What is International Trade?

International trade can be defined as either the buying (importing) or selling (exporting) of goods or services on a global basis. Thanks in great measure to the Internet, many starting businesses can enrich their prospects of success by incorporating IT into their overall business plan. In some cases, a business can be enhanced by incorporating IT marketing to supplement a domestic operation. In other cases, a business can depend solely on international trade. Lets review some examples: Exporting Quality Naturally Foods, Inc., in the City of Industry, California, manufactures prepared bakery mixes for its sister companies Yum Yum Donuts and Winchell Donuts. These and similar mixes are now sold to outlets in Japan. The added volume has reduced costs of production which has benefited all customers. Amazon.com, the preeminent online marketer (and inspiration for thousands of online entrepreneurs) has a home page toolbar called International. Amazon says: Around the World, wherever you are, get what you wantfastfrom our family of Web sites.

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Importing Good Tables, Inc. of Carson, California, formerly manufactured furniture in its California plant but was losing sales due to cheaper foreign made products. The manufacturing was moved to Mexico in a maquiladoras factory. Funrise, Inc. Woodland Hills, California, has become a world leading marketer of toys. Design, packaging and production are outsourced, primary to vendors in China. Hollow Corporations International trade is especially appropriate for the rapidly growing number of hollow corporations. Session one of this course refers to a hollow corporation as a business without a factory and with a minimum number of employees in which manufacturing is performed by outside suppliers. A hollow corporation might depend on outside suppliers for virtually all of its products, such as an American toy company importing product from China. Or, it might depend on outside suppliers for selected components in its overall product line, such as The Boeing Company. (Boeing is using Japanese firms for components of the new 787 airliner.)

Is International Trade Appropriate for Small Businesses?

The answer is definitely yes! According to the U.S. Department of Commerce, big companies make up about 4 % of U.S. Exports. Which means that 96% of exporters are small companies. Why is international trade so important to starting small businesses? In some cases the products or services you may wish to market are not available or made in your home country. For example, think about selling cashmere sweaters. You may need to become an importer in order to compete with imported products sold by your competitors. International trade is enormously beneficial for entrepreneurs and enables producers of goods and services to move beyond the U.S. market of 280 million people to the world market of 6.2 billion. While international trade accounted for 5% of U.S. economic growth in 1950, today it has become an integral part of business, accounting for more than 25% in 2002. For many small companies importing and exporting is becoming an essential cornerstone in achieving success, yet it requires knowledge of business disciplines far beyond the basic dos and donts of operating a domestic business.

Advantages and Disadvantages of International Trade Advantages to consider:

y y y y y y y y y y

Enhance your domestic competitiveness Increase sales and profits Gain your global market share Reduce dependence on existing markets Exploit international trade technology Extend sales potential of existing products Stabilize seasonal market fluctuations Enhance potential for expansion of your business Sell excess production capacity Maintain cost competitiveness in your domestic market

Disadvantages to keep in mind:

y y y y y You may need to wait for long-term gains Hire staff to launch international trading Modify your product or packaging Develop new promotional material Incur added administrative costs

y y y y

Dedicate personnel for traveling Wait long for payments Apply for additional financing Deal with special licenses and regulations

Online Resources
Since international trade necessarily requires interaction with governmental agencies, and most all governments wish to expand their country's role in international trade, entrepreneurs can look to governments themselves for a great deal of information. The U.S. government provides many valuable resources of information and these will be generously referred to in this session. The U.S. Small Business Administration offers aid to small international businesses through two major programs: business development assistance and financial assistance. Our first recommended resource is therefore the U.S. Small Business Administrations Office of International Trade. The SBA Web sitewww.sba.gov/oit is the place to begin. Resources are offered in four building blocks: Education, Technical Assistance, Risk Management, and Finance.

y y y y

General export information and development assistance including legal assistance. Small Business Guide to Exporting. An online trade mission: a search engine for foreign firms and U.S. businesses seeking partners or suppliers. Seewww.sba.gov/aboutsba/sbaprograms/internationaltrade/tmonline/index.html. Information on export financing.

