The Means of Controlling Foreign Trade

International Trade

The history of trade is largely the history of civilization. First it was what we call barter, a simple exchange of goods. Goods like cloth and glass beads were taken to distant places and exchanged for things like oriental spices. Sometimes this was a dangerous and risky business.

International trade has now developed into an intricate mechanism of transactions. Today trade is not confined to visible exports and imports of goods but also includes invisible items like services, transportation, insurance, expenditure by tourists, etc.

Countries usually specialize in certain products and commercial activities. This specialization depends on such factors as differences in climate, natural resources, labour force skills and technology. These special conditions give one country an advantage over others in producing certain goods or services.

A country has a comparative advantage in a certain product if it is produced more efficiently and at lower cost. Nations usually specialize in those goods and services in which they have the greatest comparative advantage and exchange their surplus for things they need and want but do not produce themselves.

When countries engage in international trade they express their agreement to specialize in order to produce more of certain goods or services. Countries that trade can together produce more goods and services than they could in the absence of trade.

The balance of trade indicates the difference between the total value of a country's imports and exports of visible items (goods). The balance of trade is an important part of the balance payments, which also includes invisible items and capital transfers from one country to another. If the total value of the goods imported (visibles) is higher than that of the goods exported, the balance of trade is bad (adverse or unfavourable), that is to say it shows a deficit. If the reverse case is true, the balance of trade is good or favourable and it shows a surplus. Invisible items can cover the deficit of the balance of trade and as a result the country will have a favourable balance of payments.

What a country can achieve in international trade is shown by the terms of trade. The terms of trade are the rate at which a country's exports are exchanged for its imports. Terms are said to be good or favourable to a country when the prices of its exports are high in relation to the prices of its imports, and bad or unfavourable when the reverse is the case. The terms of trade become even more favourable if the demand for a country's exports increases, or if the demand for its imports decreases, for then its import prices will fall and its export prices will rise, and it will be able to receive a greater volume of imports for a given volume of exports. On a global scale imports must equal exports, since every good exported by one country must be imported by another.

Customs

The practice of levying duties on goods entering or leaving the country originated in the Middle Ages when the king or monarch began to charge both export and import duties on goods, taking a part of the goods as payment. Later, money payments determined usually by the amount customarily paid were also accepted. This is where the term customs comes from.

The tariff policy of a country usually protects the interests of the home economy by enabling its products to penetrate foreign markets while protecting its own markets from being flooded by foreign goods.

Import tariffs are therefore kept as high as possible (except for raw materials and other goods, the imports of which are essential to the economy) and exports tariffs very low, if applicable at all.

Besides import and export duties, there are transit duties. A transit duty is a tax levied on goods passing through a customs area.

Tariffs are often classified as either protective or revenue. Protective tariffs are designed to shield domestic production from foreign competition by raising the price of the imported goods. Revenue tariffs are designed to obtain revenue for the government.

If tariffs are imposed according to the weight of goods or according to their quantity (so much per ton, per item, per metre, etc.), they are called specific tariffs. If they are levied according to the estimated value of the goods, they are known as ad valorem tariffs. A combination of these two is the compound tariff.

The customs tariff of a country is either a double-column tariff or a single-column tariff. A single-column tariff is used when the rates are valid in general for all countries. When different rates are used (preferential rates for certain countries, for example), a double-column tariff is applied.

 

Foreign Exchange

Centuries ago gold or silver coins were used as money. The value of each nation's money was determined by the gold (or silver) content of each coin. Today, each country has its own currency with names such as euro, dollar, pound, hryvnia, etc. A distinction is made between domestic currency and foreign currency. A distinction can also be made between foreign currency and foreign exchange.

Foreign exchange is a broader term than foreign currency, as it also includes short term credit instruments (bills of exchange, etc.) in foreign currencies. (Foreign exchange also means the system of dealing in and converting the currency of one country into that of another).

