After studying this chapter, you should be able to:
• discuss important steps and documents involved in executingexport transactions;
• explain major steps and documents involved in carrying outimport transactions;
• identify various incentives and schemes available to internationalfirms;
• identify and state the role of various organisations that have beenset up in the country to promote foreign trade; and
• list major international institutions and agreements existing atthe global level and discuss their role in promoting internationaltrade and development.
Exporting goods to foreign countries isquite different from marketing productsdomestically. One needs to be familiarwith various procedural formalities thatneed to be complied with before goodsare actually shipped to foreigndestinations or imported from overseas
suppliers. In order to facilitate andpromote trade, government providesseveral incentives schemes forinternational firms to import goods atzero or concessional rates of customsduty for use in manufacture ofproducts meant for exports; exemptthem from payment of various other
After deliberations with his friend and son, Mr. Sudhir Manchanda feels convincedthat this is the right time for him to step into international markets. This willenable him not only to tide over the problems of demand saturation for hisautomotive parts in the domestic market, but would also help him reap variousbenefits that accrue to international firms.
Since he has limited capital available with him right now and does not have anypast experience of overseas operations, he has decided to opt for exporting asthe mode of entry into international markets.
But the problem with him is that he does not know as to how to get into exportbusiness. His friend in the tyre business tells him that exporting and importingis not that simple an activity as operating domestically.
A number of formalities are needed to be performed and documents to be filledin before goods are finally dispatched to export markets. A similar and somewhattedious process is needed in case he desires to import some of the tools and rawmaterials for producing export quality products. Mr. Manchanda is once againin a fix. He does not have any idea of what the various formalities and documentsinvolved in exporting and importing are.
Mr. Manchanda is also wondering as to how he will protect himself againstexport risks. He is, moreover, worried about the additional costs that he wouldhave to incur in making goods export worthy. He is contemplating making use ofsome imported machines and raw materials.
But would not the import duties on such imports substantially increase hisproduct cost? In addition, he will be incurring additional costs on transportation,packaging and insurance as required in connection with export to foreigndestinations.
Mr. Manchanda’s friend in the tyre business tells him he need not worry thatmuch about these problems. After all, so many firms from India are alreadyengaged in export business and have soaring exports.
He should have patience and not get disturbed by these hiccups. He can seekadvice from some trade expert for faimiliarising himself with the export importprocedures and documentation. He also tells him that though he does not haveany specific details with him, he is aware there exist various foreign tradepromotion measures and organisations that can be helpful to him in overcominghis problem and making his products more competitive in the world markets!
duties and taxes; and carry out theirimport-export transactions in a lesscumbersome environment. Thegovernment has also set up a widevariety of organisations to collect anddisseminate information aboutinternational markets, promote exportsof specific products, train executives ofinternational business firms, andensure proper quality and packagingof export goods. At the internationallevel, various organisations such as theWorld Bank, International MonetaryFund (IMF) and World TradeOrganisation (WTO) exist foraccelerating the pace of developmentand trade amongst the nations.
This chapter is devoted to thediscussion of major steps anddocuments involved in foreign trade.The chapter also identifies andexamines the role of various tradepromotion measures and organisationsset up for promotion of internationalbusiness. The concluding section of thechapter is devoted to an analysis ofmajor international institutions thatoperate at the global level to promoteworld development and trade.
12.2 EXPORT-IMPORT PROCEDURES
AND DOCUMENTATION
A major distinction between domesticand international operations is thecomplexity of the latter. Export andimport of goods is not that straightforward as buying and selling in thedomestic market. Since foreign tradetransactions involves movement ofgoods across frontiers and use of
foreign exchange, a number offormalities are needed to be performedbefore the goods leave the boundariesof a country and enter into that ofanother. Following sections are devotedto a discussion of major steps that needto be undertaken for completing exportand import transactions.
12.2.1 Export Procedure
The number of steps and the sequencein which these are taken vary from oneexport transaction to another. Stepsinvolved in a typical export transactionare as follows.(i) Receipt of enquiry and sendingquotations: The prospective buyer of aproduct sends an enquiry to differentexporters requesting them to sendinformation regarding price, quality andterms and conditions for export ofgoods. Exporters can be informed ofsuch an enquiry even by way ofadvertisement in the press put in by theimporter. The exporter sends a reply tothe enquiry in the form of a quotation —referred to as proforma invoice. Theproforma invoice contains informationabout the price at which the exporter isready to sell the goods and also providesinformation about the quality, grade,size, weight, mode of delivery, type ofpacking and payment terms.(ii) Receipt of order or indent: Incase the prospective buyer (i.e.,importing firm) finds the export priceand other terms and conditionsacceptable, it places an order for thegoods to be despatched. This order, alsoknown as indent, contains a description
of the goods ordered, prices to be paid,delivery terms, packing and markingdetails and delivery instructions.(iii) Assessing importer’s credit-worthiness and securing a guaranteefor payments: After receipt of theindent, the exporter makes necessaryenquiry about the creditworthiness ofthe importer. The purpose underlyingthe enquiry is to assess the risks of nonpayment by the importer once thegoods reach the import destination. Tominimise such risks, most exportersdemand a letter of credit from theimporter. A letter of credit is a guaranteeissued by the importer’s bank that itwill honour payment up to a certainamount of export bills to the bank ofthe exporter. Letter of credit is the mostappropriate and secure method ofpayment adopted to settle internationaltransactions(iv) Obtaining export licence: Havingbecome assured about payments, theexporting firm initiates the stepsrelating to compliance of exportregulations. Export of goods in Indiais subject to custom laws whichdemand that the export firm must havean export licence before it proceedswith exports. Important pre-requisitesfor getting an export licence are asfollows:
• Opening a bank account in anybank authorised by the ReserveBank of India (RBI) and getting anaccount number.
• Obtaining Import Export Code(IEC) number from the DirectorateGeneral Foreign Trade (DGFT) or
Regional Import Export LicensingAuthority.
• Registering with appropriateexport promotion council.
• Registering with Export Credit andGuarantee Corporation (ECGC) inorder to safeguard against risksof non payments.
An export firm needs to have theImport Export Code (IEC) number asit needs to be filled in various export/import documents. For obtaining theIEC number, a firm has to apply to theDirector General for Foreign Trade(DGFT) with documents such asexporter/importer profile, bank receiptfor requisite fee, certificate from thebanker on the prescribed form, twocopies of photographs attested by thebanker, details of the non-residentinterest and declaration about theapplicant’s non association withcaution listed firms.
