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					Chapter 3
   Foreign trade is all about imports and
   The backbone of any foreign trade between
    nations is those products and services which
    are being traded to some other location
    outside a particular country's borders.
   Some nations are adept at producing certain
    products at a cost-effective price.
   Import Trade
   Export Trade
   Entrepot Trade
   Division of labour and specialisation
   Optimum allocation and utilisation of
   Equality of prices
   Availability of multiple choices
   Ensures quality and standard goods
   Raises standard of living of the people
   Generate employment opportunities
   Facilitate economic development
   Assistance during natural calamities
   Maintains balance of payment position
   Brings reputation and helps earn goodwill
   Foreign trade helps every country to make
    optimum use of its natural resources
   Foreign trade enables a country to obtain
    goods, which it cannot produce
   Foreign trade leads to specialization and
    encourages production of different goods in
    different countries.
   This also introduces an extra caution for
    maintaining quality that is able to meet the
    international standards
   What’s more foreign trade leads to production at
    large scale and thus the advantages of large scale
    production can be obtained by all the countries
    of the world that indulge in mutual trade
   Under developed countries can establish and
    develop new industries with the machinery,
    equipments and technical know-how imported
    from developed countries.
   Due to foreign competition, the producers in a
    particular country attempt to produce better
    quality goods at the minimum possible cost.
   Support of Non-Democratic Systems
   Cultural Identity Issues
   Social Welfare Issues
   Environmental Issues
   Political Issues
   Step 1: Receipt of enquiry and sending
    The importer of goods first sends an enquiry to
     different exporters requesting them to send
     information about price, quality, terms of payment
    In reply to the enquiry, the exporters then send the
     quotation mentioning details about the products,
     price, and quality, mode of delivery, terms and
     conditions if any.
   Step 2: Receipt of an indent or export order:
    If the prospective importer finds the terms and
     conditions acceptable, then he places an order for
     export of goods which is known as indent.
    An indent contains a description of the goods
     ordered, price to be paid, terms and conditions of
     delivery, packing of goods and other details. On
     receipt of indent if the exporter finds it satisfactory,
     then he forwards his acceptance to export the
   Step 3: Credit Enquiry
    The exporter must ensure that there is no risk of
     default in payment. He should verify the credit
     worthiness of the importer.
    For this purpose he may ask the importer to send a
     letter of credit, bank guarantee or any other
   Step 4: Obtaining export licence
    To get an export license, the exporter must have
    a) an IEC (Importer Exporter Code) number
    b) RCMC from appropriate export promotion council
    c) Registration with Export Credit and Guarantee
       Corporation (ECGC). The registration with ECGC
       safeguards against risk of non-payments.
   Step 5: Production or Procurement of goods
    The exporter has to produce the goods or buy them
     from the market. The goods must be in accordance
     with the instructions given in the indent regarding
     the quality, quantity, price, etc.
   Step 6: Pre-shipment Inspection
    To ensure that only good quality products are
     exported from our country, the Government of India
     has made compulsory pre-shipment inspection of
     goods by certain authorised agencies.
   Step 7: Excise Clearance
    In India, manufactured products are subject to
     excise duty under the Central Excise Act. Therefore
     excise clearance certificate is a must for the goods
     to be exported.
    It may be noted here that the Government of India
     has exempted excise duty in many cases if the
     goods are manufactured exclusively for the purpose
     of export.
   Step 8: Packing and marking of the goods
    Packing should be done strictly according to the
     instructions given in the indent. If loss arises due to
     defective packing, the exporter may have to bear it.
     If necessary, grading should be done before
    The packages should be properly marked according
     to instructions, if any, so that they may be easily
   Step 9: Appointment of forwarding agent
    Packed goods may be despatched to the port
     directly by the exporter or through a forwarding
    If the goods are stored in any location, the exporter
     may appoint a forwarding agent who will perform
     all the formalities on behalf of the exporter before
     shipping the goods.
    The forwarding agent will charge commission for
     this work.
   Step 10: Despatch of goods
    The exporter has to despatch the goods by rail/
     road to the port town.
    He will send the R/R (railway receipt) to the
     forwarding agent along with other instructions.
    The agent will take delivery of the goods and
     complete other formalities before shipping them to
     the importer.
 Step 11: Formalities to be completed by
  Forwarding agent
a) Obtaining the custom permit
     The agent has to apply to the custom office giving
      full details of the goods and also their destination
      in order to receive the custom permit.
     If goods are duty free then custom permit is given
      immediately, otherwise it will be necessary to
      complete other formalities.
 Step 11: Formalities to be completed by
  Forwarding agent
b) Obtaining shipping order
 The agent has to secure adequate space in
    the ship for loading of goods.
 For this purpose he has to sign an
    agreement with the shipping company for
    issue of the shipping order which will
    enable him to put the goods in the ship.
 Step 11: Formalities to be completed by
  Forwarding agent