Currencies can be (a) free or convertible (hard) currencies (b) transferable currencies, which can be transferred from one bank to a foreign bank on the basis of agreements, and (c) closed currencies (soft currencies), which can only be used by special arrangement in international payments.

The price at which one currency can be exchanged for another (i.e. the price of a currency on the foreign exchange market) is called the exchange rate or rate of exchange.

Under a floating exchange rate the rates of exchange are determined by market trading based on the supply of and demand for specific currencies. As demand fluctuates, the rates fluctuate also - rising when demand is greater than supply and declining when supply exceeds demand. Under a fixed exchange rate the government keeps the price fixed, in the short run by accumulating or depleting its foreign exchange reserves or else by borrowing abroad or introducing foreign exchange restrictions.

 

 

Payments Agreements

Payments agreements are concluded between two or more countries (bilateral and multilateral payments agreements) to settle their mutual obligations arising from the exchange of goods, from services mutually rendered and from financial payments, such as wages, salaries, fees, royalties, copyright fees, etc. Payments agreements usually supplement trade agreements.

The most usual type of payments agreements is the clearing - agreement. A clearing-agreement usually contains the following items: the clearing rate of exchange, clearing-accounts, the settlement of the balance on the clearing-account, and some other clauses.

The clearing rate of exchange is the rate which is applied for the conversion of the currency of one country into the currency of the other country. The official rate is usually fixed in advance and remains unchanged during the entire period of the validity of the payments agreement.

All payments between importers of one country and exporters of the other country are settled on the clearing accounts thatare opened with the so-called clearing banks (usually banks of issue) in the countries concerned.

When the validity of the payments agreement has expired, the balance on the clearing accounts is stated and the debtor country settles it in one of the following ways: (a) it transfers the balance to the clearing account of a new payments agreement, if such has been concluded: (b) it undertakes to settle the balance by deliveries of goods within a given time after the expiration of the validity of the payments agreement; (e) it agrees to settle the balance in free foreign exchange; (d) it agrees to settle it in gold.

 

The Contract of Sale

A contract - in the most general sense of the word - is a legally binding agreement between two or more persons to do (or abstain from doing) something in return for something else. Generally, there are no formalities, and a contract may be written or oral. For example, if you call a taxi by phone you expect it to arrive on time, and if it doesn't you havereason to complain. At the Stock Exchange contracts involving large sums of money are made orally, and only later confirmed in writing.

The contract must be of such a kind that both parties should reasonably suppose that the agreement is legally binding. Thus, acceptance of an invitation to a dinner is an agreement but not a contract.

In most cases, however, writing is necessary to make a contract, as once it is made in writing neither party can change it or interpret it in different ways. In foreign trade, agreements made by telephone should be confirmed either by telex or by letter (telefax).

A sales contract must be written clearly and precisely. It must state who buys what (quantity and quality of the goods), from whom, for how much (price) and under what conditions (payment, delivery, special terms, etc.).

A sales contract usually contains the following points:

(1) The description of the goods. With certain types of goods (machinery, instruments, etc.) detailed specification is necessary, sometimes even blueprints and technical documentation. In some cases (chemicals, cosmetics, etc.) samples may be required. It is also usual to stipulate that the goods should be of fair average quality (f.a.q.) or good ordinary brand (G.O.B.).

(2) The quantity of the goods. Certain goods are sold by piece, pair, dozen or score. Other goods are sold by weight. If the weight is given in tons, you must bear in mind that there is a difference between the metric ton (1,000 kilos), the long ton (1,016 kilos) used in Britain and the short ton (907 kilos) used in the U.S.A. Liquids are sometimes measured in gallons (in Britain 4.54, in America 3.78 litres).

(3) Price and payment. The contract must state in what currency payment should be made and on what conditions.

(4) Delivery terms, which define who bears the risks and costs of the delivery.

(5)The delivery date (i.e. when the goods must be dispatched).

(6) The packing of the goods.

