Class 11 business studies Chapter 12 International Business-II
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NCERT Notes for Class 11 business studies Chapter 12 International Business-II
Class 11 business studies Chapter 12 International Business-II
- Export goods to foreign countries are different from marketing products domestically.
- One need to familiar with various procedural formalities that need to be complied with before goods are actually shipped to foreign countries or imported from overseas suppliers.
- This chapter discuss in detail the major steps and documents involved in foreign trade.
- It also examines the role of various trade promotion measures and organizational set up for promotion of international business.
Export Import Procedures and Documentation
- Export and Import of goods is not simple as in the case of domestic trade.
- Foreign trade involves movement of goods across boundaries and use of foreign exchange, a number of formalities are needed to be performed before the goods leave the boundaries of a country and enter into that of another.
A. Export Procedures
- Steps involved in a typical export transaction are as follows:
1- Receipt of Enquiry and Sending Quotations
- The prospective buyer of a product sends an enquiry to different exports requesting them to send information about price, quality and terms of payment etc.
- the exporter sends a reply to the enquiry in the form of a quotation referred to as proforma invoice.
2- Receipt of Order or Indent
- If the buyer is satisfied with the export price and other terms and condition, he places the order or indent for the goods.
3- Assessing importer’s creditworthiness and securing a guarantee for payments
- After receipt of the indent, the exporter makes necessary enquiry about the creditworthiness of the importer.
- To minimize such risks, most exporters demand a Letter of Credit from the importer.
Note: Letter of Credit
- A Letter of Credit is a guarantee issued by the importer’s bank that it will honour payment up to a certain amount of export bills to the bank of the exporter.
- Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions.
4- Obtaining export License
- When the exporter is assured about the payment, he initiates steps relating to fulfillment of export formalities.
- In India, export of goods is subject to fulfillment of customs laws, according to which the exporter must have export license before he proceeds with exports.
Following is the procedure for obtaining export license:
- To open an account with any RBI approved bank.
- To obtain Import Export Code number (IEC) from Regional Import Export Licensing Authority.
- To obtain Registration – Cum Membership Certificate (RCMC) from Export Promotion Council, Commodity Boards or Federation of Indian Export Organisation .
- To get registered with Export Credit Guarantee Corporation (ECGC) is necessary in order to protect overseas payments from political and commercial risks.
5- Obtaining pre-shipment finance
- After obtaining the export license, the exporter approaches his banker in order to obtain pre-shipment finance for carrying out production.
6- Production or procurement of goods
- Exporter, after obtaining pr-shipment finance from the bank, proceeds to get the goods ready as per the orders of the importer.
7- Pre-shipment Inspection
- Quality control and pre-shipment inspection is compulsory in India as per quality Control and Inspection Act, 1963.
- Inspection certificate is provided by Export Inspection Council.
- The customs authority permits the shipment of goods only if there is inspection certificate.
8- Excise Clearance
- According to Central Excise Tariff Act, excise duty on the raw material used in manufacturing goods is to be paid.
- But in many cases the Government exempts payment of the excise duty or later on refunds it if the goods so manufactured are meant for exports.
- For this purpose the exporter approaches the concerned Excise Commissioner in the region with an invoice.
- If the excise commissioner is satisfied, he may issue the excise clearance.
- The refund of excise duty is known as duty drawback.
9- Obtaining Certificate of Origin
- This is a certificate which specifies the country in which goods are being produced.
- This certificate enables the importer to claim tariff concession or other exemptions which were agreed between nations.
Note: Certificate of Origin: This certificate specifies the country in which goods are being produced.
- Import regulations of a foreign country may require that all import consignments must carry a certificate of origin.
- The purpose of this certificate is to charge customs duty at concessional rate, in case there is trade agreement between importing and exporting countries.
- It is issued by chambers of commerce, Export Promotion Council etc.
10- Reservation of Shipping Space
- The exporting firm applies to the shipping company for provision of shipping space.
- It has to specify the types of goods to be exported, probable date of shipment and the port of destination.
- Then the shipping company issues a shipping order.