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Other valuable resources from the U.S. government include y y The Department of Commerce Web site www.commerce.gov furnishes trade opportunities for U.S. Business and export related assistance and market information. The U.S. Government Export Portal www.export.gov provides online trade resources and one-onone assistance for your international business.

The International Trade Administration (ITA) www.ita.doc.gov offers market information, trade leads and overseas business contacts. Trade professionals can assist you every step of the way with information counseling that reduce the cost, risk and mystery of exporting. Counterfeiting and Piracy cost the world economy approximately $650 billion per year. You can find articles and initiatives about protecting your Intellectual Property abroad at www.stopfakes.gov as well as toolkits for Brazil, China, Korea, Malaysia, Mexico Peru, Russia and Taiwan.

Here are some non-governmental resources to expand your knowledge about international trade: y Search engines such as Google or Yahoo www.google.com or www.yahoo.com provide a huge database of information (type in international trade) that will require selectivity to retrieve the most helpful information. The Federation of International Trade Associations www.fita.org provides portals to trade leads, market research, a global trade shop and even a job bank. www.worldbid.com is a large network of international trade market places, providing trade leads and new business contacts. A large database of suppliers can be found at www.alibaba.com. Users can either find suppliers or sell products. www.wand.com is a business to business center matching buyers and sellers in most all industries throughout the world. www.openentry.com - Catalog authoring tool for e-commerce.

y y y y y

Common Mistakes Made in International Trade

A detailed guide on international trade can be found in Exporting, Importing and E-Commerce by Sharon T. Freeman, Ph.D., President of the All American Small Business Exporters Association. Another book of interest would be Conversations With Women Who Export. Following is a condensed version of Dr. Freemans how-to guide in avoiding the ten common export start-up mistakes Common Export Mistakes 1. Failure to obtain qualified export counseling and to develop a master international marketing plan before starting an export business. 2. Insufficient commitment by top management to exporting. Solutions Obtain Export Counseling

Determine Export Readiness

3. Failure to have a solid agent/distributors agreement Understand Agent/Distributor Contracts 4. Blindly chasing E-orders from around the world. 5. Failure to understand the connection between country risk and securing export financing. 6. Failure to understand Intellectual Property Rights 7. Insufficient attention to marketing and advertising requirements. 8 . Lack of attention to product preparation needs. 9. Failure to consider legal aspects of going global. 10. Failure to know the rules of trade. Avoid Accidental Exporting Understand Export Financing

Understand Intellectual Property Rights (IPR) Pay Attention to Overseas Marketing and Advertising Pay Attention to Product Preparation Requirements Understand Licensing and Joint Ventures Understand Export Regulations

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1. Failure to obtain export counseling and to develop a master international marketing plan before starting an export business.
Utilize Government and Association Resources for Export Counseling: It is also important for new exporters to seek legal counsel. Hire a Lawyer to Help You Structure Your Export Operations for the Long Run:Lawyers are concerned with issues of compliance on both ends of the transaction, therefore they are instrumental in helping you to make sure that your recordkeeping system is planned correctly, that your legal documents are structured correctly, and to advise you on a broad range of compliance issues before the sale, during the sale, and after the sale.

2. Insufficient commitment to overcome the initial difficulties and financial requirements of exporting.

To be successful in exporting, firms have to establish an export department to which they dedicate personnel and a budget, and for which they develop appropriate procedures, preferably in consultation with a qualified trade lawyer. A recommended resource for helping firms to assess their readiness to export is cited below: Michigan State Universitys Center for International Business Education and ResearchCIBER: MSU has an Export Academy that has developed a state-of-the-art system to assess export readiness. Called CORE V, it is a Windows-based managerial tool for self-assessment of organizational readiness to export. (See www.ciber.bus.msu.edu/dss).

