O Level Revision : Commerce - International Trade
Countries differ in their demand for goods and services and in their ability to produce them. Further, factors of production are unevenly distributed globally. Hence countries import and export goods and services to meet their needs.
One country’s imports become another’s exports and vice versa. Buying and selling of goods and services among countries of the world develop and flourish. Trade patterns are created at international level.
Importance of international trade
- Consumers have access to goods and services not produced in their countries.
- Goods of high quality are brought into the market.
- Home produced goods have ready markets at home and abroad.
- Countries can specialise in production of goods in large quantities at low prices.
- Creates employment.
- A variety of goods is available on the market.
- Trading with other countries creates friendship and understanding among nations
Why trade increases
- Mechanisation
- Use of machinery in primary, secondary and tertiary sectors results in increased production of goods.
- Increased production calls for mass distribution of goods to consumers at home and abroad.
- New technologies
- Researches have resulted in increased sources of raw materials and production
of finished goods.
- Raw materials and finished goods are easily distributed to consumers.
- Communication improvements
- The emergence of computers, landline and mobile phones, Facebook, and
WhatsApp has promoted fast contacts among traders globally.
- Transport management
- Improved transport systems cause fast distribution of goods and services.
- Large, fast ships and planes carry specialised, bulky goods.
- Increased airlines carry traders and goods fast.
- Increased road networks result in goods being carried to remotest areas.
- Improved standard of living
- Demand for basic life accessories and gadgets, e.g. computers, satellite dishes, WiFi, increase trade at home and abroad.
- International banking system
- Facilitates payment in foreign trade by facilitating currency exchange.
- Importers use letters of credit to speedily get imports.
- Exporters use shipping documents, letters of credit, and bills of lading to get immediate payment from the banks.
- Visa electronic card holders access money at internationally recognised banks.
- Governments
- Open trade missions abroad.
- Set international trade fairs.
- Offer credit guarantee insurance to cover against loss due to political, economic, social, technological, legal and environmental (PESTLE) changes at home and abroad.
- Join common markets e.g. COMESA, ECOWAS, SADC.
- IMF efforts
- Maintain stability in currency exchange rates to promote international trade.
- Cushion against high, frequent and unprecedented currency exchange rates to encourage trade.
- Make available Special Drawing Rights to facilitate the settlement of internal indebtedness among countries.
Barriers to trade
- Political
- Countries boycott other countries` goods and services.
- Some countries impose sanctions on others.
- Economic
- Impose high import duties.
- Impose strict quotas on exports and imports.
- Enforce exchange control regulations.
- Language
- At least two foreign languages are involved.
- Must be translated in the importer`s language.
- Instructions should be in both the importer and exporter`s languages.
- Information on markets
- Difficult to access.
- Costly on internet.
- Social standards
- Tastes, culture and social status differ.
- Imports are restricted on cultural basis.
- Measurement
- Weights, measures and sizes differ .e.g. shoe sizes are 7 or 41, 7.5 or 42.
- Payment
- Delays in payment.
- Risk of non-payment.
- Shortage of foreign currency.
- Documentation
- More than one document required.
- Documents become proof of ownership, of goods on carriage.
- Currencies
- Different currencies used.
- Must be exchanged at banks.
- Exchange rates fluctuate.
- Distances
- Exporters and importers are long distances apart.
- Distances are risky.
- Insurance costs are high.
- Cumbersome entry and exit procedures at borders.
- Passports and visas are a must at borders.
Ways to promote export trade
- Market research to determine:
- the market for the products;
- suitability of products for the market;
- standard of living of the people; and
- religion and tastes of the people.
- Export intelligence department of trade
- Provides information on prospective importers to exporters.
- Promotes goods through trade fairs.
- Encourages overseas firms to visit exporters.
- Export Credit Guarantee Department (ECGD) insures risks against non- payment resulting from wars and exchange control changes.
- Banks
- Obtain information about overseas markets.
- Obtain information about financial standing of importers.
- Arrange documentary credit for importers in favour of exporters.
- International trade fairs
- Trade fairs are held in different countries.
- Locals and foreigners display their products.
- Businesses place orders for the displayed products.
- Producers make, sell or order goods.
- The Zimbabwe International Trade Fair (ZITF), which is held annually promotes trade by:
- creating a forum for business information exchange through seminars, print
and electronic media
- marketing local communities abroad
- causing local and foreign producers to exhibit at trade fairs
- offering consultancy to producers and buyers of goods
- Trading blocs
- Two or more countries remove trade restrictions among themselves.