It is obligatory for every exporter toget registered with the appropriateexport promotion council. Variousexport promotion councils such asEngineering Export Promotion Council(EEPC) and Apparel Export PromotionCouncil (AEPC) have been set up by theGovernment of India to promote anddevelop exports of different categoriesof products. We shall discuss aboutexport promotion councils in a latersection. But it may be mentioned herethat it is necessary for the exporter tobecome a member of the appropriateexport promotion council and obtaina Registration cum MembershipCertificate (RCMC) for availing benefits
Registration with the ECGC isnecessary in order to protect overseaspayments from political andcommercial risks. Such a registrationalso helps the export firm in gettingfinancial assistance from commercialbanks and other financial institutions.(v) Obtaining pre-shipment finance:Once a confirmed order and also a letterof credit have been received, theexporter approaches his banker forobtaining pre-shipment finance toundertake export production. Pre-shipment finance is the finance that theexporter needs for procuring rawmaterials and other components,processing and packing of goods andtransportation of goods to the port ofshipment.(vi) Production or procurement ofgoods: Having obtained the pre-shipment finance from the bank, theexporter proceeds to get the goodsready as per the specifications of theimporter. Either the firm itself goes infor producing the goods or else it buysfrom the market.(vii) Pre-shipment inspection: TheGovernment of India has initiated manysteps to ensure that only good qualityproducts are exported from thecountry. One such step is compulsoryinspection of certain products by acompetent agency as designated by thegovernment. The government haspassed Export Quality Control andInspection Act, 1963 for this purpose.and has authorised some agencies to
act as inspection agencies. If theproduct to be exported comes undersuch a category, the exporter needs tocontact the Export Inspection Agency(EIA) or the other designated agency forobtaining inspection certificate. Thepre-shipment inspection report isrequired to be submitted along withother export documents at the time ofexports. Such an inspection is notcompulsory in case the goods are beingexported by star trading houses,trading houses, export houses,industrial units setup in exportprocessing zones/special economiczones (EPZs/SEZs) and 100 per centexport oriented units (EOUs). We shalldiscuss about these special types ofexport firms in a later section.(viii) Excise clearance: As per theCentral Excise Tariff Act, excise duty ispayable on the materials used inmanufacturing goods. The exporter,therefore, has to apply to the concernedExcise Commissioner in the region withan invoice. If the Excise Commissioneris satisfied, he may issue the exciseclearance. But in many cases thegovernment exempts payment of exciseduty or later on refunds it if the goodsso manufactured are meant for exports.The idea underlying such exemptionor refund is to provide an incentive tothe exporters to export more and alsoto make the export products morecompetitive in the world markets. Therefund of excise duty is known as dutydrawback. This scheme of dutydrawback is presently administered bythe Directorate of Drawback under the
Ministry of Finance which is responsiblefor fixing the rates of drawback fordifferent products. The work relatingto sanction and payment of drawbackis, however, looked after by theCommissioner of Customs or CentralExcise Incharge of the concerned port/airport/land custom station fromwhere the export of goods is consideredto have taken place.(ix) Obtaining certificate of origin:Some importing countries provide tariffconcessions or other exemptions to thegoods coming from a particularcountry. For availing such benefits, theimporter may ask the exporter to senda certificate of origin. The certificate oforigin acts as a proof that the goodshave actually been manufactured in thecountry from where the export istaking place. This certificate can beobtained from the trade consulatelocated in the exporter’s country.(x) Reservation of shipping space:The exporting firm applies to theshipping company for provision ofshipping space. It has to specify thetypes of goods to be exported, probabledate of shipment and the port ofdestination. On acceptance ofapplication for shipping, the shippingcompany issues a shipping order. Ashipping order is an instruction to thecaptain of the ship that the specifiedgoods after their customs clearance ata designated port be received on board.(xi) Packing and forwarding: Thegoods are then properly packed andmarked with necessary details such asname and address of the importer, grossand net weight, port of shipment and
destination, country of origin, etc. Theexporter then makes necessaryarrangement for transportation of goodsto the port. On loading goods into therailway wagon, the railway authoritiesissue a ‘railway receipt’ which serves asa title to the goods. The exporterendorses the railway receipt in favourof his agent to enable him to takedelivery of goods at the port of shipment.(xii) Insurance of goods: The exporterthen gets the goods insured with aninsurance company to protect againstthe risks of loss or damage of the goodsdue to the perils of the sea during thetransit.(xiii) Customs clearance: The goodsmust be cleared from the customsbefore these can be loaded on the ship.For obtaining customs clearance, theexporter prepares the shipping bill.Shipping bill is the main document onthe basis of which the customs officegives the permission for export.Shipping bill contains particulars of thegoods being exported, the name of thevessel, the port at which goods are tobe discharged, country of finaldestination, exporter’s name andaddress, etc.
Five copies of the shipping bill alongwith the following documents are thensubmitted to the Customs Appraiser atthe Customs House:
• Export Contract or Export Order• Letter of Credit• Commercial Invoice• Certificate of Origin• Certificate of Inspection, where
After submission of these docu-ments, the Superintendent of theconcerned port trust is approached forobtaining the carting order. Cartingorder is the instruction to the staff atthe gate of the port to permit the entryof the cargo inside the dock. Afterobtaining the carting order, the cargois physically moved into the port areaand stored in the appropriate shed.Since the exporter cannot make himselfor herself available all the time forperforming all these formalities, thesetasks are entrusted to an agent —referred to as Clearing and Forwarding(C&F) agent.(xiv) Obtaining mates receipt: Thegoods are then loaded on board theship for which the mate or the captainof the ship issues mate’s receipt to theport superintendent. A mate receipt isa receipt issued by the commandingofficer of the ship when the cargo isloaded on board, and contains theinformation about the name of thevessel, berth, date of shipment,descripton of packages, marks andnumbers, condition of the cargo at thetime of receipt on board the ship, etc.The port superintendent, on receipt ofport dues, hands over the mate’sreceipt to the C&F agent.
(xv) Payment of freight and issuanceof bill of lading: The C&F agentsurrenders the mates receipt to theshipping company for computation offreight. After receipt of the freight, theshipping company issues a bill oflading which serves as an evidence thatthe shipping company has accepted the
goods for carrying to the designateddestination. In the case the goods arebeing sent by air, this document isreferred to as airway bill.
(xvi) Preparation of invoice: Aftersending the goods, an invoice of thedespatched goods is prepared. Theinvoice states the quantity of goods sentand the amount to be paid by theimporter. The C&F agent gets it dulyattested by the customs.(xvii) Securing payment: Afterthe shipment of goods, the exporterinforms the importer about theshipment of goods. The importer needsvarious documents to claim the title ofgoods on their arrival at his/hercountry and getting them customscleared. The documents that areneeded in this connection includecertified copy of invoice, bill of lading,packing list, insurance policy,certificate of origin and letter of credit.The exporter sends these documentsthrough his/her banker with theinstruction that these may be deliveredto the importer after acceptance of thebill of exchange — a document whichis sent along with the above mentioneddocuments. Submission of the relevantdocuments to the bank for the purposeof getting the payment from the bankis called ‘negotiation of the documents’.
Bill of exchange is an order to theimporter to pay a certain amount ofmoney to, or to the order of, a certainperson or to the bearer of theinstrument. It can be of two types:document against sight (sight draft) ordocument against acceptance (usance
draft). In case of sight draft, thedocuments are handed over to theimporter only against payment. Themoment the importer agrees to sign thesight draft, the relevant documents aredelivered. In the case of usance draft,on the other hand, the documents aredelivered to the importer against his orher acceptance of the bill of exchangefor making payment at the end of aspecified period, say three months.
On receiving the bill of exchange,the importer releases the payment incase of sight draft or accepts the usancedraft for making payment on maturityof the bill of exchange. The exporter’sbank receives the payment through theimporter’s bank and is credited to theexporter’s account.
The exporter, however, need notwait for the payment till the release ofmoney by the importer. The exportercan get immediate payment from his/her bank on the submission ofdocuments by signing a letter ofindemnity. By signing the letter, theexporter undertakes to indemnify thebank in the event of non-receipt ofpayment from the importer along withaccrued interest.
Having received the payment forexports, the exporter needs to get a bankcertificate of payment. Bank certificate ofpayment is a certificate which says thatthe necessary documents (including billof exchange) relating to the particularexport consignment has been negotiated(i.e., presented to the importer forpayment) and the payment has beenreceived in accordance with the exchangecontrol regulations.
12.2.2 Import Procedure
Import trade refers to purchase ofgoods from a foreign country. Importprocedure differs from country tocountry depending upon the country’simport and custom policies and otherstatutory requirements. The followingparagraphs discuss various stepsinvolved in a typical import transactionfor bringing goods into Indian territory.(i) Trade enquiry: The first thing thatthe importing firm has to do is to gatherinformation about the countries andfirms which export the given product.The importer can gather suchinformation from the trade directoriesand/or trade associations andorganisations. Having identified thecountries and firms that exportthe product, the importing firmapproaches the export firms with thehelp of a trade enquiry for collectinginformation about their export pricesand terms of exports. A trade enquiryis a written request by an importingfirm to the exporter for supply ofinformation regarding the price andvarious terms and conditions on whichthe latter is ready to exports goods.
After receiving a trade enquiry, theexporter prepares a quotation andsends it to the importer. The quotationis known as profor ma invoice. Aproforma invoice is a document thatcontains details as to the quality, grade,design, size, weight and price of theexport product, and the terms andconditions on which their export willtake place.
Major Documents needed in Connection with Export Transaction
A. Documents related to goodsExport invoice: Export invoice is a sellers’ bill for merchandise and containsinformation about goods such as quantity, total value, number of packages, markson packing, port of destination, name of ship, bill of lading number, terms of deliveryand payments, etc.Packing list: A packing list is a statement of the number of cases or packs and thedetails of the goods contained in these packs. It gives details of the nature ofgoods which are being exported and the form in which these are being sent.Certificate of origin: This is a certificate which specifies the country in which thegoods are being produced. This certificate entitles the importer to claim tariffconcessions or other exemptions such as non-applicability of quota restrictionson goods originating from certain pre-specified countries. This certificate is alsorequired when there is a ban on imports of certain goods from select countries.The goods are allowed to be brought into the importing country if these are notoriginating from the banned countries.Certificate of inspection: For ensuring quality, the government has made itcompulsory for certain products that these be inspected by some authorisedagency. Export Inspection Council of India (EICI) is one such agency which carriesout such inspections and issues the certificate that the consignment has beeninspected as required under the Export (Quality Control and Inspection) Act, 1963,and satisfies the conditions relating to quality control and inspection as applicableto it, and is export worthy. Some countries have made this certificate mandatoryfor the goods being imported to their countries.