 

 

Insurance

Trading has always been a risky business. In old times very often the ships sent on long voyages never returned to port. A rich merchant could become a poor man overnight if his ship laden with cargo was lost at sea. Robbers attacked the caravans and took the merchants' money and goods. Even today acci­dents, fire or theft may damage the goods and cause losses for the buyer or seller. In order to avoid these accidents today it is natural to insure the shipment of goods against these risks.

All sensible businessmen now insure goods for the full value. The idea of insurance is to obtain indemnity in case of damage or loss. Insurance is against risk. Insurance is one of the aids to trade, allowing risks to be taken without fear of disastrous loss. Without adequate insurance many enterprises would be too risky to undertake. It is essential that all goods for export be covered by insurance at every stage of transportation.

While the goods are in a warehouse, the insurance covers the risk of fire, burglary, etc. As soon as the goods are in transit they are insured against pilferage, damage by water, breakage or leakage. Other risks may also be covered. The insured is better protected if his goods are insured against all risks /a.a.r./. The goods may be also covered against general or particular average. In the insurance business the word 'average' means loss. Particular average refers to risks affecting only one shipper's consignment. General average refers to a loss incurred by one consignor but shared by all the other consignors who use the same vessel on the same voyage.

In a foreign trade transaction the terms of the contract of sale will indi­cate whether the costs of insurance will be paid by the seller or the buyer. The document that gives the details of what the insured party has to pay or what the insurance company will do if the goods are damaged or lost is called the insurance policy. The insurance policy forms part of the shipping documents. The amount of the insurance charges, insurance premium, will depend on the value of the goods insured and the risk involved.

In the old days when there were yet no insurance companies a merchant who wanted to insure the voyage of a ship would ask various other merchants how much they would pay him if his ship was lost. These other merchants would write their names and the amount accepted under the details of the contract. As for example, merchant X wanted to insure his ship for five hundred thousand pounds. He went to merchant A who signed for twenty thousand pounds, to merchant B who signed for thirty thousand and so on until he was fully covered. Merchants A, B, C, etc. were called the underwriters, a word which is still used today.

Lloyds of London is an association of underwriters best known for marine insurance. lt originated as a group of underwriters who met at a London coffee house owned by Edward L1oyd, who had a reputation for obtaining up-to-date information about shipping movements. Merchants and ship-owners met to arrange insurance for ships and their cargoes and in 1680 Lloyds of London was formed. Although marine insurance still accounts for over 40 per cent of Lloyds' business, it now covers many different risks. It was the first insurer of cover for burglary, car or planes. As well as insurance, Lloyds provides a comprehensive shipping information service. The Shipping Index records the movements of ships throughout the world, showing where they are, which port they were at last and where they are going to.

Principles of insurance

All insurance is governed by certain principles.

1) A person can only insure an event which will cause a personal or monetary loss.

2) Person taking out insurance must not tell lies or omit to mention relevant facts which might affect the insurer's decision about whether to issue a policy or what premium to charge.

3) lf a claim is made the insured person should be restored to the same position he or she was in before the event. Nobody can make a profit out of insurance. No one must encourage damage in order to get money.

* Lloyds' Shipping Index - реєстр Ллойдз; перелік морських суден, що видається компанією Ллойдз

 

International Trade

The history of trade is largely the history of civilization. First it was what we call barter, a simple exchange of goods. Goods like cloth and glass beads were taken to distant places and exchanged for things like oriental spices. Sometimes this was a dangerous and risky business.

International trade has now developed into an intricate mechanism of transactions. Today trade is not confined to visible exports and imports of goods but also includes invisible items like services, transportation, insurance, expenditure by tourists, etc.

Countries usually specialize in certain products and commercial activities. This specialization depends on such factors as differences in climate, natural resources, labour force skills and technology. These special conditions give one country an advantage over others in producing certain goods or services.

A country has a comparative advantage in a certain product if it is produced more efficiently and at lower cost. Nations usually specialize in those goods and services in which they have the greatest comparative advantage and exchange their surplus for things they need and want but do not produce themselves.

