International Business Part 2
Long Answer Type
Question 1: Rekha Garments has received an order to export 2000 men’s trousers to Swift Imports Ltd. located in Australia. Discuss the procedure that Rekha Garments would need to go through for executing the export order.
Answer: Rekha Garments needs to go through following procedures for executing the export order:
- It needs to obtain a letter of credit from the importer. This is necessary to safeguard against the risks of non-payment.
- After that, this company will need to obtain the IEC code. This can be obtained from Directorate General Foreign Trade or from Regional Import Export Licensing Authority.
- After that, this company will need to obtain pre-shipment finance from the importer’s bank. This finance can be utilized for various pre-shipment activities; like procuring raw materials, getting the garments made and transporting the finished products to the port of shipment.
- Once the firm is done with production of garments, it will have to go for pre-shipment inspection. Pre-shipment inspection is done in order to ensure that only quality goods are exported from the country. For this, Rekha Garment will have to approach Export Inspection Agency or any other designated agency.
- After clearing the pre-shipment inspection, this firm will have to obtain excise clearance from the relevant Excise Commissioner. The company may not have to pay excise duty or it can get refund of excise duty at a later date.
- After obtaining the excise clearance, this firm will have to get the certificate of origin which shows that the garments are manufactured in a particular country.
- After above step, the firm will have to reserve shipping space from a desired port. For this, the firm will have to apply to a shipping company and will have to provide some details; like type of goods to be shipped, probable date of shipment and the port of destination. Once the shipping company accepts the application, the firm will be issued a shipping order.
- After the above step, the goods need to be packed properly and marked with appropriate details; such as name and address of importer, gross and net weight, port of shipment, destination, country of origin, etc. Then the firm needs to make necessary arrangements to transport the goods to the port. This can be done by roadways or railways.
- After that, the exporter needs to get the consignment insured against the risks involved during sea voyage.
- After that, the firm needs to take customs clearance. For this, it needs to submit the shipping bill to the customs department. Apart from five copies of the shipping bill, the firm needs to submit following documents to the Customs Appraiser: Export contract or Export order, Letter of Credit, Commercial Invoice, Certificate of Origin, Certificate of inspection; where necessary, Marine insurance policy
- After customs clearance, the custom officials issue the carting order. Carting order facilitates physical movement of the consignment to the port area. This is a permit to the staff at the gate of the port to permit entry of the cargo inside the dock.
- Once the consignment is loaded on the ship, the captain of the ship issues mate’s receipt which is utilized for further processes.
Question 2: Your firm is planning to import textile machinery from Canada. Describe the procedure involved in importing.
Answer: This firm will have to go through following procedures:
Trade Enquiry: Trade enquiry involves gathering information about various suppliers, prices and terms and conditions. Such information can be obtained from various directories and also from export promotion bodies of different countries. Now-a-days, even online directories are available.
Proforma Invoice: After gathering information through trade enquiry, the firm needs to contact some potential exporters to get proforma invoice; which shows price, and terms and conditions.
Import License: The firm needs to obtain the IEC number. For this, the firm needs to contact Directorate General Foreign Trade (DGFT) or the relevant Regional Import Export Authority. The IEC (Import Export Code) number needs to be quoted in almost all the relevant documents.
Obtaining Foreign Exchange: The firm then needs to obtain the currency of exporter’s country. In many cases, dollar is usually accepted. There are many authorized dealers who deal in foreign exchange. Banks also issue foreign exchange. The importer needs to apply to a bank to get sanction of the desired amount of foreign exchange.
Placing order or indent: After the previous step, the importer needs to place an order to the exporting firm. The indent should contain various details; like size of consignment, grade, quality and instructions related to shipping, packing, port of shipment and destination.
Obtaining letter of credit: The importer also needs to obtain a letter of credit from its bank. The letter of credit needs to be sent to the exporter so that the exporter gets a guarantee of payment.
Arranging for finance: The importer needs to arrange for finance so that it can pay the amount on arrival at the port. Advance arrangement of finance is necessary to avoid paying demurrages (penalties) if the imported goods lie uncleared at the port.
Receipt of shipment advice: After loading the goods at the port, the exporter sends the shipment advice to the importer. The shipment advice contains various details; such as invoice number, bill of lading/airways bill, name of vessel with date, port of export, description of goods, date of sailing vessel, etc.