B. Documents related to shipmentMate’s receipt: This receipt is given by the commanding officer of the ship to theexporter after the cargo is loaded on the ship. The mate’s receipt indicates thename of the vessel, berth, date of shipment, description of packages, marks andnumbers, condition of the cargo at the time of receipt on board the ship, etc. Theshipping company does not issue the bill of lading unless it receives the mate’sreceipt.Shipping Bill: The shipping bill is the main document on the basis of which customsoffice grants permission for the export. The shipping bill contains particulars ofthe goods being exported, the name of the vessel, the port at which goods are to bedischarged, country of final destination, exporter’s name and address, etc.Bill of lading: Bill of lading is a document wherein a shipping company gives itsofficial receipt of the goods put on board its vessel and at the same time gives anundertaking to carry them to the port of destination. It is also a document of titleto the goods and as such is freely transferable by the endorsement and delivery.Airway Bill: Like a bill of lading, an airway bill is a document wherein an airlinecompany gives its official receipt of the goods on board its aircraft and at the sametime gives an undertaking to carry them to the port of destination. It is also adocument of title to the goods and as such is freely transferable by the endorsementand delivery.
(ii) Procurement of import licence:There are certain goods that can beimported freely, while others needlicensing. The importer needs toconsult the Export Import (EXIM)policy in force to know whether thegoods that he or she wants to importare subject to import licensing. In casegoods can be imported only against thelicence, the importer needs to procurean import licence. In India, it isobligatory for every importer (and alsofor exporter) to get registered with theDirectorate General Foreign Trade(DGFT) or Regional Import ExportLicensing Authority, and obtain anImport Export Code (IEC) number. This
number is required to be mentioned onmost of the import documents.(iii) Obtaining foreign exchange:Since the supplier in the context of animport transaction resides in a foreigncountry, he/she demands payment ina foreign currency. Payment in foreigncurrency involves exchange of Indiancurrency into foreign currency. In India,all foreign exchange transactions areregulated by the Exchange ControlDepartment of the Reserve Bank ofIndia (RBI). As per the rules in force,every importer is required to secure thesanction of foreign exchange. Forobtaining such a sanction, the importerhas to make an application to a bank
Marine insurance policy: It is a certificate of insurance contract whereby theinsurance company agrees in consideration of a payment called premium toindemnify the insured against loss incurred by the latter in respect of goodsexposed to perils of the sea.Cart ticket: A cart ticket is also known as a cart chit, vehicle or gate pass. It isprepared by the exporter and includes details of the export cargo in terms of theshipper’s name, number of packages, shipping bill number, port of destinationand the number of the vehicle carrying the cargo.
C. Documents related to paymentLetter of credit: A letter of credit is a guarantee issued by the importer’s bankthat it will honour up to a certain amount the payment of export bills to thebank of the exporter. Letter of credit is the most appropriate and secure methodof payment adopted to settle international transactionsBill of exchange: It is a written instrument whereby the person issuing theinstrument directs the other party to pay a specified amount to a certain personor the bearer of the instrument. In the context of an export-import transaction,bill of exchange is drawn by exporter on the importer asking the latter to pay acertain amount to a certain person or the bearer of the bill of exchange. Thedocuments giving title to the export consignment are passed on to the importeronly when the importer accepts the order contained in the bill of exchange.Bank certificate of payment: Bank certificate of payment is a certificate that thenecessary documents (including bill of exchange) relating to the particular exportconsignment has been negotiated (i.e., presented to the importer for payment)and the payment has been received in accordance with the exchange controlregulations.
authorised by RBI to issue foreignexchange. The application is made in aprescribed form along with the importlicence as per the provisions ofExchange Control Act. After properscrutiny of the application, the banksanctions the necessary foreignexchange for the import transaction.(iv) Placing order or indent: Afterobtaining the import licence, theimporter places an import order orindent with the exporter for supply ofthe specified products. The importorder contains information about theprice, quantity size, grade and qualityof goods ordered and the instructionsrelating to packing, shipping, ports ofshipment and destination, deliveryschedule, insurance and mode ofpayment. The import order should becarefully drafted so as to avoid anyambiguity and consequent conflictbetween the importer and exporter.(v) Obtaining letter of credit: If thepayment terms agreed between theimporter and the overseas supplier isa letter of credit, then the importershould obtain the letter of credit fromits bank and forward it to the overseassupplier. As stated previously, a letterof credit is a guarantee issued by theimporter’s bank that it will honourpayment up to a certain amount ofexport bills to the bank of the exporter.Letter of credit is the most appropriateand secured method of paymentadopted to settle internationaltransactions. The exporter wants thisdocument to be sure that there is norisk of non-payment.
(vi) Arranging for finance: Theimporter should make arrangements inadvance to pay to the exporter onarrival of goods at the port. Advancedplanning for financing imports isnecessary so as to avoid hugedemurrages (i.e., penalties) on theimported goods lying uncleared at theport for want of payments.(vii) Receipt of shipment advice:After loading the goods on the vessel,the overseas supplier dispatches theshipment advice to the importer. Ashipment advice contains informationabout the shipment of goods. Theinformation provided in the shipmentadvice includes details such as invoicenumber, bill of lading/airways billnumber and date, name of the vesselwith date, the port of export,description of goods and quantity, andthe date of sailing of vessel.(viii) Retirement of import docu-ments: Having shipped the goods, theoverseas supplier prepares a set ofnecessary documents as per the termsof contract and letter of credit andhands it over to his or her banker fortheir onward transmission andnegotiation to the importer in themanner as specified in the letter ofcredit. The set of documents normallycontains bill of exchange, commercialinvoice, bill of lading/airway bill,packing list, certificate of origin, marineinsurance policy, etc.
The bill of exchange accompanyingthe above documents is known as thedocumentary bill of exchange. Asmentioned earlier in connection with
the export procedure, documentary billof exchange can be of two types:documents against payment (sightdraft) and documents againstacceptance (usance draft). In the caseof sight draft, the drawer instructs thebank to hand over the relevantdocuments to the importer only againstpayment. But in the case of usancedraft, the drawer instructs the bank tohand over the relevant documents tothe importer against acceptance of thebill of exchange. The acceptance of billof exchange for the purpose of gettingdelivery of the documents is known asretirement of import documents. Oncethe retirement is over, the bank handsover the import documents to theimporter.(ix) Arrival of goods: Goods areshipped by the overseas supplier as perthe contract. The person in charge ofthe carrier (ship or airway) informs theofficer in charge at the dock or theairport about the arrival of goods in theimporting country. He provides thedocument called import generalmanifest. Import general manifest is adocument that contains the details ofthe imported goods. It is a documenton the basis of which unloading ofcargo takes place.(x) Customs clearance and releaseof goods: All the goods imported intoIndia have to pass through customsclearance after they cross the Indianborders. Customs clearance is asomewhat tedious process and calls forcompleting a number of formalities. Itis, therefore, advised that importersappoint C&F agents who are well
versed with such formalities and playan important role in getting the goodscustoms cleared.
Firstly, the importer has to obtaina delivery order which is otherwiseknown as endorsement for delivery.Generally when the ship arrives at theport, the importer obtains theendorsement on the back of the bill oflading. This endorsement is done bythe concerned shipping company. Insome cases instead of endorsing the bill,the shipping company issues a deliveryorder. This order entitles the importerto take the delivery of goods. Of course,the importer has to first pay the freightcharges (if these have not been paid bythe exporter) before he or she can takepossession of the goods.
The importer has to also pay dockdues and obtain port trust duesreceipt. For this, the importer has tosubmit to the ‘Landing and ShippingDues Office’ two copies of a duly filledin form — known as ‘application toimport’. The ‘Landing and ShippingDues Office’ levies a charge for servicesof dock authorities which has to beborne by the importer. After paymentof dock charges, the importer is givenback one copy of the application as areceipt. This receipt is known as ‘porttrust dues receipt’.