c) Completion of shipping bill and payment of
    export duty:
     The Agent has to fill in three copies of shipping
      bill and submit them to the custom-house.
     On the basis of the bill, duty is calculated by the
      custom authority.
     The agent has to make payment of the duty and
      get the original and third copy of the Shipping Bill
      from the custom authority.
 Step 11: Formalities to be completed by
  Forwarding agent
d) Payment of dock dues
     The agent has to make arrangement for carrying
      the goods to the dock. For this purpose, two
      copies of properly completed ‘Dock Challan’ are
      submitted to the dock authorities along with one
      copy each of shipping bill and shipping order.
     After dock charges are received, the dock
      authorities retain one copy of dock challan and
      return the duly signed second copy to the agent.
  Step 11: Formalities to be completed by
   Forwarding agent
e)   Custom’s verification before loading of goods:
       As soon as the ship touches the port, the dock
        authorities start loading the goods on it.
       Before the goods are actually loaded, custom officials
        verify them to know if there is anything on which duty
        remains to be paid or which is not mentioned in the
        shipping bill.
       The captain or his assistant (mate) will receive goods
        only when shipping order has been produced before
  Step 11: Formalities to be completed by
   Forwarding agent
f)   Mate’s receipt
     The captain or mate will issue a receipt known as
      “mates receipt” after the goods have been loaded.
     This receipt contains particulars like quantity of
      goods, number of packets, condition of packing,
 Step 11: Formalities to be completed by
  Forwarding agent
g) Bill of lading
       The forwarding agent has to present the mate’s receipt
        at the office of the shipping company and in exchange
        will get a document known as Bill of Lading.
       He has to fill in three blank forms of bills of lading
        giving details regarding the goods, destination, name
        of the ship, date and place of loading and name and
        address of the person to whom delivery is to be made.
       If the freight is paid in advance the bill of lading is
        marked ‘freight paid’. Otherwise it is marked ‘freight
        forward’ which means freight will be paid at the port
        of destination.
 Step 11: Formalities to be completed by
  Forwarding agent
h) Insurance of cargo
     As a safeguard against marine risks, it is
      necessary to insure the goods.
     Insurance must be done strictly according to the
      instructions, if any, of the importer as given in the
      indent. If there is no instruction, the exporter
      himself should insure the goods.
     The insurance policy is sent to the importer along
      with the bill of lading and other documents.
    Step 11: Formalities to be completed by
     Forwarding agent
i)     Advice to the exporter
      The agent then informs the exporter about the
       shipment of goods and other related matters.
      He will send the bill of lading, insurance policy,
       shipping bill etc. to the exporter along with a
       statement showing his expenses and
   Step 12: Preparation of export invoice and
    consular invoice
    Having received the advice from the forwarding
     agent, the exporter prepares an export invoice
     known as foreign invoice.
    This invoice states the quantity of goods sent and
     amount due from the importer.
    Custom regulations of many countries require
     consular invoice for the purpose of easy clearance
     of goods at the port of destination in the importing
    If it is required by the importer then the exporter
     has to arrange for such a document also.
 Step 13: Securing Payment
 There are two alternative methods by which
  payment can be received by the exporter.
a) Letter of credit
     The exporter can get immediate payment on the
      strength of the letter of credit which is issued by
      the importer’s bank in favour of the exporter.
     The exporter has to draw the bill in order to get
      the payment from the local branch of the bank (in
      home country), which has issued the letter of
      credit on behalf of the importer.
 Step 13: Securing Payment
b) Letter of hypothecation
       If the exporter wants to receive payment immediately,
        he can get the bill (accepted by the importer)
        discounted with his bank. But for this purpose, he has
        to give a letter of hypothecation to his bank.
       Letter of hypothecation is a letter addressed to a bank
        attached with the bill of exchange which is accepted
        by the importer.
       Through his letter of hypothecation, the exporter
        authorises the bank to sell the goods in case of
        dishonour of the bill by the importer so that the bank
        can realise the amount advanced by it to the exporter.
   EOUs were started with an intention of
    exporting 100% of its products outside the
    country. Such units will trade only globally
    and not cater to the domestic needs. It was a
    concept started in 1981.
   Many concessions in the form of tax holidays,
    import subsidy, excise concessions are
    extended to such units. Importing raw
    materials, machinery, technology was made
   The World Trade Organization (WTO) is an
    organization that intends to supervise and
    liberalize international trade.
   The organization officially commenced on
    January 1, 1995 under the Marrakech
    Agreement, replacing the General Agreement
    on Tariffs and Trade (GATT), which
    commenced in 1948
   A free trade zone (FTZ) or export processing
    zone (EPZ) is an area of a country where some
    normal trade barriers such as tariffs and
    quotas are eliminated and bureaucratic
    requirements are lowered in hopes of
    attracting new business and foreign
                       Home Trade                                                Foreign Trade
Trade within territorial boundaries or within the nation   Trade between two countries