Retirement of import document: After dispatching the goods, the overseas supplier prepares a set of documents as per terms of contract and letter of credit. The exporter hands this document to his/her banker. The bank facilitates onward transmission of these documents and facilitates negotiations with the importer as per terms and conditions.
Arrival of goods: The person in charge of the carrier ship issues import general manifest which contains various details about the consignment. This document provides the basis for unloading the consignment.
Custom clearance and release of goods: The importer needs to pay certain amount of custom duty. Custom clearance is a complicated procedure. Importers usually take the services of Carrying and Forwarding (C&F) Agent for getting custom clearance. Goods are released only after custom clearance.
Question 3: Discuss the principal documents used in exporting.
Answer: The principal documents used in exporting are as follows:
Documents related to goods
Export Invoice: This is seller’s bill for merchandise. It contains information about goods; such as quantity, total value, number of packages, marks on package, port of destination, name of ship, bill of lading number, terms of delivery, etc.
Packing List: This is a list which shows number of packs or cases. This also shows details of goods in each packet.
Certificate of Origin: This certificate shows the country in which the goods have been produced. This certificate entitles the customer to get some relief on duty. This certificate is also required because some countries have put a ban on import from certain countries.
Certificate of Inspection: For ensuring quality of goods being exported, the government of India makes it mandatory to inspect the goods. This certificate is issued by any designated agency.
Documents related to shipment
Mate’s Receipt: This is issued by the captain of the ship once the goods are loaded on the ship. This certificate shows name of vessel, berth, date of shipment, description of package, condition of consignment at the time of loading, etc. This receipt needs to be produced before the shipping company to obtain the bill of lading.
Shipping Bill: This is the main document on which basis the customs office grants the permission of export. This bill contains description of goods, name of vessel, destination port and final destination, and name and address of exporter.
Bill of Lading: This is issued by the shipping company and is like the official receipt by the shipping company. Through this bill, the shipping company gives an undertaking that it has taken the responsibility of transporting the consignment.
Airway Bill: This is issued when the consignment is sent by air. This is similar to bill of lading.
Marine Insurance Policy: Sea voyage has its own unique set of risks. Marine insurance is done against those risk factors. By issuing the insurance policy, the insurance company guarantees to compensate the exporter in case of any damage to the consignment.
Cart Ticket: This is also known as cart chit, vehicle or gate pass. This contains information like shipper’s name, number of packages, shipping bill number, port of destination and the number of vehicle carrying the cargo. This is prepared by the exporter.
Documents related to payment
Letter of Credit: This is guarantee issued by the importer’s bank that it will give payment up to a certain amount. Letter of credit is the most often used mode of payment guarantee in case of export import.
Bill of Exchange: It is a written instrument. The person issuing this instrument directs the other party to pay a specified amount to a certain person or to bearer of the instrument. The bill of exchange is drawn by exporter on importer asking the importer to pay the specified amount. The importer needs to accept the bill of exchange in order to get access to documents which give him title to the imported consignment.
Bank Certificate of Payment: Once the transaction is completed by the importer, the bank issues the certificate of payment. This shows that the importer has made the necessary payment and has received the documents pertaining to title of the consignment.
Question 4: List and explain various incentives and schemes that the government has evolved for promoting the country’s export.
Answer: Following are the various incentives and schemes that the government has evolved for promoting the country’s export:
Duty Drawback Scheme: Since the goods are not produced for domestic consumption, they are entitled to get exemption from various excise and custom duties. If an exporting firm pays excise duty, then it is usually refunded to the exporter. This is called duty drawback scheme. If the exporter has paid some custom duty on import of raw materials and machinery, he can also get the refund of custom duties paid. This is called custom duty drawback.
Export Manufacturing Under Bond Scheme: This facility entitles a firm to not pay excise and other duties. For availing this facility, the firm has to give an undertaking that it will export all its products and the products shall not be channelized into domestic market.
Exemption from payment of sales tax: Goods which are being manufactured for export are exempted from sales tax. For a long time, incomes derived from export operations were exempt from income tax. Now this benefit is limited only to goods being produced in 100% Export Oriented Units (EOUs) and goods being produced in Export Processing Zones (EPZs) or Special Economic Zones (SEZs) for certain number of years.