The importer then fills in a form ‘billof entry’ for assessment of customsimport duty. One appraiser examinesthe document carefully and gives theexamination order. The importerprocures the said document preparedby the appraiser and pays the duty,if any.
Trade enquiry: A trade enquiry is a written request by an importing firm to theexporter for supply of information regarding the price and various terms andconditions on which the latter exports goods.
Proforma invoice: A proforma invoice is a document that contains details as to thequality, grade, design, size, weight and price of the export product, and the termsand conditions on which their export will take place.
Import order or indent: It is a document in which the buyer (importer) orders forsupply of requisite goods to the supplier (exporter). The order or indent contains theinformation such as quantity and quality of goods to be imported, price to be charged,method of forwarding the goods, nature of packing, mode of payment, etc.
Letter of credit: It is document that contains a guarantee from the importer bankto the exporter’s bank that it is undertaking to honour the payment up to a certainamount of the bills issued by the exporter for exports of the goods to the importer.
Shipment advice: The shipment advice is a document that the exporter sends tothe importer informing him that the shipment of goods has been made. Shipmentof advice contains invoice number, bill of lading/airways bill number and date,name of the vessel with date, the port of export, description of goods and quantity,and the date of sailing of the vessel.
Bill of lading: It is a document prepared and signed by the master of the shipacknowledging the receipt of goods on board. It contains terms and conditions onwhich the goods are to be taken to the port of destination.
Airway Bill: Like a bill of lading, an airway bill is a document wherein an airline/shipping company gives its official receipt of the goods on board its aircraft and atthe same time gives an undertaking to carry them to the port of destination. It isalso a document of title to the goods and as such is freely transferable by theendorsement and delivery.
Bill of entry: Bill of entry is a form supplied by the customs office to the importer. It isto be filled in by the importer at the time of receiving the goods. It has to be in triplicateand is to be submitted to the customs office. The bill of entry contains informationsuch as name and address of the importer, name of the ship, number of packages,marks on the package, description of goods, quantity and value of goods, name andaddress of the exporter, port of destination, and customs duty payable.
Bill of exchange: It is a written instrument whereby the person issuing theinstrument directs the other party to pay a specified amount to a certain personor the bearer of the instrument. In the context of an export-import transaction,bill of exchange is drawn by the exporter on the importer asking the latter to paya certain amount to a certain person or the bearer of the bill of exchange. Thedocuments giving title to the export consignment are passed on to the importeronly when the importer accepts the order contained in the bill of exchange.
Sight draft: It is a type of bill of exchange wherein the drawer of the bill of exchangeinstructs the bank to hand over the relevant documents to the importer onlyagainst payment.
After payment of the import duty,the bill of entry has to be presented tothe dock superintendent. The same hasto be marked by the superintendentand an examiner will be asked tophysically examine the goods imported.The examiner gives his report on thebill of entry. The importer or his agentpresents the bill of entry to the portauthority. After receiving necessarycharges, the port authority issues therelease order.
12.3 FOREIGN TRADE PROMOTION:INCENTIVES AND
ORGANISATIONAL SUPPORT
Various incentives and schemes areoperational in the country to helpbusiness firms improve competitivenessof their exports. From time-to-time, thegovernment has also setup a numberof organisations to provide infra-structural support and marketingassistance to firms engaged ininternational business. Major foreigntrade promotion schemes andorganisations are discussed in thefollowing sections.
12.3.1 Foreign Trade PromotionMeasures and Schemes
Details of various trade promotionmeasures and schemes available tobusiness firms to facilitate their exportand import operations are announcedby the government in its export-import(EXIM) policy. Major trade promotionmeasures (especially those related toexports) are as follows:(i) Duty drawback scheme: Sincegoods meant for exports are notconsumed domestically, these are notsubjected to payment of various exciseand customs duties. Any such dutiespaid on export goods are, therefore,refunded to exporters on production ofproof of exports of these goods to theconcerned authorities. Such refundsare called duty draw backs. Somemajor duty draw backs include refundof excise duties paid on goods meantfor exports, refund of customs dutiespaid on raw materials and machinesimported for export production. Thelatter is also called customs drawback.(ii) Export manufacturing underbond scheme: This facility entitlesfirms to produce goods without
Usance draft: It is a type of bill of exchange wherein the drawer of the bill of exchangeinstructs the bank to hand over the relevant documents to the importer onlyagainst acceptance of the bill of exchange.
Import general manifest. Import general manifest is a document that contains thedetails of the imported good. It is the document on the basis of which unloading ofcargo takes place.Dock challan: Dock charges are to be paid when all the formalities of the customsare completed. While paying the dock dues, the importer or his clearing agentspecifies the amount of dock dues in a challan or form which is known as dockchallan .
payment of excise and other duties.The firms desirous of availing suchfacility have to give an undertaking(i.e., bond) that they are manufacturinggoods for export purposes andwill export such products on theirproduction.(iii) Exemption from payment ofsales taxes: Goods meant for exportpurposes are not subject to sales tax.Even for a long time, income derivedfrom export operations had beenexempt from payment of income tax.Now this benefit of exemption fromincome tax is available only to 100 percent Export Oriented Units (100 percent EOUs) and units set up in ExportProcessing Zones (EPZs)/SpecialEconomic Zones (SEZs) for select years.We shall shortly discuss about the 100per cent Export Oriented Units (100 percent EOUs) and units set up in ExportProcessing Zones (EPZs)/SpecialEconomic Zones (SEZs) in thesucceeding paragraphs.(iv) Advance licence scheme: It is ascheme under which an exporter isallowed duty free supply of domestic aswell as imported inputs required for themanufacture of export goods. As suchthe exporter is not required to paycustoms duty on goods imported foruse in the manufacture of export goods.The advance licences are available toboth the types of exporters — those whoexport on a regular basis and also tothose who export on an adhoc basis. Theregular exporters can avail suchlicences against their productionprogrammes. The firms exporting
intermittently can also obtain theselicences against specific export orders.(v) Export Promotion Capital GoodsScheme (EPCG): The main objective ofthis scheme is to encourage the importof capital goods for export production.This scheme allows export firms toimport capital goods at negligible orlower rates of customs duties subjectto actual user condition and fulfilmentof specified export obligations. If thesaid conditions are fulfilled by themanufacturers, then they can import thecapital goods either at zero orconcessional rate of import duty.Supporting manufacturers and serviceproviders are also eligible to importcapital goods under this scheme. Thisscheme is especially beneficial to theindustrial units interested inmodernisation and upgradation of theirexisting plant and machinery. Nowservice export firms can also avail of thisfacility for importing items such ascomputer software systems required fordeveloping softwares for purposesof exports.(vi) Scheme of recognising exportfirms as export house, trading houseand superstar trading house: Withan objective to promote establishedexporters and assist them in marketingtheir products in internationalmarkets, the government grants thestatus of Export House, TradingHouse, Star Trading House to selectexport firms. This status is granted toa firm on its achieving a prescribedaverage export of performance in pastselect years. Besides attaining a
minimum of past average exportperformance, such export firms have toalso fulfill other conditions as laiddown in the import-export policy.Various categories of export houseshave been recognised with a view tobuilding marketing infrastructureand expertise required for exportpromotion. These houses are givennational recognition for exportpromotion. They are required to operateas highly professional and dynamicinstitutions and act as an importantinstrument of export growth.(vii) Export of Services: In order toboost the export of services, variouscategories of service houses have beenrecognised. These houses are recognisedon the basis of the export performanceof the service providers. They arereferred to as Service Export House,International Service Export House,International Star Service Export Housebased on their export performance.(viii) Export finance: Exportersrequire finance for the manufacture ofgoods. Finance is also needed after theshipment of the goods because it maytake sometime to receive payment fromthe importers. Therefore, two types ofexport finances are made available tothe exporters by authorised banks.They are termed as pre-shipmentfinance or packaging credit and post-shipment finance. Under the pre-shipment finance, finance is providedto an exporter for financing thepurchase, processing, manufacturingor packaging of goods for exportpurpose. Under the post-shipmentfinance scheme, finance is provided to
the exporter from the date of extendingthe credit after the shipment of goodsto the export country. The finance isavailable at concessional rates ofinterest to the exporters.(ix) Export Processing Zones (EPZs):Export Processing Zones are industrialestates, which form enclaves from theDomestic Tariff Areas (DTA). These areusually situated near seaports orairports. They are intended to providean internationally competitive duty freeenvironment for export production atlow cost. This enables the products ofEPZs to be competitive, both quality-wise and price-wise, in the internationalmarkets. These zones have been setup at various places in India whichinclude: Kandla (Gujarat), Santa Cruz(Mumbai), Falta (West Bengal), Noida(Uttar Pradesh), Cochin (Kerala),Chennai (Tamil Nadu), andVishakapatnam (Andhra Pradesh).