- Form a common market or trading bloc.
- Blocs are formed to:
- promote free trade
- reduce and relax tariff barriers
- facilitate payment arrangements
- create favourable credit facilities
- ease movement of goods in the region
- promote trade and economic development in the region
- Common Market for East and Southern Africa (COMESA) and Southern
African Development Community (SADC) are some of the trading blocs.
Agents in foreign trade
- The export agents
- Act as agents for foreign buyers.
- Buy the goods and pay the producers promptly.
- Are experts in foreign markets and on procedures of exporting goods.
- Give credit to overseas importers.
- The import agents
- Are agents of overseas exporters.
- Earn a commission by selling the exporter’s products at the best price.
- Del credere agents
- Guarantee to find a buyer for the exporter’s products.
- Earn an extra commission.
- Factors
- Possess the goods in which they deal.
- Can sell the goods in their own name.
- Earn commission on sales.
- Can decide the best price for the goods they deal in.
- Forwarding agents
- Offer advice on transport facilities available.
- Undertake transport documentation.
- Arrange for the collection of goods from manufacturers.
- Advise on import and export formalities.
- Arrange warehousing for the product.
- Ensure delivery of goods to the customer.
Documents used in international trade
- Documents in foreign trade are used to:
- compile balance of payments statistics
- determine the pattern of trade
- determine the duty payable
- enable the importer to collect the goods
- show proof that the goods have been exported
- Bill of lading
- The shipping company provides the bill of lading and the exporter completes it.
- It is used when goods are exported by sea.
- A bill of lading is:
- an agreement or contract for the carriage of goods on board a vessel
- a document of title or proof of ownership of the goods
- transferrable to another person
- an acknowledgement of the receipt of goods on board
- It shows/contains:
- the name of the shipping company
- the name of the ship or vessel
- port of loading
- details of goods
- the names and addresses of exporter and importer
- the freight charges
- the marks on the crates, if any
- calculated value of the goods
- terms of carriage
- The shipmaster signs the three copies of the bill of lading and retains a copy.
- The exporter keeps the second copy and sends the third copy by air to the importer.
- Bill of exchange
- Drafted and issued by creditor i.e. seller or exporter.
- Accepted and signed by debtor i.e. buyer or importer.
- Payable in three months, a specified sum of money to the creditor or order of specified person or bearer.
- Is a negotiable instrument i.e. transferable from one party to another.
- Debt is paid when the bill matures.
- It can be endorsed and transferred to own creditor and settle own debts.
- Can be discounted with discount houses to obtain immediate payment.
- Cable transfer
- A form of remittance that requires the use of certified telegrams or cables.
- Is an order to pay in telegraphic form.
- Is used by banks and large commercial concerns in various exchange markets of the world.
- Is a safe and fast form of remittance.
- Is expensive to use.
- Documentary credit
- Issued, and guaranteeing payment, by the bank of the importer
- Is addressed to exporter of goods.
- Exporter adheres to terms of credit, surrenders to the importer`s bank documents e.g. bill of lading on goods imported.
- Can be irrevocable and confirmed i.e. the bank must pay.
- Can be revocable i.e. the bank has the right to refuse payment.
- Airway bill
- Is used when goods are sent by air.
- Is prepared in triplicate i.e. copies for exporter, airline and importer.
- Is not a document of title.
- Is evidence of a contract of carriage of goods.
- Indent
- Raised by importer.
- An order for goods from abroad.
- Sent to a buying agent in the exporting country.
- Gives details of goods i.e. prices, shipping marks, shipment, etc.
- Exporter orders the goods from any producer in an open indent, or orders
specific goods of known quantities at known prices from a specific firm.
- Dock warrant
- Is a receipt of acknowledgement of goods stored in the bonded warehouse.
- It is negotiable after endorsement.
- Is a document of title.
- Is proof of ownership of goods.
- Consular invoice
- The consul of the importing country, who is resident in the exporting country,
certifies as correct the prices quoted on the invoices.
- Customs duties are levied on the certified prices of goods.
- Copies of consular invoice are sent to the exporter and importer’s customs
authorities.
- Export invoice
- Contains:
- the names and addresses of exporter and importer
- description of goods
- quantity of goods
- amount of freight charges
- amount of insurance charges
- total amount payable
- Certificate of origin
- Shows the producer or manufacturer’s country.
- Is signed by the consul of the importing country resident in the exporting country.
- 1 Import licence
- Shows that the importer’s government allows the importation of the goods and
that foreign currency to pay for the goods will be available.