Note: Shipping Order: Shipping order is an instruction issued by the shipping company to the captain of the ship that the specified goods after their customs clearance at a designated port be received on board.
11- Packing and Forwarding
- The goods are then properly packed and marked with necessary details such as name address of the importer, gross and net weight, port of shipment and destination etc.
- The exporter then make necessary arrangement for transportation of goods to the port.
12- Insurance of Goods
- The exporter then gets the goods insured with an insurance company to protect against the risks of loss or damage of the goods due to the perils of the sea during the transit.
13- Customs Clearance
- The goods must be cleared from the customs before these can be loaded on the ship.
- For obtaining customs clearance, the exporter prepares the shipping bill.
Five copies of shipping bill along with the following documents are then submitted to the Customs appraiser at the Customs House:
- Export Contract
- Letter of credit
- Commercial Invoice
- Certificate of origin
- Certificate of inspection
- Marine Insurance Policy
After submission of these documents, the superintendent of the concerned port trust approached for obtain the Carting Order.
After obtaining the carting order, the cargo is physically moved into the port area and stored in the appropriate shed.
Note: Shipping Bill: It is a document prepared by the exporter and on the basis of which the customs office gives the permission for export.
- Shipping bill contains particulars of the goods being exported, the name of the vessel, the port of shipment and destination, exporters name and address etc.
Note: Carting Order: Carting order is the instruction to the staff at the gate of the port to permit the entry of the cargo inside the dock.
14- Obtaining Mates Receipts
- The goods are then loaded on the board the ship for which the mate or the captain of the ship issues mates receipt to the port superintendent.
- The port superintendent, on receipt of port dues, hands over the mate’s receipt to the exporter or his C&F agent.
Note: Mate Receipt: It is a document acknowledging the receipt of goods on the ship.
- It is a receipt issued by the captain of the ship or his assistant mate when the cargo is loaded on the board.
- It contains the information about the name of the vessel, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship etc.
15- Payment of Freight and Receipt of Bill of Lading
- The clearing and forwarding agent (C&F) surrenders the mates receipt to the shipping company for computation of freight.
- After receipt of freight them, the shipping company issues a bill of lading.
- Which serves as an evidence that the shipping company
Note: Bill of Lading: It is an agreement between the shipping company and the forwarding agent, wherein the shipping company agrees to carry goods to the destined port against the payment of freight.
- It is a title to goods as it gives ownership right to the person who is holding it.
- It is freely transferable by endorsement and delivery.
- The captain of the ship gives delivery of goods to the importer only when he presents the copy of the Bill of lading.
- It is an evidence of the contract of shipment.
16- Preparation of Export Invoice
- After sending the goods, an invoice of the dispatched goods is prepared.
- It should be duly attested by the customs authorities.
Note: Export Invoice: It is the exporter’s bill which contains information about the goods like quantity, number of packages, name of the ship, port of destination, terms of delivery and payments etc.
17- Securing Payments
- After the shipment of the goods, the exporter informs the importer about the shipment of goods.
- Various documents like certified copy of invoice, bill of lading, packing list, insurance policy, certificate of origin and letter of credit are sent by the exporter through his bank.
- These documents are required by the importer for getting goods cleared from the customs.
- The exporter get payment from his bank on the submission of necessary documents called negotiations of the documents.
Documents Related to Goods
1- Export Invoice (Refer Note)
2- Packing List
- A packing list is statement of the number of cases or packs and the details of the goods contained in these packs.
3- Certificate of Origin (Refer Note)
4- Certificate of Inspection
- For ensuring quality the government has made inspection of goods to be exported with the help of some authorized agencies like Export Inspection Council of India (EICI) etc.
- After inspecting the goods , the agency issues a certificate of inspection that the goods has been inspected as required under Export (Quality control & Inspection) Act, 1963.
Documents Related to Shipment
- Mate’s Receipt (Refer Note)
- Shipping Bill (Refer Note)
- Bill of lading (Refer Note)
- Airway Bill
- This document is the same as Bill of Lading with only one difference is that it is issued by the Airway Company and not by the shipping company.