Santa Cruz zone is exclusivelymeant for electronic goods and gem andjewellery items. All other EPZs deal withmultifarious items. Recently the EPZshave been converted to SpecialEconomic Zones (SEZs) which are moreadvanced form of export processingzones. These SEZs are free from allrules and regulations governingimports and exports units exceptrelating to labour and banking
Government has also permitteddevelopment of EPZs by private, stateor joint sector. The inter-ministerialcommittee on private EPZs has alreadycleared proposals for setting up ofprivate EPZs in Mumbai, Surat andKanchipuram.
(x) 100 per cent Export OrientedUnits (100 per cent EOUs): The100 per cent Export Oriented Unitsscheme, introduced in early 1981, iscomplementary to the EPZ scheme. Itadopts the same production regime,but offers a wider option in locationwith reference to factors like source ofraw materials, ports, hinterlandfacilities, availability of technologicalskills, existence of an industrial baseand the need for a larger area of landfor the project. EOUs have beenestablished with a view to generatingadditional production capacity forexports by providing an appropriatepolicy framework, flexibility ofoperations and incentives.
12.3.2 Organisational Support
Government of India has also set upfrom time-to-time various institutionsin order to facilitate the process offoreign trade in our country. Some ofthe important institutions are as follows:Department of Commerce: Depart-ment of Commerce in the Ministry ofCommerce, Government of India is theapex body responsible for the country’sexternal trade and all mattersconnected with it. This may be in theform of increasing commercial relationswith other countries, state trading,export promotional measures and thedevelopment, and regulation of certainexport oriented industries andcommodities. The Department ofCommerce formulates policies in thesphere of foreign trade. It also framesthe import and export policy of thecountry in general.
Export Promotion Councils (EPCs):Export Promotion Councils are nonprofit organisations registered underthe Companies Act or the SocietiesRegistration Act, as the case may be.The basic objective of the exportpromotion councils is to promote anddevelop the country’s exports ofparticular products falling under theirjurisdiction. At present there are21 EPC’s dealing with differentcommodities.Commodity Boards: CommodityBoards are the boards which havebeen specially established by theGovernment of India for thedevelopment of production oftraditional commodities andtheir exports. These boards aresupplementary to the EPCs. Thefunctions of commodity boards aresimilar to those of EPCs. At presentthere are seven commodity boardsin India: Coffee Board, Rubber Board,Tobacco Board, Spice Board, CentralSilk Board, Tea Board, and Coir Board.Export Inspection Council (EIC):Export Inspection Council of India wassetup by the Government of Indiaunder Section 3 of the Export QualityControl and Inspection Act 1963. Thecouncil aims at sound development ofexport trade through quality controland pre-shipment inspection. Thecouncil is an apex body for controllingthe activities related to quality controland pre-shipment inspection ofcommodities meant for export. Barringa few exceptions, all the commoditiesdestined for exports must be passedby EIC.
Indian Trade Promotion Organi-sation (ITPO): Indian TradePromotion Organisation was setupon 1st January 1992 under theCompanies Act 1956 by the Ministryof Commerce, Government of India. Itsheadquarter is at New Delhi. ITPO wasformed by merging the two erstwhileagencies viz., Trade DevelopmentAuthority and Trade Fair Authority ofIndia. ITPO is a service organisationand maintains regular and closeinteraction with trade, industry andGovernment. It serves the industry byorganising trade fairs and exhibitions—both within the country and outside, Ithelps export firms participate ininternational trade fairs andexhibitions, developing exports of newitems, providing support and updatedcommercial business information. ITPOhas five regional offices at Mumbai,Bangalore, Kolkata, Kanpur andChennai and four international officesat Germany, Japan, UAE and USA.Indian Institute of Foreign Trade(IIFT): Indian Institute of ForeignTrade is an institution that was setupin 1963 by the Government of India asan autonomous body registered underthe Societies Registration Act with theprime objective of professionalising thecountry’s foreign trade management. Ithas recently been recognised asDeemed University. It provides trainingin international trade, conductresearches in areas of internationalbusiness, and analysing anddisseminating data relating tointernational trade and investments.
Indian Institute of Packaging (IIP):The Indian Institute of Packaging wasset up as a national institute jointly bythe Ministry of Commerce, Governmentof India, and the Indian Packagingindustry and allied interests in 1966.Its headquarters and principallaboratory is situated at Mumbai andthree regional laboratories are locatedat Kolkata, Delhi and Chennai. It is atraining-cum-research institutepertaining to packaging and testing. Ithas excellent infrastructural facilitiesthat cater to the various needs of thepackage manufacturing and packageuser industries. It caters to thepackaging needs with regard to boththe domestic and export markets. Italso undertakes technical consultancy,testing services on packagingdevelopments, training and edu-cational programmes, promotionalaward contests, information servicesand other allied activities.State Trading Organisations: A largenumber of domestic firms in Indiafound it very difficult to compete in theworld market. At the same time, theexisting trade channels wereunsuitable for promotion of exportsand bringing about diversification oftrade with countries other thanEuropean countries. It was under thesecircumstances that the State TradingOrganisation (STC) was setup in May1956. The main objective of the STC isto stimulate trade, primarily exporttrade among different trading partnersof the world. Later the government setup many more organisations such as
Metals and Minerals TradingCorporation (MMTC), Handloom andHandicrafts Export Corporation(HHEC).
12.4 INTERNATIONAL TRADE
INSTITUTIONS AND TRADE
AGREEMENTS
The First World War (1914-1919) andthe Second World War (1939-45) wereaccompanied by massive destructionof life and property the world over.Almost all the economies of the worldwere adversely affected. Due to scarcityof resources, countries were not in aposition to take up any reconstructionor developmental works. Even theinternational trade amongst nations gotadversely affected because of thedisruption of the world’s currencysystem. There was no system ofgenerally accepted exchange rate. Itwas at that juncture that representativeof forty-four nations under theleadership of J.M. Keynes — a notedeconomist joined together at BrettonWoods, New Hampshire to identifymeasures to restore peace andnormalcy in the world.
The meeting was concluded withthe setting up of three internationalinstitutions, namely the InternationalMonetary Fund (IMF), InternationalBank for Reconstruction andDevelopment (IBRD) and theInternational Trade Organisation (ITO).They considered these threeorganisations as three pillars ofeconomic development of the world.While the World Bank was assigned
with the task of reconstructing war-torneconomies — especially the ones inEurope, the IMF was entrusted with theresponsibility of ensuring stabilisationof exchange rates to pave way for theexpansion of world trade. The mainobjective of the ITO as they couldforesee at that time was to promote andfacilitate international trade among themember countries by overcomingvarious restrictions and discrimi-nations that were being practiced atthat time.
The first two institutions, viz., IBRDand IMF, came into existenceimmediately. The idea of setting up ofITO, however, could not materialise dueto stiff opposition from the UnitedStates. Instead of an organisation,what eventually emerged was anarrangement to liberalise internationaltrade from high customs tariffs andvarious other types of restrictions. Thisarrangement came to be known as theGeneral Agreement for Tariffs andTrade (GATT). India was one of thefounding members of these threeinternational bodies. The majorobjectives and functions of these threeinternational institutions are discussedin more detail in the following sections.
12.4.1 World Bank
The International Bank for Re-construction and Development (IBRD),commonly known as World Bank, wasresult of the Bretton Woods Conference.The main objectives behind setting upthis international organisation were toaid the task of reconstruction of the
war-affected economies of Europe andassist in the development of theunderdeveloped nations of the world.For the first few years, the World Bankremained preoccupied with the task ofrestoring war-torn nations in Europe.Having achieved success inaccomplishing this task by late 1950s,the World Bank turned its attention tothe development of underdevelopednations. It realised that by investingmore and more in these countries,especially in social sectors likehealth and education; it could bringabout the needed social andeconomic transformation of thedeveloping countries. To give shapeto this investment aspect inthe underdeveloped nations, theInternational Development Association(IDA) was formed in the year 1960. Themain objective underlying setting upIDA has been to provide loans onconcessional terms and conditions tothose countries whose per capitaincomes are below a critical level.Concessional terms and conditionsmean that (i) repayment period is muchlonger than the repayment period ofIBRD, and (ii) the borrowing nationneed not pay any interest on theborrowed amount. IDA, thus, provides
interest free long-term loans to the poornations. IBRD also provides loans butthese carry interest charged oncommercial basis.