Advance License Scheme: Under this scheme an exporter is allowed duty free supply of domestic as well as imported inputs required for manufacturing the goods. This facility is available both for regular exporters and intermittent exporters. A regular exporter can avail this benefit against his production plan.
Export Promotion Capital Goods Scheme (EPCG): This scheme is aimed at encouraging import of capital goods for export production. A firm can import capital goods at zero or subsidized custom duty if it fulfills certain conditions. Supporting firms in this activity can also avail of this benefit. This scheme helps the firms which may be interested in upgrading their manufacturing facilities.
Scheme of recognizing firms as export house, trading house and superstar trading house: This scheme encourages firms to export in ever larger quantities. Based on performance of a specified number of years, a firm can be recognized as export house, trading house and superstar trading house. These firms have to fulfill certain criteria as per the Export Import Policy of the government.
Export of Services: This scheme is aimed at boosting the export of services. Based on their past performance, service exporting firms are recognized as Service Export House, International Service Export House, International Superstar Service Export House.
Finance for Export: Exporters are given pre-shipment and post-shipment finance so that they can work better.
Export Processing Zones (EPZs): These are industrial zones which form enclaves from the Domestic Tariff Areas (DTAs). These are usually situated near ports or airports. These zones are made so that firms can produce in internationally competitive duty free zones. These zones have set up at various places in India.
Question 5: Identify various organisations that have been set up in the country by the government for promoting country’s foreign trade.
Answer: Various organizations that have been set up in the country by the government to promote country’s foreign trade are as follows:
Department of Commerce: This department comes under the Ministry of Commerce. This is the apex body concerned with India’s external trade. This department takes measures to increase commercial relations with other countries, and takes measures to promote export from India. This department formulates policies related to external trade and also formulates export import policy.
Export Promotion Councils (EPCs): EPCs are registered under the Companies Act or Societies Act; as the case may be. These are not for profit organizations which work on export promotion of products falling under their jurisdiction. At present, there are 21 Export Promotion Councils in India.
Commodity Boards: These are formed with an aim of export promotion of certain commodities. Commodity Boards act as supplementary to the EPCs. At present there are seven commodity boards which include; Coffee Board, Rubber Board, Tobacco Board, Spice Board, Central Silk Board, Tea Board, and Coir Board.
Export Inspection Council: Export Inspection Council of India was setup by the Government of India under Section 3 of the Export Quality Control and Inspection Act 1963. This council was set up with an aim of developing sound practices related to export. This council undertakes pre-shipment inspection of consignments to ensure proper quality of items being exported. Barring a few exceptions; all the commodities need to pass the inspection by the EIC.
India Trade Promotion Organisation (ITPO): ITPO was set up in 1992 under the Companies Act. This was formed by merging two erstwhile agencies, viz. Trade Development Authority and Trade Fair Authority of India. It is headquartered in New Delhi at Pragati Maidan. This organization serves the industry by organizing trade fairs at regular intervals. By organizing trade fairs, this organization also carries out export promotion activities. There are five regional offices of ITPO and they are based at Mumbai, Kanpur, Bangalore, Kolkata and Chennai. It has four international offices at Germany, Japan, UAE and USA.
Indian Institute of Foreign Trade (IIFT): This institute was set up in 1963 under the Societies Registration Act. This institute was set up to professionalize the country’s foreign trade management. It provides training in international business, conducts research in related areas and analyses and disseminates data related to international trade and investment.
Indian Institute of Packaging (IIP): This institute was set up in 1966. Its headquarters and principal laboratory are situated at Mumbai. There are three regional laboratories situated at Kolkata, Delhi and Chennai. This is a training-cum research institute related to packaging and testing. It provides training, consultancy, promotional contests, information services and other related activities.
State Trading Organisations: The State Trading Organisation was set up in 1956. Its main objective is to stimulate trade; primarily export with various trading partners in the world. Many other trading organizations were also set up by the government; like Metals and Minerals Trading Corporation (MMTC), Handloom and Handicrafts Export Corporation (HHEC), etc.
Question 6: What is World Bank? Discuss its various objectives and role of its affiliated agencies.