Generally, licensing formalities are limited               Licensing formalities are too many. Licenses have to be
                                                           procured in the international trade

Sales volume will not be very high                         As there will be large scale operation sales volume will
                                                           be high
Benefit of economies of large scale operation cannot be Production and sales volume will be high.
Documentation process is lesser                            More documentation work and it differs from one
                                                           country to another.
Caters for domestic market. Limited scope of expansion     Caters globally. Wide scope of expansion.

Not much cultural difference within country. So easier Wide differences in cultures across different countries.
to communicate and trade                                   Understanding the same might be difficult.
Uniform political system. So easy to adjust.      Varying   political   systems   across     different
                                                  countries make it hard to understand
No limit on trade. Goods can move from one Free movement of goods may not be possible as
place to another without hindrance                they are governed by the trade laws and limits

Factors of production can easily move from place Production factors cannot be transferred so easily
of abundance to place of scarcity
Currency in which the transactions take place will Currency varies from country to country
be in rupees or home country’s currency

Less time consuming, less risky and less More time consuming, more complicated and
complicated                                       involves high risk and uncertainty
   Step 1: Obtaining import license and quota
    In all countries there are many government
     regulations to be followed.
    Sanction of government is necessary.
    Importer has to apply to the controller of imports
     for getting necessary permission.
    Importer has to attach the following documents to
     his application form :-
     a) Receipt which shows that import license fee has
        been paid.
     b) Certificate from a Chartered Accountant showing the
        total value of goods to be imported.
     c) Verification Certificate for income tax.
   Step 2: Obtaining foreign exchange
    Before placing any order, the importer must apply
     to the Exchange Control Department (ECD) of RBI
     (India's Central Bank) for the release of requisite
     foreign exchange.
    The importer should forward the application
     through his bank.
    The ECD verifies the application of the importer,
     and if found valid, sanctions the foreign exchange
     for the particular transaction.
   Step 3 Placing an order:
    The importer may either place the order directly or
     through the indent house (Agent).
    In case of canalised items, he obtains the imports
     through the canalizing agency.
    (Canalisation means channelization of goods
     through a government agency like MMTC
   Step 4 Despatching letter of credit:
    After getting the confirmation from the supplier
     regarding the supply of goods, the importer
     requests his bank to issue a Letter of credit in
     favour of supplier
   Step 5 - Appointing clearing and forwarding
    The importer makes arrangement to appoint
     clearing and forwarding agents to clear the goods
     from the customs.
    Since clearing of goods is a specialized job, it is
     better to appoint C & F agents.
   Step 6 Receipt of shipment device
    The importer receives the shipment advice from the
    The shipment advice states the date on which the
     goods are loaded on the ship.
    The shipment advice helps the importer to make
     arrangement for clearance of goods.
   Step 7 Receipts of document
    The importer's bank receives the documents from
     the exporter's bank.
    The documents include bill of exchange, a copy of
     bill of lading, certificate of origin, commercial
     invoice, consular invoice, packing list, and other
     relevant documents.
    The importer makes payment to the bank (if not
     paid earlier) and collects the documents.
   Step 8 Bill of entry
    This is a document required in case of import of
     goods. It is like shipping bill in case of exports.
    A Bill of Entry is the document testifying the fact
     that goods of the stated value and description in
     specified quantity are entering into the country
     from abroad
   Step 9 Delivery order: The clearing agents
    obtain the delivery order from the office of
    the shipping company. The shipping
    company gives the delivery order only after
    payment of freight, if any.
   Step 10 Clearing of goods
    The clearing agent pays the necessary dock or port trust
     dues and obtains the port Trust Receipt in two copies.
    He then approaches the Customs House and presents
     one copy of Port Trust Receipt, and two copies of Bill of
     Entry to the customs authorities.
    The customs officer endorses the Bill of Entry Forms and
     one copy of Bill of Entry is handed back to the importer.
    The importer then pays the customs duty and clears the
     goods. In case, the customs duty is not paid, then the
     goods are stored in the bonded warehouses. As and
     when the duty is paid, the goods are cleared from the
   Step 11 Payment to clearing and forwarding
    agent: The importer then makes the necessary
    payment to the clearing agent for his various
    expenses and fees.
   Step 12 Payment to exporter: The importer has to
    make payment to exporter. Usually, the exporter
    draws a bill of exchange. The importer has to
    accept the bill and make payment.
   Step 13 Follow up: The importer then informs the
    exporter about the receipt of goods. If there are
    any discrepancies or damages to the goods, he
    should inform the exporter.
   Import of goods from a foreign country can
    be affected in two ways. The import of goods
    can take place directly or through a
    middleman. The import of goods through an
    intermediary is called an Indent House. Indent
    houses are of two types.
   They may be representative or agents of
    foreign producers or exporters or they may
    be independent firms engaged in foreign
Provide link between importers and exporters
Supply information to the importer on the availability of
 various commodities
If necessary arrange credit facilities for the importer
Convey complaints and grievances of the importers to
 the foreign exports
They buy goods in bulk for a large number of importers
 and thereby enable the small dealers to get the
 economies of scale buying
Provide importers latest information about the foreign
Help the importers to select better quality products.
Also help exporters to find new market for their goods
 in foreign countries.

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