Foreign Trade

Foreign/International Trade

International trade is the exchange of capital, goods, and services across international borders

Types of International/Foreign Trade

Export Trade Import Trade Entreport Trade
Sales of goods and services to another country Purchases of goods and services from another country Importing with the purpose of re-exporting
Foreign exchange enters the country Foreign exchange leaves the country No effect on foreign exchange

Visible and Invisible Trade

Visible Trade Invisible Trade
Sales of goods to another country is called visible export Sales of services to another country is called invisible export
Purchases of goods from another country is called visible import Purchases of services from another country is called invisible import

Why Foreign Trade has increased?

  1. Gap between the rich and poor countries has increased.
  2. Role of IMF (International Monetary Fund), SDR (Special Drawing Rights) decreases the risk of foreign exchange fluctuations.
  3. WTO (World Trade Organization).
  4. Improvement in technology has led to increased production.
  5. Improvement in aids to trade.
  6. Globalization.
  7. Improved standards of living.
  8. Efforts of governments to improve trades.
  9. Role of trading blocs e.g ASEAN.

Problems in Foreign Trade

  1. Different languages and culture.
  2. Additional cost of transportation.
  3. Additional cost of packing and insurance.
  4. Excessive documentation.
  5. Government rules in importing country.
  6. Import and export duty.
  7. Different units of measurement.
  8. Trade barriers like trade embargo and strict quota.
  9. Payment can be delayed.
  10. More risks involved.
  11. Exchange rate fluctuations.

Risks in Foreign Trade

Economic risks

  1. Risk of insolvency of the buyer,
  2. Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
  3. Risk of non-acceptance
  4. Surrendering economic sovereignty
  5. Risk of Exchange rate

Political risks

  1. Risk of cancellation or non-renewal of export or import licenses
  2. War risks
  3. Risk of expropriation or confiscation of the importer's company
  4. Risk of the imposition of an import ban after the shipment of the goods
  5. Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
  6. Surrendering political sovereignty
  7. Influence of political parties in importer's company

Advantages of Foreign Trade

  1. A greater variety of goods and services become available.
  2. Local shortages can be complemented.
  3. Government earns revenue (by import/export duties).
  4. More foreign exchange reserves (in case of export).
  5. A country can specialize in producing certain goods and services.
  6. Links between countries develops.
  7. More employment is created (All three sectors in case of export and tertiary sector in case of import).
  8. Increases competition and thus quality of local production.

Disadvantages of Foreign Trade

  1. Loss of employment in Primary and Secondary sector in case of import.
  2. Loss to the local producers.
  3. Loss of foreign exchange (in case of import).
  4. Importing country can become dependant.
  5. Dumping can occur (selling products at a loss).
  6. Harmful goods can enter the country.
  7. Increase in price level.
  8. Exploitation of importing country.
  9. Depreciation of currency of importing country.

Balance of Trade

Balance of Payments

Why deficit in Balance of Payments and Balance of Trade is undesirable

  1. Loss of foreign exchange.
  2. Depreciation of currency.
  3. Imports will become expensive and it can create inflation.

How to protect from imports-to make balance of payment surplus?

Steps to be taken in Exporting

  1. Market research for:
    i. Size of market.
    ii. Competitions.
    iii. Economy of importing country.
    iv. Government policies..
    v. Public Demand.
  2. Signing contract with buyer.
  3. Getting order from importer.
  4. Preparing the consignment.
  5. Mode of transportation.
  6. Preshipment inspections.
  7. Dispatch of cargo.
  8. Getting payment.

Documents in Foreign Trade


Issued by: Importer
Issued to: Exporter/Agent
Purpose: It is a order for goods. It gives full particulars and conditions as regards price, packing and shipment etc.

Shipping Note

Issued by: Exporter
Issued to: Port Authority
Purpose: To request port authority to load the goods to be exported, specifying the quantity of goods and vessel on which goods are to be boarded. Sent together with goods and sometimes before goods are send so that space is reserved for them.

Bill of Lading (BOL) or (B/L)

Issued by: Master of ship in triplet.
Issued to: Exporter, Importer, Shipmaster.
Purpose: Acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified

  1. Document of title.
  2. Contract of carriage.
  3. Receipt of goods.
  4. Importer cannot release the cargo from its port unless he has the bill.
  5. Exporter can get bank loan against the dispatched cargo upon presentation of documents including bill of lading.
  6. Required by custom authority for appraisement of cargo and for verifying quantities.
  7. It is also a document of transfer, being freely transferable but not a negotiable instrument.


  1. Name of exporter.
  2. Name of importer.
  3. Name of agent.
  4. Full details of goods.
  5. Place of departure and place of arrival of goods.
  6. Name of ship carrying goods.

Consignment Note

Issued by: Trucking company (Goods forwarder).
Information: Quantity and description of goods being dispatched.
Purpose: Evidence of contract.

Airway bill

Issued by: Airway company.
Purpose: Same as consignment note, in case of air transportation.

Bill of Exchange

  • It is unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or future time, a sum of certain money.
  • By this purchases promises to settle a debt on a specific date.
  • Can be discounted by the bank.

Finances to the Exporter

Loans and overdraft

Negotiating and discounting bill of exchange

Finance to the Importer

Documentary Credit (letter of credit) or (L/C) or (D/C)