- Customs specification and entry
- Details of imports and exports must be sent to customs authorities to enable them to assess duties payable and obtain information for balance of payments statistics.
- A customs entry and a customs specification is completed for imports and
exports respectively.
- Charter party
- States terms of contract to hire a named ship.
- Used when a whole ship is chartered for a period of time, i.e. time charter, or for a particular voyage i.e. voyage charter.
- Ship hired to carry bulky goods like coal, iron or timber that fill a whole ship.
- Terms of contract include:
- names of parties to the agreement; name of vessel and its officer
- length and name of port of destination
- total freight payable by charterer i.e. by weight of cargo for a voyage
- tonnage of ship for the time charter
- the number of lay days for loading and unloading allowed
- the number of days on demurrage allowed and state of additional fee
payable for exceeding agreed lay days
- subletting terms of the charter
- A demise charter shows that the care and maintenance of the ships, officers and
crew are inclusive of the charter.
Functions of Customs and Excise Authorities
- Collect import duties
- Customs duties or taxes are levied by government on imported goods and collected by Customs with a view to:
- raising revenue
- saving foreign currency by restricting imports
- protecting home industries from foreign competition
- helping the balance of payments
- maintaining full employment in home industries e.g. agriculture
- preventing dumping of foreign surplus goods
- The imposition of customs duties on imports:
- reduces the volume of trade
- makes foreign goods more expensive
- leads to a fall in imports
- reduces the availability of variety and quality goods
- leads to shortages of goods and services
- may lead to smuggling
- protects home industries
- might lead to production of shoddy goods
- may lead to retaliation by other countries
- Keep statistical records of imports and exports
- The customs authorities compile statistics on quantities, values, destination of exports and sources of imports.
- The records of imports and exports:
- show the Government the pattern of trade
- reflect the movement of goods with individual countries
- enable the calculation of the balance of trade
- allow for corrective action to be effected
- Enforce quotas
- Quotas are imposed to:
- protect the local industry from foreign competition
- limit quantities of specific imports
- reduce competition with the locally produced goods
- Control bonded warehouses
- Control/monitor bonded warehouses to ensure that:
- dutiable imports are stored until duty on them has been paid.
- dutiable imports meant for re-export are stored to avoid the payment of duty upon entry and exit. If duty on re-exports has been paid, the importer can claim a refund known as customs drawback.
- Safeguard public health
- Sanitise border entry points.
- Inspect food entry at border.
- Check and control animal infectious diseases.
- Organise quarantines for animals.
- Prevent contraband and evasion of duty
- ‘Police’ all points of entry into the country.
- Check and prevent contraband or prohibited imports e.g. dangerous drugs from entering the country illegally.
- Prevent dutiable imports or exports entering or exiting the country without payment of duty.
- Get State revenue which otherwise might be lost through illegal transactions.
Export duty
- Is levied on locally produced goods for export to:
- raise revenue
- reduce inflationary effects on the economy when export prices rise
- prevent any shortage of basic items e.g. fruits
- reserve goods for local market or consumption
Import duty
- Is duty levied on imports to:
- raise revenue
- protect local industry
- make imports more expensive
- reduce demand for imports
- correct balance of trade deficit
- reduce and discourage consumption of some imports e.g. liquor
- protect health and moral values e.g. drugs ,cosmetics, videos, …
- fight back trade barriers on its exports
Excise duty
- Is tax on locally produced goods, such as liquor, tobacco, beef, sugar intended for home market, to:
- raise revenue
- discourage local consumption
- protect health and moral values
- reserve for export market
Balance of payments (BOP)
- The balance of payments is the difference between total earnings on both visible and invisible items and total expenses on both visible and invisible items.
Visible trade balance
- Visible trade involves the import and export of tangibles (goods) like tea, steel and clothes.
- The difference between visible exports and visible imports is the visible balance of trade.
Invisible trade balance
- Invisible trade includes imports and exports of intangibles (services) like tourism,
interests, profits, dividends, aviation and government services.
- For example, Zimbabwe’s embassy in Zambia is an invisible import because Zimbabwean staff are paid salaries by the Zimbabwean government and that money is spent in Zambia.
Deficit and surplus on balance of payments
- A balance deficit results if the expenditure on imports is greater than the receipts on
exports.
- A balance of payments surplus results if exports are more than imports.
Exchange rate
- Expresses the value of one currency against other currencies.
- Is determined by supply and demand of goods and services, and the subsequent supply and demand of the currencies to buy or sell the goods and services.
- Rates may be fixed or pegged, or floating.