When countries engage in international trade they express their agreement to specialize in order to produce more of certain goods or services. Countries that trade can together produce more goods and services than they could in the absence of trade.

The balance of trade indicates the difference between the total value of a country's imports and exports of visible items (goods). The balance of trade is an important part of the balance payments, which also includes invisible items and capital transfers from one country to another. If the total value of the goods imported (visibles) is higher than that of the goods exported, the balance of trade is bad (adverse or unfavourable), that is to say it shows a deficit. If the reverse case is true, the balance of trade is good or favourable and it shows a surplus. Invisible items can cover the deficit of the balance of trade and as a result the country will have a favourable balance of payments.

What a country can achieve in international trade is shown by the terms of trade. The terms of trade are the rate at which a country's exports are exchanged for its imports. Terms are said to be good or favourable to a country when the prices of its exports are high in relation to the prices of its imports, and bad or unfavourable when the reverse is the case. The terms of trade become even more favourable if the demand for a country's exports increases, or if the demand for its imports decreases, for then its import prices will fall and its export prices will rise, and it will be able to receive a greater volume of imports for a given volume of exports. On a global scale imports must equal exports, since every good exported by one country must be imported by another.

The Means of Controlling Foreign Trade

The government can control foreign trade activities in different ways. It can encourage exports and control imports.

The commercial policy of a country is always closely connected with its foreign policy. This is reflected not only by the general trend of the foreign trade of the respective country but also by the various restrictions, for example establishing quotas, raising taxes, and introducing licence systems to encourage imports or promote exports.

The government can control foreign trade activities directly or indirectly. Administrative measures (for example the introduction of a strict licence system) control these activities directly, foreign exchange regulations (for example the devaluation of the local currency) have an indirect effect on foreign trade turnover. The pound sterling, for instance, was devalued against the dollar in 1949 and 1967, making the dollar more expensive to purchase in the United Kingdom and the pound less expensive in the United States. So imports to Britain were discouraged and exports encouraged.

The government can also subsidize prices, which means that it allows goods to be sold at a price lower than the market price. The aim is to prevent the decline of a company or industry. For the same purpose the government can also extend credits.

One of the most important means of controlling foreign trade activities is through the policy of customs duties.

 

Customs

The practice of levying duties on goods entering or leaving the country originated in the Middle Ages when the king or monarch began to charge both export and import duties on goods, taking a part of the goods as payment. Later, money payments determined usually by the amount customarily paid were also accepted. This is where the term customs comes from.

The tariff policy of a country usually protects the interests of the home economy by enabling its products to penetrate foreign markets while protecting its own markets from being flooded by foreign goods.

Import tariffs are therefore kept as high as possible (except for raw materials and other goods, the imports of which are essential to the economy) and exports tariffs very low, if applicable at all.

Besides import and export duties, there are transit duties. A transit duty is a tax levied on goods passing through a customs area.

Tariffs are often classified as either protective or revenue. Protective tariffs are designed to shield domestic production from foreign competition by raising the price of the imported goods. Revenue tariffs are designed to obtain revenue for the government.

If tariffs are imposed according to the weight of goods or according to their quantity (so much per ton, per item, per metre, etc.), they are called specific tariffs. If they are levied according to the estimated value of the goods, they are known as ad valorem tariffs. A combination of these two is the compound tariff.

The customs tariff of a country is either a double-column tariff or a single-column tariff. A single-column tariff is used when the rates are valid in general for all countries. When different rates are used (preferential rates for certain countries, for example), a double-column tariff is applied.

 

Foreign Exchange

Centuries ago gold or silver coins were used as money. The value of each nation's money was determined by the gold (or silver) content of each coin. Today, each country has its own currency with names such as euro, dollar, pound, hryvnia, etc. A distinction is made between domestic currency and foreign currency. A distinction can also be made between foreign currency and foreign exchange.

Foreign exchange is a broader term than foreign currency, as it also includes short term credit instruments (bills of exchange, etc.) in foreign currencies. (Foreign exchange also means the system of dealing in and converting the currency of one country into that of another).