Answer: The International Bank for Reconstruction and Development (IBRD) is commonly known as the World Bank. It was established as a result of Bretton Woods Conference. The main objective of setting up the World Bank was reconstruction of war-ravaged economies of Europe after the Second World War. After successfully achieving its objective in Europe, the World Bank shifted its focus on developing nations and has been engaged in that since 1950s.
The aftershocks of the Second World War made the world leaders to realize the futility of war. They also realized that close cooperation among different countries was necessary to bring the world economy back on rails. Most of the European countries were in bad shape at that time; so the World Bank took up the task of restoring normalcy in those countries. During initial years, the main emphasis was on development of infrastructure; which could facilitate economic activities.
By the 1950s, situation in Europe improved significantly and hence the World Bank turned its attention towards developing countries and underdeveloped countries. It provided financial assistance to underdeveloped countries in the form of interest free loans. It was aimed at improving human development index in those countries so that the whole world could be benefited.
Role of Affiliate Agencies of the World Bank:
- International Development Association provides soft loans to less developed nations.
- International Finance Corporation provides financial assistance to private sector of developing countries.
- The Multinational Investment Guarantee Agency supplements the activities of the World Bank and IFC.
- International Monetary Fund looks after orderly evolution of international exchange system.
Question 7: What is IMF? Discuss its various objectives and functions.
Answer: International Monetary Fund (IMF) is next only to the World Bank. IMF was established in 1945 and is headquartered at Washington. Its main activities include; promotion of international monetary cooperation, facilitate growth of balanced international trade, to promote exchange stability and to establish multilateral payment system.
Objectives of IMF:
- To promote international monetary cooperation through a permanent institution.
- To facilitate balanced growth of international trade and to contribute thereby to the promotion of high levels of employment and real income.
- To promote exchange stability.
- To assist in the establishment of a multilateral system of payments in respect of current transactions among the member countries.
Functions of IMF:
- Acting as short term credit institution.
- Providing machinery for the orderly adjustment of exchange rates.
- Acting as reservoir of the currencies of all the member nations so that a country can borrow currency of another nation.
- Acting as lending institution of foreign currency and current transaction.
- Determining the value of a currency and altering it if required.
- Providing machinery for international consultations.
Question 8: Write a detailed note on features, structure, objectives and functioning of WTO.
Answer: World Trade Organisation (WTO) was formed on 1st January 1995. In fact; the erstwhile organization, General Agreement on Tariffs and Trade (GATT) was transformed into WTO on this date. Formation of WTO was like implementation of the proposal to form International Trade Organisation (ITO) which was planned after the Bretton Woods Conference.
WTO is much more powerful than GATT. It governs trade in goods as well as in services and intellectual property. WTO is a permanent organization created by an international treaty ratified by the governments and legislatures of the member nations. All the major decisions in the WTO are taken by the member governments on the basis of consensus. India is one of the founding members of WTO. As on 11th December 2005, there were 149 members in the WTO.
Structure of WTO: WTO sees itself as rules-based and member-based organization. The General Council is the main body of WTO and it has following subsidiary bodies which oversee committees in different areas:
- Council for Trade in Goods
- Council for Trade Related Aspects of Intellectual Property Rights
- Council for Trade in Services
- Trade Negotiation Committee
Objectives of WTO:
- To ensure reduction of tariffs and other trade barriers imposed by different countries.
- To engage in such activities which improve standard of living, create employment, increase income and effective demand and facilitate higher production and trade.
- To facilitate optimal use of world’s resources for sustainable development.
- To promote an integrated, more viable and durable trading system.
Functions of WTO:
- Promoting an environment which is encouraging to its member countries to come forward to WTO to mitigate their grievances.
- Laying down a commonly acceptable code of conduct which helps in lowering the trade barrier and stopping discriminating practices in international trade relations.
- Acting as a disputes settlement body.
- Ensuring that all the rules and regulations are followed by member countries while settling their disputes.
- Holding consultations with IMF and IBRD to bring better understanding and cooperation in global economic policy making.
- Supervising on a regular basis the operations of the revised Agreements and Ministerial declarations relating to goods, services and Trade Related Intellectual Property Rights (TRIPS).