Over the time, additional organi-sations have been set up under theumbrella of the World Bank. As oftoday, the World Bank is a group of fiveinternational organisations responsiblefor providing finance to differentcountries. The group and its affiliatesheadquartered in Washington DCcatering to various financial needs arelisted in the Box A on World Bank andits affiliates.
Functions of the World Bank
As mentioned earlier, the World Bankis entrusted with the task of economicgrowth and widening of the scope ofinternational trade. During its initialyears of inception, it placed moreemphasis on developing infrastructurefacilities like energy, transportation andothers. No doubt all this has benefitedthe under-developed nations too, butthe results were not found to be verysatisfactory due to poor administrativestructure, lack of institutionalframework and non-availability ofskilled labour in these countries.Moreover, since the underdeveloped
Box AWorld Bank and its Affiliates
InstitutionInternational Bank for Reconstruction and Development (IBRD) 1945International Financial Corporation (IFC) 1956International Development Association (IDA) 1960Multilateral Investment Guarantee Agency (MIGA) 1988International Centre for Settlement of Investment Disputes (ICSID) 1966
countries depend heavily onagriculture and small industries, theattempt to develop infrastructure hadhardly any effect on these two sectors.Realising these problems, the WorldBank later decided to divert resourcesto bring about industrial andagricultural development in thesecountries. Assistance is extended todifferent countries for raising cashcrops so that their incomes rise andthey may export the same for earningforeign exchange. The bank has alsobeen providing resources for education,sanitation, health care and small scaleenterprises.
Today, the services provided by theWorld Bank have increased manifold.The World Bank is no longer confined tosimply providing financial assistance forinfrastructure development, agriculture,industry, health and sanitation. It israther significantly involved in areas likeremoval of rural poverty through raisingproductivity, increasing income of therural poor, providing technical support,and initiating research and cooperativeventures.
12.4.2 International DevelopmentAssociation
International Development Association(IDA) was set up in 1960 as an affiliateof the World Bank. IDA was establishedprimarily to provide finance to the lessdeveloped member countries on a softloan basis. It is due to its objective ofproviding soft loans that it is called theSoft Loan Window of the IBRD.
Major objectives of IDA include• To provide development finance
on easy terms to the lessdeveloped member countries,
• To provide assistance for povertyalleviation in the poorestcountries,
• To provide finance at concessionalinterest rates in order to promoteeconomic development, raiseproductivity and living standardsin less developed nations, and
• To extend macro economicmanagement services such asthose relating to health, edu-cation, nutrition, human resourcedevelopment and populationcontrol.
12.4.3 International FinanceCorporation (IFC)
IFC was established in July 1956 inorder to provide finance to the privatesector of developing countries. IFC isalso an affiliate of the World Bank, butit has its own separate legal entity,funds and functions. All the membersof the World Bank are eligible tobecome members of IFC.
12.4.4 The MultinationalInvestment GuaranteeAgency (MIGA)
The Multinational Investment Gua-rantee Agency was established in April1988 to supplement the functions ofthe World Bank and IFC.
• To encourage flow of directforeign investment into the lessdeveloped member countries;
• To provide insurance cover toinvestors against political risks;
• To provide guarantee against non-commercial risks (like dangersinvolved in currency transfer, warand civil disturbances and breachof contract);
• To insure new investments,expansion of existing investments,privatisation and financial re-structuring;
• To provide promotional andadvisory services; and
• To establish credibility.
12.4.5 International MonetaryFund
International Monetary Fund (IMF) isthe second international organisationnext to the World Bank. IMF whichcame into existence in 1945 has itsheadquarters located in Washington DC.In 2005, it had 191 countries as itsmembers. The major idea underlyingthe setting up of the IMF is to evolve anorderly international monetary system,i.e., facilitating system of internationalpayments and adjustments inexchange rates among nationalcurrencies.
Major objectives of IMF include
• To promote internationalmonetary cooperation through apermanent institution,
• To facilitate expansion of balancedgrowth of international trade andto contribute thereby to thepromotion and maintenance ofhigh levels of employment and realincome,
• To promote exchange stabilitywith a view to maintain orderlyexchange arrangements amongmember countries, and
• To assist in the establishment of amultilateral system of paymentsin respect of current transactionsbetween members.
Functions of IMF
Various functions are performed by theIMF to achieve the aforesaid objectives.Some of the important functions of IMFinclude:
• Acting as a short-term creditinstitution;
• Providing machinery for theorderly adjustment of exchangerates;
• Acting as a reservoir of thecurrencies of all the membercountries, from which a borrowernation can borrow the currency ofother nations;
• Acting as a lending institution offoreign currency and currenttransaction;
• Determining the value of acountry’s currency and altering it,if needed, so as to bring about anorderly adjustment of exchangerates of member countries; and
• Providing machinery for inter-national consultations.
12.4.6 World Trade Organisation(WTO) and MajorAgreements
Like on the lines of IMF and the WorldBank, it was initially decided at theBretton Woods conference to set up theInternational Trade Organisation (ITO)to promote and facilitate internationaltrade among the member countriesand to overcome various restrictionsand discriminations as were beingpracticed at that time. But the ideacould not materialise due to stiffopposition from the United States.Instead of altogether abandoning theidea, the countries that wereparticipants to the Bretton Woodsconference agreed upon having somearrangement among themselves so asto liberalise the world from highcustoms tariffs and various other typesof restrictions that were in vogue at thattime. This arrangement came to beknown as the General Agreement forTariffs and Trade (GATT).
GATT came into existence witheffect from 1st January 1948 andremained in force till December 1994.Various rounds of negotiations havetaken place under the auspices ofGATT to reduce tariff and non-tariffbarriers. The last one, known as theUruguay Round, was the mostcomprehensive one in terms of coverageof issues, and also the lengthiest onefrom the point of view of duration ofnegotiations which lasted over a periodof seven years from 1986 to 1994.
One of the key achievements of theUruguay Round of GATT negotiations
was the decision to set up a permanentinstitution for looking after thepromotion of free and fair tradeamongst nations. Consequent to thisdecision, the GATT was transformed intoWorld Trade Organisation (WTO) witheffect from 1st January 1995. The headquarters of WTO are situated at Geneva,Switzerland. Establishment of WTO,thus, represents the implementation ofthe original proposal of setting up of theITO as evolved almost five decades back.
Though, WTO is a successor toGATT, it is a much more powerful bodythan GATT. It governs trade not only ingoods, but also in services andintellectual property rights. UnlikeGATT, the WTO is a permanentorganisation created by an internationaltreaty ratified by the governments andlegislatures of member states. It is,moreover, a member driven rule-basedorganisation in the sense that allthe decisions are taken by themember governments on the basis of ageneral consensus. As the principalinternational body concerned withsolving trade problems betweencountries and providing a forum formultilateral trade negotiations, it has aglobal status similar to that of the IMFand the World Bank. India is a foundingmember of WTO. As on 11th December2005, there were 149 members in WTO.
Objectives of WTOThe basic objectives of WTO are similarto those of GATT, i.e., raising standardsof living and incomes, ensuring fullemployment, expanding production andtrade, and optimal use of the world’s
resources. The major difference betweenthe objectives of GATT and WTO is thatthe objectives of WTO are more specificand also extend the scope of WTO to covertrade in services. WTO objectives,moreover, talk of the idea of ‘sustainabledevelopment’ in relation to the optimaluse of the world’s resources so as toensure protection and preservation of theenvironment. Keeping in view the abovediscussion, we can state more explicitlythe following as the major objectives ofWTO:
• To ensure reduction of tariffs andother trade barriers imposed bydifferent countries;
• To engage in such activities whichimprove the standards of living,create employment, increaseincome and effective demand andfacilitate higher production andtrade;
• To facilitate the optimal use of theworld’s resources for sustainabledevelopment; and
• To promote an integrated, moreviable and durable trading system.