3. Failure to have a solid agent and or distributors agreement.

Firms that intend to enter and to expand in exporting will likely need an agent or distributor at some point. Key considerations include Understanding the Role of Agents: The NTDB Web site at (www.stat-USA.gov) provides information on agents and distributors. As explained on this Web site, agents receive commission on their sales rather than buying and selling for their own account. As agents do not own the products they sell, the risk of loss remains with the company the agent represents (the principal). Understanding the Role of Distributors: The key legal distinctions between an agent and distributor are y y A distributor takes title to the goods and accepts the risk of loss. A distributor makes profits by reselling the goods. Distributors cannot contractually bind the company producing the goods.

Distributors establish the price and sales terms of the goods.

Contract Drafting Considerations for Agent/Distributor Agreements: The first and most important consideration when drafting an agreement is to ensure that the agreement clearly states whether there is an agent or a distributor relationship. The agreement should also clarify the terms and conditions for selling the products. For example: y y y y y y y y y y Determine whether the relationship is exclusive versus non-exclusive. Specify which geographic regions are to be covered. Outline issues of payment and payment schedules for the products (in the case of a distributor) and for payments of commissions (in the case of agents). Determine the currency in which payments are to be made and address currency fluctuation issues. Provide specific provisions regarding renewal of the agreement, including specific parameters for performance, promotional activity and notice of desire to renew. Establish a specific provision for termination of the agreement and terms for such termination. (Some foreign countries restrict or prohibit termination without just cause or compensation.) Outline the termination process for the end of the agreement period. Provide for workable and acceptable dispute settlement clauses. Assure that the agreement addresses whether or not intellectual property rights are being licensed or reserved. Do not allow, without sellers consent, the contract to be assigned to another party (sub-agents or sub-distributors) to be used to fulfill obligations in the contract or the contract to be transferred with a change of ownership or control over the agent/distributor. Assure that your contract complies with both U.S. and foreign laws.

The Commercial Service of the Commerce Department provides a service to identify qualified agents, distributors, and representatives for U.S. firms. For each Agent/Distributor Service, (www.ita.doc.gov/cs/) Commercial officers abroad identify up to six foreign prospects that have examined the U.S. firm's product literature and expressed interest in representing the U.S. firm's products.

4. Blindly chasing orders from around the world

You may be in your office when suddenly and unexpectedly someone from a foreign country contacts you electronically and wants to buy a line of your products. What do you do next? Make sure the order is not on the denied list: Go to the Bureau of Industry and Securitys Web site to view the entire list of denied orders (www.bis.doc.gov/dpl/default.shtm). Business considerations in checking out the firm making the inquiry: Make sure the opportunity is a reasonable one and involves something that can reasonably be handled by your firm, without spending

countless hours researching the requirement. The Department of Commerce Commercial Service has a number of services to assist you. y y International Company Profile (ICP) The ICP service, referred to earlier, helps firms investigate the reliability of prospective trading partners. Country Directories of International Contacts (CDIC)Provides the name and contact information for directories of importers, agents, trade associations, government agencies, etc., on a countryby-country basis. The information is available on the National Trade Data Bank.

Competitive considerations in checking out the market for the product: By reviewing industry sector information, firms can obtain useful data to assess the probability that the inquiry they are investigating is real. One resource that may be helpful is the Department of Commerce, Commercial Services Industry Sector.

The U.S. Department of Commerces Commercial Service Officers are a valuable resource for information about firms overseas. Access this service to learn if a particular deal sounds legitimate and whether the agency has any information on the firm making the inquiry. For the e-mail addresses of Commercial Service Offices go to www.export.gov/eac/index.asp.