- The exchange rates vary continually as a result of the changes in the demand and supply of the goods and services.
Terms of trade
- The terms of trade denote the rate at which exports exchange for imports. The numerical value of terms of trade may be calculated thus;
Terms of Trade = index of export prices x 100 index of import prices
- The importance of the terms of trade numerical values:
- a base year might show 100 for both the export index and import index
- the terms of trade factor will be 100
- an index of 100 and above shows favourable terms of trade. Imports are cheaper
than exports.
- an index of less than 100 shows a fall in terms of trade. Exports are cheaper than
imports.
Correcting an unfavourable balance of payments
- A country can draw on its gold and foreign currency reserves.
- Borrowing from financial institutions such as the African Development Bank,
International Monetary Fund and World Bank.
- Setting quotas on imports.
- Reducing government expenditure on imports.
- Depreciating or devaluing the local currency.
- Imposing tariffs or import duties.
Multiple choice questions
For questions 1 to 3 refer to trade figures for Country Y below.
The following are trade figures for country Y in 2014 in $m
Visible exports 7 000
Visible imports 8 000
Invisible exports 2 000
Invisible imports 500
- Country Y’s balance of trade was
- (1 000) B. 500
- 1 000 D. 2 500
- Country Y’s balance of payments was
- 15 000 B. 1 500
- 1 000 D. 500
- Which is an invisible import for Country Y?
- Dividends on shares from overseas companies.
- Expenditure on embassies overseas.
- Maize exports overseas.
- Investments to overseas.
- An exporter in the Republic of South Africa sent goods worth R100 to an importer in the United States of America. The exchange rate was $1 to R10. The invoice showed
- $1000 B. $110
- $90 D. $10
Use the following information to answer questions 5 to 7.
The foreign exchange rate of the Mozambican meticais was quoted as: Botswana Pula P 0,69
British Pound Sterling £ 0,19
Malawi Kwacha MK 1,02
Zambia Kwacha ZK1,20
- The Mozambican meticais had more buying value than the
- Pula and Pound Sterling.
- Kwacha MK and Kwacha ZK.
- Kwacha MK and Pula.
- Kwacha ZK and Pound Sterling.
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- Which country had the strongest currency?
7.
Study the graph showing country D’s export and import figures (in $100m) between
2001and 2005 and answer questions 8 to10.
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900
800
700
600
500
400
300
200
100
0
Imports
Exports
- In which years did country D experience deficit balances of trade?
- 2001, 2002 and 2003 B. 2003, 2004 and 2005
- 2002, 2004 and 2005 D. 2001, 2003 and 2004
- When did country D experience the largest deficit in its balance of trade?
- 2001 B. 2002
- 2003 D. 2004
- In 2001 the balance of trade was
- a deficit. B. favourable.
- a surplus. D. unfavourable.
- 1 Countries trade to
(i) earn foreign currency.
(ii) get varieties of products. (iii) increase migrations.
- (i) and (ii) B. (i) and (iii)
- (ii) and (iii) D. (i), (ii) and (iii)
- A country might correct a balance of payments deficit by increasing
- government expenditure on exports.
- imports and reducing exports.
- imports and customs duties on basic capital goods.
- home demand for consumer imports.
- An indent is
- raised by importer.
- a document of title.
- an order for goods raised by exporter.
- a temporary receipt of goods on board a vessel.
- The bill of lading
(i) acts as an advice note.
(ii) acts as a receipt of goods on board a ship.
(iii) is evidence of a contract of carriage between the ship owner and exporter.
- (i) and (ii) B. (i) and (iii)
- (ii) and (iii) D. (i), (ii) and (iii)
Essay questions
- Distinguish between a bill of lading and an airway bill.
- Explain ways to promote export trade.
- Explain:
- a) bill of lading
- b) import brokers
- c) consular invoice d) balance of trade
- e) quotas and tarif
- Why is international trade important to Zimbabwe?
- Explain five problems in the export trade.
- Why does Zimbabwe levy duties on imports?
- Show the importance of bonded warehouses.
- Explain ways of correcting balance of payments deficit.
- Study the figures below. 2005 was the base year.
Year Export Index Import Index Trade Terms
2000 84 80
2001 90 85
2002 95 88
2003 95 90
2004 95 93
2005 100 100 100
2006 105 102
2007 107 105
2008 105 105 a) Calculate the terms of trade for:
(i) 2000 to 2004 (ii) 2006 to 2008
- b) (i) Comment on the trends of the terms of trade for both periods. (ii) Suggest corrective actions for each period.