Functions of WTO
The major functions of WTO include:• Promoting an environment that is
encouraging to its membercountries to come forward to WTOin mitigating their grievances;
• Laying down a commonlyaccepted code of conduct with aview to reducing trade barriersincluding tariffs and eliminatingdiscriminations in internationaltrade relations;
• Acting as a dispute settlementbody;
• Ensuring that all the rulesregulations prescribed in the Actare duly followed by the membercountries for the settlement of theirdisputes;
• Holding consultations with IMFand IBRD and its affiliatedagencies so as to bring betterunderstanding and cooperationin global economic policy making;and
• Supervising on a regular basis theoperations of the revised Agree-ments and Ministerial declarationsrelating to goods, services andTrade Related IntellectualProperty Rights (TRIPS).
Benefits of WTO
Since its inception in 1995, WTO hascome a long way in constituting thelegal and institutional foundation of thepresent day multilateral tradingsystem. It has been instrumental notonly in facilitating trade, but also inimproving living standards andcooperation among membercountries. Some of the major benefitsof WTO are as follows:
• WTO helps promote internationalpeace and facilitates internationalbusiness.
• All disputes between membernations are settled with mutualconsultations.
• Rules make international tradeand relations very smooth andpredictable.
• Free trade improves the livingstandard of the people byincreasing the income level.
• Free trade provides ample scopeof getting varieties of qualitativeproducts.
• Economic growth has beenfastened because of free trade.
• The system encourages goodgovernment.
• WTO helps fostering growth ofdeveloping countries by providingthem with special and preferentialtreatment in trade relatedmatters.
WTO Agreements
As against GATT which covered onlyrules relating to trade in goods, theWTO agreements cover trade in goods,services as well as intellectual property.The agreements contain the procedurefor settling disputes and also haveprovisions for special treatment todeveloping countries. The agreementsrequire the governments to make theirtrade policies transparent by notifyingto the WTO office about the laws andmeasures adopted towards tradeliberalisation. Major WTO agreementsare discussed below:Agreements Forming Part of GATT:The erstwhile General Agreement onTariffs and Trade (GATT) after itssubstantial modification in 1994(effected as part of the Uruguay Roundof negotiations) is very much part of theWTO agreements. Besides the generalprinciples of trade liberalisation,GATT also includes certain special
agreements evolved to deal with specificnon-tariff barriers. Some of the specificagreements contained in the GATTare listed in the bank on GATT 1994major agreements.Agreement on Textile and Clothing(ATC): This agreement was evolvedunder WTO to phase out the quotarestrictions as imposed by thedeveloped countries on exports oftextiles and clothing from thedeveloping countries. The developedcountries were imposing various kindsof quota restrictions under the Multi-Fibre Arrangement (MFA) that itself wasa major departure from the GATT’sbasic principle of free trade in goods.Under the ATC, the developed countriesagreed to remove quota restrictions ina phased manner during a period often years starting from 1995. ATC isconsidered as a landmark achievementof the WTO. It is due to the ATC thatthe world trade in textile and clothinghas become virtually quota free since1st January 2005, thus, benefitingimmensely the developing countriesto expand their textiles andclothing exports.Agreement on Agriculture (AoA): Itis an agreement to ensure free and fairtrade in agriculture. Though originalGATT rules were applicable to trade inagriculture, these suffered from certainloopholes such as exemption tomember countries to use some non-tariff measures such as customs tariffs,import quotas and subsidies to protectinterests of the farmers in the homecountry. Trade in agriculture becamehighly distorted especially due to use
of subsidies by some of the developedcountries. AoA is a significant steptowards an orderly and fair trade inagricultural products. The developedcountries have agreed to lower downthe customs duties on their importsand subsidies to the exports ofagricultural products. Due to theirhigher dependence on agriculture, thedeveloping countries have beenexempted from making similarreciprocal offers.General Agreement on Trade inServices (GATS): Services means actsor performances that are essentiallyintangible and cannot be touched orsmelt as goods. GATS is regarded as alandmark achievement of the UruguayRound as it extends the multilateralrules and disciplines to services. It isbecause of GATS that the basic rulesgoverning ‘trade in goods’ have becomeapplicable to ‘trade in services’.
Three major provisions of GATSgoverning trade in services are asfollows:
• All member countries are requiredto remove restrictions on trade inservices in a phased manner. Thedeveloping countries, however,have been given a greater freedomto decide about the period bywhich they would liberalise andalso the services they would liketo liberalise by that period
• GATS provides that trade inservices is governed by ‘MostFavoured Nations’ (MFN)obligation that prevents countriesfrom discriminating among foreignsuppliers and services.
• Each member country shallpromptly publish all its relevantlaws and regulations pertaining toservices including internationalagreements pertaining to tradeand services to which the memberis a signatory.
Agreement on Trade RelatedAspects of Intellectual PropertyRights (TRIPS): The WTO’s agree-ment on Trade Related Aspects of
GATT 1994: Major Agreements
• Agreement on Customs Valuation i.e., Agreement on Implementation ofArticle VII (Customs Valuation) of GATT 1994
• Agreement on Pre-shipment Inspection
• Agreement on Technical Barriers to Trade
• Agreement on Import Licensing Procedures• Agreement on Application of Sanitary and Phytosanitary Measures
• Agreement on Safeguards
• Agreement on Subsidies and Countervailing Measures
• Agreement on Anti-dumping Duties, i.e., Agreement on Implementation ofArticle VI (Anti-dumping) of GATT 1994
Introduction: Exporting and importing are not such straight forwardactivities as buying and selling in the domestic market. Since foreign tradetransactions involve movement of goods across frontiers and use of foreignexchange, a number of formalities are needed to be performed before thegoods leave the boundaries of a country and enter into that of another.
Export Procedures: The starting point in an export transaction is the receiptof an enquiry from the overseas buyer. In response, the exporter preparesan export quotation — called proforma invoice, giving details about the exportgoods and the terms and conditions of export. In case the importer finds
Proforma invoiceOrder or intentExport licenceIEC numberRegistration cummembershipcertificatePre-shipment financePre-shipmentinspectionExport inspectionagencyExcise clearanceCertificate of originCustoms clearanceLetter of creditShipping billMate receipt
Bill of ladingAirway billInvoiceBill of exchangeSight draftUsance draftNegotiation of billsMarine insurancepolicyCart ticketBank certificate ofpaymentCertificate ofinspectionTrade enquiryShipment adviceImport generalmanifest
Delivery orderBill of entryC&F agentPort trust dues receiptDuty drawback schemeExport manufacturingunder bond schemeAdvance licence schemeExport Promotion CapitalGoods Scheme (EPCG)Export financePost-shipment financeExport processing zone(EPZ)100% Export OrientedUnit (100% EOU)Department of CommerceExport promotion council
Key Terms
Intellectual Property Rights (TRIPS)was negotiated in 1986-1994. It wasthe Uruguay Round of GATTnegotiations where for the first timethe rules relating to intellectualproperty rights were discussed andintroduced as part of the multilateraltrading system. Intellectual propertymeans information with commercialvalues such as ideas, inventions,
creative expression and others. Theagreement sets out the minimumstandards of protection to be adoptedby the parties in respect of sevenintellectual properties, viz., copyrights and related rights, trade marks,geographical indication, industrialdesigns, patents, layout design ofintegrated circuits, and undisclosedinformation (trade secrets).
the quotation acceptable, he places an order or indent and gets a letter ofcredit issued from his bank to the exporter. The exporter then proceedswith the formalities related to obtaining an export licence from the DirectorGeneral of Foreign Trade and getting a registration-cum-membershipcertificate from the export promotion council looking after the export of theconcerned product. In case the exporter requires funds, he/she can availof pre-shipment finance from a bank. The exporter then proceeds with theproduction or procurement of the goods and gets them inspected from ExportInspection Council. If required by the importer, the exporter approachesthe foreign consulate for obtaining the certificate of origin to enable theimporter to claim tariff or quota concessions at the time of clearance ofcargo at the import destination. The exporter then makes arrangement forreserving space on the ship and insuring goods against transit perils. Afterobtaining the excise clearance, goods are sent to the concerned port forcustoms clearance. Since customs clearance is a tedious process, exportersoften employ C&F agents for availing their services in preparation of variouscustoms documents and getting the goods customs cleared.