5. Failure to understand the connection between country risk and the probability of getting export financing.
The best source of information about whether a country is in good standing with the U.S. is the U.S. Export-Import Banks Country Limitation Schedule. (www.exim.gov). Access the Export Financing Options: The SBA, ExIm, and the Agriculture Department are three of the biggest providers of export financing in the federal government. A list of the strategic banking partners of the ExIm and SBA export financing and credit insurance programs can be obtained from ExIm and SBA. Check out SBAs Export Financing Products: The SBAs Export Working Capital Program (EWCP) provides short-term working capital for up to one year. Consult the ExIms Export Financing Products: The ExIms Working Capital Guarantee Program allows commercial lenders to make working capital loans to U.S. exporters for various export-related activities by substantially reducing the risks associated with these loans. Access ExIms Export Credit Insurance: The Export Credit Insurance program provides protection against losses associated with foreign buyers or other foreign debtor default for political or commercial reasons.

6. Failure to understand Intellectual Property Rights (IPR).

Intellectual property rights refer to the legal system that protects patents, trademarks, copyrights, trade secrets. It is important for exporters to understand how and whether intellectual property rights are protected in different countries. See the U.S. Department of Commerces Legal Counsel Web site at: (www.ita.doc.gov/legal).

7. Insufficient attention to marketing and advertising requirements.

Key considerations include Trade Shows and Trade Missions: Trade shows and missions may be in the virtual form or entail traveling to the foreign country. All Department of Commerce-sponsored shows and trade missions are listed in the Export Promotion Calendar, available on the TIC Web site; the NTDB or by mail from a TIC trade specialist. Information is also usually posted on the Internet pages for industry offices accessible from the International Trade Administration (www.ita.doc.gov). For an additional source of information on upcoming trade shows visit the Internet Web site for Trade Show Central (www.tsnn.com)or the Trade Show Center (tradeshow.globalsources.com) Web site which lists trade shows around the world. Advertising: Exporters can advertise U.S.-made products or services in Commercial News USA, a catalog-magazine published 10 times a year to promote U.S. products and services in overseas markets. Commercial News USA is disseminated to business readers worldwide via U.S. embassies and consulates and international electronic bulletin boards, and selected portions are also reprinted in certain newsletters. U.S. Pavilions: About eighty to one hundred worldwide trade fairs are selected annually by the Commerce Department for recruitment of a USA pavilion. Selection priority is given to events in viable markets that are suitable for new-to-export or new-to-market, "export ready" firms.

8. Lack of attention to product adaptation and preparation needs

The selection and preparation of a firms product for export requires not only knowledge of the product, but also knowledge of the unique characteristics of each market being targeted. Key considerations include Product Adaptation to standards requirements: As tariff barriers (tariffs, duties, and quotas) are eliminated around the world in accordance with the requirements of participation in the World Trade Organization (WTO), other non-tariff barriers, such as product standards, are proliferating. Exporters must understand conformity requirements to operate on an international basis. The DOCs National Center for Standards and Certification Information (NCSCI) provides information on U.S. and foreign conformity assessment procedures and standards for non-agricultural products. You can visit their Web site by going to ts.nist.gov. Product Engineering and Redesign: The factors that may necessitate re-engineering or redesign of U.S. products may include differences in electrical and measurement systems. Branding, Labeling and Packaging: Cultural considerations and customs may influence branding, labeling and package considerations. y y y y y Are certain colors used on labels and packages attractive or offensive? Do labels have to be in the local language? Must each item be labeled individually? Must each item be labeled individually? Are name brands important?

Installation: Another important element of product preparation is to ensure that the product can be easily installed in the foreign location. Importers and exporters need to know they may also consider providing training or providing manuals that have been translated into the local language along with the product. Warranties: In order to compete with competitors in the market, firms may have to include warranties on their products. Servicing: The service that U.S. companies provide for their products is of concern to foreign consumers. Foreign consumers want to know whether they can access spare parts, technicians who can service the product, and distributors of the products in their countries.

