasing or decreasing progressively
Uncertainty to businessmen
There is uncertainty in the economy, especially for the businessmen
as profits fluctuate more than any other type of income
International Nature
Trade Cycles are international in character
The Great Depression of 1930s
2009 Depression
Dynamic forces operating in a capitalist economy create various

kinds of economic fluctuations; classified as follows :
Short-Time Cycle
This trade cycle occur for a short period of time
It is also known as minor cycles and lasts for about 3-4 years
Secular Trends
This trade cycle occurs for a long period of time and is known
as Long term cycle
It lasts for 4-8 years or more and it is also known as major cycle
Seasonal Fluctuations
This refers to trade cycles, which take place due to seasonal changes
in the economy
For e.g. failure of monsoon can cause a downtrend in the economy
which may be followed by a good monsoon and up to trend
Irregular or Random Fluctuations

These trade cycles are unpredictable and occur during a period of
strikes, war, etc., causing a shock to the economic system
Cyclic Fluctuation
These fluctuations are wave-like changes in economic activity
caused by recurring phases of expansion and contraction
There is an upswing from a trough (low point) to peak and

downswing from the peak to trough caused due to economic
changes in demand, or supply or various other factors
Four phases of trade cycle
The trade cycle is divided into the following four phases:

Prosperity Phase : Expansion or Boom or Upswing of economy
Recession Phase : from prosperity to recession (upper turning point)
Depression Phase : Contraction or Downswing of economy
Recovery Phase : from depression to prosperity (lower turning Point)

1. Prosperity phase
When there is an expansion of output, income, employment, prices
and profits, there is also a rise in the standard of living
The features of prosperity are :
High level of output and trade
High level of effective demand
High level of income and employment
Rising interest rates
Inflation
Large expansion of bank credit
Overall business optimism
A high level of Marginal efficiency of capital and investment

1. Prosperity phase
Due to full employment of resources,

the level of production is Maximum and
there is a rise in GNP (Gross National Product)
Due to a high level of economic activity,

it causes a rise in prices and profits
There is an upswing in the economic activity and

economy reaches its Peak
This is also called as a ”Boom Period”


2. Recession phase
The turning point from prosperity to depression is termed as
Recession Phase
During a recession period, the economic activities slow down

When demand starts falling,
the overproduction and future investment plans are also given up
There is a steady decline in the output, income, employment, prices

and profits
The businessmen lose confidence and become pessimistic (Negative)

it reduces investment

2. Recession phase
The banks and the people try to get greater liquidity,

so credit also contracts
Expansion of business stops, stock market falls

Orders are cancelled and people start losing their jobs
The increase in unemployment causes a sharp decline in income and
aggregate demand
Generally, recession lasts for a short period

3. Depression phase
When there is a continuous decrease of output, income, employment,
prices and profits,
there is a fall in the standard of living and depression sets in
The features of depression are:
Fall in volume of output and trade
Fall in income and rise in unemployment
Decline in consumption and demand
Fall in interest rate
Deflation
Contraction of bank credit; Overall business pessimism
Fall in Marginal efficiency of capital and investment
3. Depression phase
In Depression,
there is under-utilization of resources and
fall in GNP (Gross National Product)
The aggregate economic activity is at the lowest,

causing a decline in prices and
profits until the economy reaches its Trough (low point)

4. Recovery phase
The turning point from depression to expansion is termed as

Recovery or Revival phase
During the period of revival or recovery,

there are expansions and rise in economic activities
When demand starts rising, production increases and

this causes an increase in investment
There is a steady rise in output, income, employment,

prices and profits

4. Recovery phase
The businessmen gain confidence and become optimistic (positive)
The stimulation of investment brings about the revival or recovery of
the economy
The banks expand credit, business expansion takes place and stock
markets are activated
There is an increase in employment, production, income and
aggregate demand, prices & profits start rising, and business expands
Revival slowly emerges into prosperity,
and the business cycle is repeated
Thus we see that, during the expansionary or prosperity phase,
there is inflation and during the contraction or depression phase,
there is a deflation
What is Counter trade?
A general international trade term for a variety of methods