After customs clearance and payment of dock charges to the port authoritiesand freight charges to the shipping company, goods are loaded on the ship.The captain of the ship issues a mate’s receipt. This mate’s receipt issubmitted to the shipping company’s office for payment of freight. Afterreceiving the freight charges, the shipping company issues a bill of ladingwhich is a document of contract relating to shipment of the goods by theshipping company. Once the goods are despatched, the exporter preparesan invoice and sends the necessary documents such as certified copy ofinvoice, bill of lading, packing list, insurance policy, certificate of origin,letter of credit and bill of exchange to the importer through his/her bank.The bank presents these documents to the importer. On getting acceptanceof the bill of exchange by the importer, the documents are handed over tothe importer to enable him/her to claim the imported goods. Once thepayment is received, the exporter requests his/her bank to release acertificate of payment. Certificate of payment is a document that certifiesthat the export transaction is over and the payment has been received.
Import Procedure: The procedure to import is also beset with severalformalities. The process starts with a search for export firms and making atrade enquiry about the product, its price and terms and conditions ofexports. Having selected an export firm, the importer asks the exporter tosend him/her a formal quotation — called proforma invoice. The importerthen proceeds to obtain the import licence, if required, from the office of theDirectorate General Foreign Trade (DGFT) or Regional Import ExportLicensing Authority. The importer also applies for the Import Export Code(IEC) number. This number is required to be mentioned on most of theimport documents. Since payment for imports requires foreign currency,the importer has to also make an application to a bank authorised forsanction of the necessary foreign exchange.
After obtaining an import licence, the importer places an import order orindent with the exporter for supply of the specified products. If required asper the terms of contract, the importer arranges for the issuance of a letterof credit to the exporter from the bank. Having shipped the goods undershipment advice to the importer, the exporter sends a set of necessarydocuments containing bill of exchange, commercial invoice, bill of lading/airway bill, packing list, certificate of origin, marine insurance policy, etc.,to enable the importer claim title to the goods on their arrival at the port ofdestination. The exporter sends these documents through his/her bankto the importer. The bank presents these documents to the importer andafter obtaining his/her acceptance of the bill of exchange, delivers thedocuments to the importer.
After the arrival of the goods in the importing country, the person in chargeof the carrier (ship or airway) prepares import general manifest to informthe officer in charge at the dock or the airport that the goods have reachedthe ports of the importing country. The importer or his/her C&F agent paysthe freight (if not already paid by exporter) to the shipping company andobtains delivery order from it which entitles the importer to take the deliveryof the goods at the port. At this time, port dock dues are also paid and aport trust dues receipt is obtained. The importer then fills in a form ‘bill ofentry’ for assessment of customs import duty. After payment of the importduty, the bill of entry has to be presented to the dock superintendent forphysical examination of the goods. The examiner gives his report on the billof entry. The importer or his agent presents the bill of entry to the portauthority for issuance of the release order.
Foreign Trade Promotion: A number of schemes such as duty drawback,export manufacturing under bond, exemption from payment of sales tax,advance licence, Export Promotion Capital Goods (EPCG), 100 per cent ExportOriented Units (100 per cent EOUs) and Export Processing Zones (EPZs)/Special Economic Zones (SEZs) are in operation in the country to help theexport firms compete more effectively in world markets. The schemes permitthe exporters either to make outrightly duty free imports of raw materialsand machinery as needed for producing goods and services for exports orto later claim refund of duties, if already paid, on such imports. The exportersare, moreover, either outrightly exempted from payment of excise dutiesand other taxes or else they can later claim refund of such duties onsubmitting proof of export to the concerned authorities.
There also exist in the country the scheme of recognising certain firms asexport house, trading house and super star trading house, and bestowingupon them certain advantages such as permission to maintain officesabroad, liberal grant of foreign exchange to enable them to meet the expenses
of participating in international trade fairs and exhibitions and travelabroad. As of today, even the firms engaged in exports of services are entitledto such recognition subject to attaining a minimum of past average exportperformance and fulfilling other conditions as laid down in the import-exportpolicy. Exporters are also entitled to pre-shipment and post-shipmentfinance to meet their financial requirements relating to export transactions.
International Trade Institutions: The Government of India hasside-by- side setup various organisations to facilitate and promote thecountry’s foreign trade. While the Department of Commerce in the Ministryof Commerce is the apex body responsible for regulation and administrationof the country’s external trade, other organisations like export promotioncouncils, commodity boards, Export Inspection Council (EIC), IndianInstitute of Foreign Trade (IIFT), India Trade Promotion Organisation (ITPO),Indian Institute of Packaging (IIP) help exporters by way of promotion ofspecific export products, quality inspection, participation in trade fairs andexhibitions, conducting training programmes, carrying out overseasresearches, disseminating product and market information, and providingpackaging consultancy and testing. The government has also set up statetrading organisations such as STC, MMTC and HHEC for trading in differentcommodities and promotion of country’s exports.
Trade Agreements: At the global level, there exist various internationalorganisations such as the World Bank, IMF and WTO for fostering economiccooperation, trade and investments among the countries. While the WorldBank and its four affiliates, viz., IDA, MIGA, IFC and ICSID, are concernedwith providing long term finance and finance related assistance such asprotection from risks to the member countries, IMF is devoted to maintenanceof exchange rates and providing short term loans to the countries facingshort term foreign exchange problems. In matters relating to trade, it wasoriginally conceived at the Bretton Woods conference to establishInternational Trade Organisation (ITO). But the idea somehow could notmaterialise. Instead an arrangement called General Agreement for Tariffsand Trade (GATT) was evolved to promote trade through reduction of tariffand non-tariff barriers. GATT came into existence with effect from 1st January1948 and remained in force till December 1994. Since 1st January 1995,GATT has been transformed into World Trade Organisation (WTO). UnlikeGATT, WTO is a permanent body and has a global status similar to that ofIMF and World Bank. WTO agreements cover trade in not only goods butalso in services and intellectual property through various agreements suchas Agreement on Textiles on Clothing (ATC), General Agreement on Tradein Services (GATS), Agreement Relating to Trade in Intellectual Property(TRIP) and Agreement on Agriculture (AoA).
7. Which of the following document is prepared by the exporter andincludes details of the cargo in terms of the shippers name, the numberof packages, the shipping bill, port of destination, name of the vehiclecarrying the cargo?
a. Shipping bill b. Packaging listc. Mate’s receipt d. Bill of exchange
8. The document containing the guarantee of a bank to honour draftsdrawn on it by an exporter is
a. Letter of hypothetication b. Letter of creditc. Bill of lading d. Bill of exchange
9. Which of the following does not belong to the World Bank group?
a. IBRD b. IDAc. MIGA d. IMF
10. TRIP is one of the WTO agreements that deal with
a. Trade in agriculture b. Trade in servicesc. Trade related d. None of these
investment measures
Short Answer Questions
1. Discuss the formalities involved in getting an export licence.
2. Why is it necessary to get registered with an export promotion council?
3. What is IEC number?
4. What is pre-shipment finance?
5. Why is it necessary for an export firm to go in for pre-shipmentinspection?
6. Discuss the procedure related to excise clearance of goods.
7. Explain briefly the process of customs clearance of export goods.
8. What is bill of lading? How does it differ from bill of entry?
11. What is a letter of credit? Why does an exporter need this document?
12. Discuss the process involved in securing payment for exports.
13. Differentiate between the following
(i) Sight and usance drafts (ii) Bill of lading and airway bill(iii) Pre-shipment and post-shipment finance
14. Explain the meaning of the following documents used in connectionwith import transactions
(i) trade enquiry (ii) Import licence (iii) Shipment of advice(iv) Import general manifest (v) Bill of entry
15. List out major affiliated bodies of the World Bank.
16. Write short notes on the following
(i) UNCTAD (ii) MIGA (iii) World Bank(iv) ITPO (v) IMF
Long Answer Questions
1. Rekha Garments has received an order to export 2000 men’s trousersto Swift Imports Ltd. located in Australia. Discuss the procedure thatRekha Garments would need to go through for executing the exportorder.
2. Your firm is planning to import textile machinery from Canada. Describethe procedure involved in importing.
3. Discuss the principal documents used in exporting.
4. List and explain various incentives and schemes that the governmenthas evolved for promoting the country’s export.
5. Identify various organisations that have been set up in the country bythe government for promoting country’s foreign trade.
6. What is World Bank? Discuss its various objectives and role of itsaffiliated agencies.
7. What is IMF? Discuss its various objectives and functions.
8. Write a detailed note on features, structure, objectives and functioningof WTO.