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9. Failure to obtain legal advice

While it is virtually impossible for any firm, no matter how big or small, to know all of the laws that pertain to exporting from the U.S., as well as the relevant laws of other countries, there are measures that can be taken by firms in the planning process to minimize the probability that they will make unnecessary errors that have grave legal consequences. Some of the measures that can be taken in the planning process are Utilize SBAs ELAN service: Under the Export Legal Assistance Network (ELAN), your local SBA office can arrange a free initial consultation with an attorney to discuss international trade questions. Consult the Commerce/ITA Legal Web page: the DOC, International Trade Administrations (ITA) legal Web site: (www.ita.doc.gov/legal/)

10. Failure to understand export licensing requirements.

Businesses that are new to the export arena may confuse the local and state rules regarding business taxes, zoning and other issues, i.e., legal registrations, with the federal requirements governing export licenses. In order to export an item that may be on the restricted list, an export license is required. This allows the federal government to control the export of the goods. The license is not required for every item exported.

The U.S. Department of Commerce Bureau of Export Administration (BXA) is the primary licensing agency for dual-use exports (commercial items that could have military applications). The first step in determining your license requirements is to classify your product using the Commerce Control List (CCL). Once the products classification is determined, the following five questions will determine your obligations under the EAR: y y y y y What is the item you intend to export or re-export? Where is it going? Who will receive it? What will they do with it? What are the recipient's other activities?

Importance of a Business Plan for International Trade

Once your decision is made to export or import, it is important that your overall business plan includes provisions for international trade. A downloadable template for this purpose is furnished at the end of this session.

Suggested Activities:
1. Make a list of your potential competitors and make a tabulation of their principal products or services. Determine the county of origin of each product or service. Determine the cost of each product or service. 2. Evaluate your own capabilities to compete with these products or services.

Top Ten Do's and Don'ts

TOP TEN DO'S

Print this Top Ten List

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Take international trade classes at the college level. Visit trade shows and trade missions. See www.tsnn.com. Join an international trade association specializing in your business. Personally visit your offshore suppliers (or customers). Take advantage of online resources such as www.sba.gov/oit. Inspect and approve merchandise before it is shipped. Consider hiring an international trade consultant. Become personally familiar with all monetary transactions. Use a trade lawyer for agent and distributor agreements and licensing requirements. To begin, start on a very small scale.

TOP TEN DON'TS

1. Investigate the potential opportunities and benefits of international trade.

2. 3. 4. 5. 6. 7. 8. 9. 10. Rely on a single source of supply (or customer). Have an understanding of intellectual property rights. Have an understanding of import/export financing. Learn how your best competitors are handling international trade. Provide dispute settlement provisions. Make assumptions as to vendor's compliance with your specifications. Check out your suppliers/customers before establishing relationship. Rely on handshake agreements. Rely solely on others including employees for importing/exporting expertise.

advantages nternational trade has flourished over the years due to the many benefits it has offered to different countries across the globe. International trade is the exchange of services, goods, and capital among various countries and regions, without much hindrance. The international trade accounts for a good part of a countrys gross domestic product. It is also one of important sources of revenue for a developing country. With the help of modern production techniques, highly advanced transportation systems, transnational corporations, outsourcing of manufacturing and services, and rapid industrialization, the international trade system is growing and spreading very fast. International trade among different countries is not a new a concept. History suggests that in the past there where several instances of international trade. Traders used to transport silk, and spices through the Silk Route in the 14th and 15th century. In the 1700s fast sailing ships called Clippers, with special crew, used to transport tea from China, and spices from Dutch East Indies to different European countries. The economic, political, and social significance of international trade has been theorized in the Industrial Age. The rise in the international trade is essential for the growth of globalization. The restrictions to international trade would limit the nations to the