5. Marine insurance Policy
- It is a certificate of insurance contract whereby the insurance company agrees in consideration of premium to indemnify the insured against the loss incurred by perils of the sea.
Documents Related to Payments
- Letter of Credit (Refer Note)
- Bill of Exchange
In the export & import transaction, exporter draws the bill on the importer asking him to pay a specified amount to a certain person or the bearer of the instrument. The documents required by the importer for claiming title of exported goods are passed on to him only when the importer accepts the bill.
Following are the various steps involved in the process of import.
1- Trade Enquiry
- It is a written request by the importer to the exporter for supply of relevant information regarding the price, quality, quantity, terms and conditions of export etc.
- Then the exporter prepares the quotation and sends to the importer. This quotation is known as proforma invoice.
2- Obtaining Import license
- In India it is compulsory to every importer to get registered with Director General of Foreign Trade or Regional Import Export Licensing authority and obtain an Import Export Code Number (IEC).
3- Obtaining Foreign Exchange
- As foreign exchange transactions are controlled by RBI, the importer has to submit an application along with necessary documents to the RBI to issue foreign exchange.
4- Placing Order or Indent
- After obtaining the import license, the importer places an import order or indent with the exporter for supply of specified products.
- It contains information regarding the price, quantity, quality of goods ordered, port of shipment, destination etc.
5- Obtaining letter of credit
- The importer must obtain letter of credit and send it to the exporter.
6- Arranging for financing
- The importer should make arrangements in advance to pay to the exporter on arrival of goods at the port.
- Advance planning for financing is necessary so as to avoid penalties on the imported goods lying unclear at the port for want of payments.
7- Receipt of Shipment Advice
- After loading the goods on the ship, the exporter dispatches the shipment advice to the importer.
- It contains information about the shipment of goods.
8- Retirement of Import Documents
- After shipping the goods, the exporter prepares necessary documents and hands over to his banker for their onward transmission to the importer when he accepts the bill of exchange.
- The set of documents normally contains bill of exchange, commercial invoice, packing list, certificate of origin, marine insurance policy etc.
- A bill of exchange accompanying the above documents is known as Documentary Bill of Exchange.
- Documentary Bill of Exchange can be of two types: documents against payment (Sight draft) and documents against acceptance (Usance draft)
- In case of sight draft, the exporter (Drawer) instructs the bank to hand over the relevant documents to the importer only against payment.
- In case of Usance draft, the drawer instructs the bank to hand over relevant documents to the importer against the acceptance of the bill of exchange.
- The acceptance of bill of exchange for the purpose of getting delivery of the documents is known as Retirement of Import Documents.
9- Arrival of Goods
- When the goods arrive in the importer’s country, the person in charge of the ship informs the officer in charge of the dock about it.
- He provides a document called Import General Manifest for unloading cargo.
Note: Import General Manifest: It is a document that contains the details of the imported goods. It is a document on the basis of which unloading of cargo takes place.
10- Customs Clearance and Release of goods
- The importer fills a form called Bill of Entry for assessment of customs duty.
- After payment of customs duty, bill of entry has to be presented to the dock superintendent.
- After his examination, it is handed over to port authority.
- After receiving necessary charges, the port authority issues the release order.
Note: Bill of Entry: It is document prepared by the importer when he gets information about the arrival of goods at port.
- This document contains the information such as name and address of the importer, name of the ship, number of packages, description of goods, quantity and value of goods, name and address of the exporter, port of destinations, customs duty payable etc.
- It has to be in triplicate and is to be submitted to the customs office. There are three types of bill of entry:
1- Bill of entry for home consumption(white in colour)
This bill of entry is prepared when the importer is paying the customs duty for the whole lot of goods and taking delivery of all the goods.
2- Bill of entry for ware housing (yellow in colour)
This bill of entry is prepared when the importer does not pay the customs duty on imported goods and would like to transfer the goods to bonded ware house.
3- Ex-Bond bill of entry (Green in colour)
This bill of entry is prepared when the importer wants to get delivery of goods from the bonded ware house.