Currencies can be (a) free or convertible (hard) currencies (b) transferable currencies, which can be transferred from one bank to a foreign bank on the basis of agreements, and (c) closed currencies (soft currencies), which can only be used by special arrangement in international payments.

The price at which one currency can be exchanged for another (i.e. the price of a currency on the foreign exchange market) is called the exchange rate or rate of exchange.

Under a floating exchange rate the rates of exchange are determined by market trading based on the supply of and demand for specific currencies. As demand fluctuates, the rates fluctuate also - rising when demand is greater than supply and declining when supply exceeds demand. Under a fixed exchange rate the government keeps the price fixed, in the short run by accumulating or depleting its foreign exchange reserves or else by borrowing abroad or introducing foreign exchange restrictions.

 

 

Payments Agreements

Payments agreements are concluded between two or more countries (bilateral and multilateral payments agreements) to settle their mutual obligations arising from the exchange of goods, from services mutually rendered and from financial payments, such as wages, salaries, fees, royalties, copyright fees, etc. Payments agreements usually supplement trade agreements.

The most usual type of payments agreements is the clearing - agreement. A clearing-agreement usually contains the following items: the clearing rate of exchange, clearing-accounts, the settlement of the balance on the clearing-account, and some other clauses.

The clearing rate of exchange is the rate which is applied for the conversion of the currency of one country into the currency of the other country. The official rate is usually fixed in advance and remains unchanged during the entire period of the validity of the payments agreement.

All payments between importers of one country and exporters of the other country are settled on the clearing accounts thatare opened with the so-called clearing banks (usually banks of issue) in the countries concerned.

When the validity of the payments agreement has expired, the balance on the clearing accounts is stated and the debtor country settles it in one of the following ways: (a) it transfers the balance to the clearing account of a new payments agreement, if such has been concluded: (b) it undertakes to settle the balance by deliveries of goods within a given time after the expiration of the validity of the payments agreement; (e) it agrees to settle the balance in free foreign exchange; (d) it agrees to settle it in gold.

 

The Contract of Sale

A contract - in the most general sense of the word - is a legally binding agreement between two or more persons to do (or abstain from doing) something in return for something else. Generally, there are no formalities, and a contract may be written or oral. For example, if you call a taxi by phone you expect it to arrive on time, and if it doesn't you havereason to complain. At the Stock Exchange contracts involving large sums of money are made orally, and only later confirmed in writing.

The contract must be of such a kind that both parties should reasonably suppose that the agreement is legally binding. Thus, acceptance of an invitation to a dinner is an agreement but not a contract.

In most cases, however, writing is necessary to make a contract, as once it is made in writing neither party can change it or interpret it in different ways. In foreign trade, agreements made by telephone should be confirmed either by telex or by letter (telefax).

A sales contract must be written clearly and precisely. It must state who buys what (quantity and quality of the goods), from whom, for how much (price) and under what conditions (payment, delivery, special terms, etc.).

A sales contract usually contains the following points:

(1) The description of the goods. With certain types of goods (machinery, instruments, etc.) detailed specification is necessary, sometimes even blueprints and technical documentation. In some cases (chemicals, cosmetics, etc.) samples may be required. It is also usual to stipulate that the goods should be of fair average quality (f.a.q.) or good ordinary brand (G.O.B.).

(2) The quantity of the goods. Certain goods are sold by piece, pair, dozen or score. Other goods are sold by weight. If the weight is given in tons, you must bear in mind that there is a difference between the metric ton (1,000 kilos), the long ton (1,016 kilos) used in Britain and the short ton (907 kilos) used in the U.S.A. Liquids are sometimes measured in gallons (in Britain 4.54, in America 3.78 litres).

(3) Price and payment. The contract must state in what currency payment should be made and on what conditions.

(4) Delivery terms, which define who bears the risks and costs of the delivery.

(5)The delivery date (i.e. when the goods must be dispatched).

(6) The packing of the goods.