to conduct reciprocal trade in which the seller is required to
accept goods or other instruments of trade, in partial or
whole payment for its products
Reciprocal trade in which goods or services are exchanged
not for cash but for other goods or services
A large part of the internet commerce comprises of local and
international counter-trade
International trade in which goods are exchanged for other goods,
rather than for hard currency
Pros and Cons of Counter trade
A major benefit of countertrade is that it facilitates conservation of foreign

currency, which is a prime consideration for cash-strapped nations
It include increased employment, higher sales, better capacity utilization

and ease of entry into challenging markets
A major drawback of countertrade is that the value proposition may be

uncertain, especially in cases where the goods being exchanged have
significant price volatility
Other disadvantages of countertrade include complex negotiations,

potentially higher costs and logistical issues
What is Barter?
Barter forms the oldest countertrade arrangement,

and essentially involves the direct exchange of goods and services
having an equivalent value, but with no cash settlement
In a counter purchase, the overseas seller agrees to buy goods or

services sourced from the buyer's country up to a defined amount
In an offset arrangement, the seller assists in marketing products
manufactured by the buying country or allows part of the
assembly
of the exported product to be carried out by manufacturers in
the buying country;
this practice is often found in the aerospace and defense industries
What is Barter?
Barter is a no-money approach to acquire goods or services

Barter is simply trading your goods or services for another
type of goods or services that you might need
What is Product buy back?
1. An agreement to buy something in return,

as by a supplier to buy its customer's product
2. A sale whereby something sold is repurchased

from the buyer by the seller or original owner
3. The buying by a corporation of its own stock in the open

market in order to reduce the number of outstanding shares
(financial subject)
What is Counterpurchase?
A common form of countertrade in which the seller receives cash
but contractually agrees to buy local products or services
as a percentage of cash received and over a stated period of time
An exchange of goods between two parties that,

by means of two contracts,
agree to act as purchaser and supplier to each other
and to purchase all goods in cash
What is Counterpurchase?
The first contract is the original sales contract,

outlining the terms in which an initial buyer purchases
from an initial seller
The second contract, a parallel contract, outlines the terms

in which the original seller agrees to buy unrelated goods
from the original buyer
Basically this is a contractually enforced relationship between

two parties who agree, at some point,
to provide business for one another
What is Cyper trade?
Cyber trade
The largest opportunity for
import and export today and in the future
There is no president or congress of the Internet and

it has no boundaries;
therefore, cyber communication
is the international trader‘s connection without barriers!

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Welcome

to the International Trade module

Dr. Heinz Willand Niederkrüchten / Germany

Why you have chosen this International trade module?

you will have by the end of the course an overall

you will know the most common documents required in

you will have developed the ability to assess and apply

1. General definitions and understanding of International Trade

2. Foreign organization structures of Import / Export firms

4. Planning and preparations for import/export operations

5. International trade logistics and transportation

6. International pricing and terms of sales

8. Documentation, risk and insurance

10. to 13. Lesson

Why companies get into International Trade?

1. Import bring big profits

2. Export make big profits

Why it is important for the government too?

The government can generate taxes!!!

The economies of the world are independent

Many things changed during the last decades,

“world trade success will go to those individuals

Including having an understanding of products,

Trade is what we call, when people buy and sell things

Trade refers to buying and selling of goods and services for

The manufacturer or producer produces the goods,

Trade is essential for satisfaction of human wants

Trade is an important social activity because the society needs

Thus we can say that trade is a very important social activity

Trade is the transfer of ownership of goods and services from

A network of available customer or future customer that

The original form of trade was barter,

Trade originated with the start of communication in

Peter Watson dates the history of long-distance commerce

In the mediterranean region the earliest contact between

What is International Trade?

Industrialization, advanced transportation, globalization,

What is International Trade?

International Trade is, in principle,

The main difference is that international trade is typically more

The reason is that a border typically imposes additional costs such

What is International Trade?

International Trade is the place of greater competition and

What is International Trade?

Where importers and exporters trade?

What is Global trade?

What is Global trade?

Global trade allows wealthy countries to use their resources

Because countries are endowed with different assets and

What is Global trade?

International Trade not only results in increased efficiency but also

In theory, economies can therefore grow more efficiently and

Benefits of International Trade

Our economic prosperity as a nation depends upon

We live in a global economy and

Exports bring much-needed foreign exchange and

What is Wholesale trade?

Wholesale trade is defined as the sale of goods or

What is Retail trade?