services and goods produced within its territories, and they would lose out on the valuable revenue from the global trade. The benefits of international trade have been the major drivers of growth for the last half of the 20th century. Nations with strong international trade have become prosperous and have the power to control the world economy. The global trade can become one of the major contributors to the reduction of poverty. David Ricardo, a classical economist, in his principle of comparative advantage explained how trade can benefit all parties such as individuals, companies, and countries involved in it, as long as goods are produced with different relative costs. The net benefits from such activity are called gains from trade. This is one of the most important concepts in international trade. Adam Smith, another classical economist, with the use of principle of absolute advantage demonstrated that a country could benefit from trade, if it has the least absolute cost of production of goods, i.e. per unit input yields a higher volume of output. According to the principle of comparative advantage, benefits of trade are dependent on the opportunity cost of production. The opportunity cost of production of goods is the amount of production of one good reduced, to increase production of another good by one unit. A country with no absolute advantage in any product, i.e. the country is not the most competent producer for any goods, can still be benefited from focusing on export of goods for which it has the least opportunity cost of production. Benefits of International Trade can be reaped further, if there is a considerable decrease in barriers to trade in agriculture and manufactured goods. Some important benefits of International Trade
y y y y y y y y y

Enhances the domestic competitiveness Takes advantage of international trade technology Increase sales and profits Extend sales potential of the existing products Maintain cost competitiveness in your domestic market Enhance potential for expansion of your business Gains a global market share Reduce dependence on existing markets Stabilize seasonal market fluctuations

In international economics and international trade, terms of trade or TOT is (Price Exports)/(Price Imports). In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it can buy more imports for any given level of exports. The terms of trade is not affected by the exchange rate because a rise in the value of a country's currency simultaneously lowers domestic prices for both imports and exports.
Contents
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1 The term 2 Two country model CIE economics 3 Multi-commodity multi-country model 4 Limitations 5 See also 6 References

[edit]The

term

"Terms of trade" takes a plural form. However, it is a single number that represents the ratio of the relative prices.
[edit]Two

country model CIE economics

In the simplified case of two countries and two commodities, terms of trade is defined as the ratio of the total export revenue[clarification needed] a country receives for its export commodity to the total import revenue it pays for its import commodity. In this case the imports of one country are the exports of the other country. For example, if a country exports 50 dollars worth of product in exchange for 100 dollars worth of imported product, that country's terms of trade are 50/100 = 0.5. The terms of trade for the other country must be the reciprocal (100/50 = 2). When this number is falling, the country is said to have "deteriorating terms of

trade". If multiplied by 100, these calculations can be expressed as a percentage (50% and 200% respectively). If a country's terms of trade fall from say 100% to 70% (from 1.0 to 0.7), it has experienced a 30% deterioration in its terms of trade. When doing longitudinal (time series) calculations, it is common to set a value for the base year[citation needed] to make interpretation of the results easier. In basic Microeconomics, the terms of trade are usually set in the interval between the opportunity costs for the production of a given good of two countries. Terms of trade is the ratio of a country's export price index to its import price index, multiplied by 100
[edit]Multi-commodity

multi-country model

In the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyres index. In this case, a nation's terms of trade is the ratio of the Laspeyre price index of exports to the Laspeyre price index of imports. The Laspeyre export index is the current value of the base period exports divided by the base period value of the base period exports. Similarly, the Laspeyres import index is the current value of the base period imports divided by the base period value of the base period imports.

Where

price of exports in the current period

quantity of exports in the base period

price of exports in the base period

price of imports in the current period

quantity of imports in the base period

price of imports in the base period Basically: Export Price Over Import price times 100 If the percentage is over 100% then your economy is doing well (Capital Accumulation) If the percentage is under 100% then your economy is not going well (More money going out than coming in)
[edit]Limitations

Terms of trade should not be used as synonymous with social welfare, or even Pareto economic welfare. Terms of trade calculations do not tell us about the volume of the countries' exports, only relative changes between countries. To understand how a country's social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows. In the real world of over 200 nations trading hundreds of thousands of products, terms of

trade calculations can get very complex. Thus, the possibility of errors is significant.
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