Foreign Trade Promotion: Incentives and Organizational Support
- Various incentives and schemes are operational in the country to help business firms to improve competitiveness of their exports.
- From time-to-time, the government has also set up a number of organizations to provide infrastructural support and marketing assistance to firms engaged in international business.
Major trade promotion measures and schemes to boost international business
1- Duty Drawback Scheme
- It refers to the refund of customs and excise duties paid on inputs used in the manufacture of export goods.
- Such refunds are called duty draw backs.
- Some duty draw backs include refund of excise duties paid on goods meant for exports, refund of customs duties paid on raw materials and machines imported for export production.
2- Export Manufacturing Under Bond Scheme
- This facility entitles firms to produce goods without payment of excise and other duties.
- The firms desirous of availing such facility have to give an undertaking (i.e, bond) that they are manufacturing goods for export purposes and will export such products on their production.
3- Exemption from payment of sales tax
- Goods meant for export purposes are not subject to sales tax.
- Even for a long time, income derived from export operations had been exempt from payment of income tax.
- Now this benefit of exemption from income tax is available only to 100% Export Oriented Units and units setup in Export Processing Zones (EPZs)/Special Economic Zones (SEZs) for selected years.
4- Advance License Scheme
- It is a scheme under which the exporter is allowed duty free supply of domestic as well as imported inputs required for the manufacture of export goods.
5- Export Promotion Capital Goods Scheme (EPCG)
- The main objective of this scheme is to encourage the import of capital goods for export production.
- This scheme allows the export firms to import capital goods at lower rate of customs duties.
- Supporting manufacturers and service providers are also eligible to import capital goods under this scheme.
- This scheme is especially beneficial to the industrial units interested in modernization and up gradation of their existing plant and machinery.
- Now the service export firms can also avail of this facility for importing items such as computer software systems required for developing software’s for the purpose of exports.
6- Scheme of recognizing export firms as export house, trading house and super star trading house
- With an objective to promote established exporters and assist them in marketing their products in international markets, government grants status of Export House, Trading house, Star Trading house to select export firms.
- This status is granted to a firm on its achieving a prescribed average export performance in past selected years. These houses are given national recognition for export promotion.
7- Export finance
- Exporters require finance for the manufacture of goods.
- Two types of export finances are made available to the exporters by authorized banks.
- They are termed as pre-shipment finance and post shipment finance.
- Pre- shipment finance is provided to an exporter for financing the purchase, manufacturing or packaging of goods for export purpose.
- Post shipment finance is provided to the exporter from the date of extending the credit after shipment of goods to the export country.
- The finance is available at concessional rates of interest to the exporters.
8- Export Processing Zones (EPZ)
- EPZs are established as special enclaves separated from domestic tariff area.
- It provides an internationally competitive and duty free environment for the production of export goods.
- The units located in this zone will get infrastructural facilities at a lower cost.
- They can import capital goods and raw materials for production of export goods without license.
- They are also permitted to sell 50% of their product in the domestic market at concessional rate of duty.
- This enables the products of EPZs to be competitive, both quality wise and price wise in the international market.
- EPZs have been set up in various places in India, which include: Kandla(Gujarat),Sand Cruz(Maharashtra), Cochin, Chennai etc.
- Santa Cruz zone is exclusively meant for electronic godds and gems and jewelery items.
Objectives of EPZs
- To earn maximum foreign exchange
- To diversify export
- To generate more employment opportunities
- To acquire high technology and advanced skills.
9- Special Economic Zones (SEZ)
- Recently the EPZs have been converted into Special economic Zones (EPZ) which are more advanced form of EPZ. It is a special area deemed to be a foreign territory for the purpose of trading and for imposing duties.
- Goods coming from SEZ area to Domestic Tariff Area (DTA) is treated as deemed imports and goods going to SEZ area from DTA is treated as deemed exports.
- SEZs is free from all rules and regulations governing imports and exports units except relating to labour and banking.
The following EPZ have been converted into SEZ by the government.
- Kandla Export Processing Zone.
- Santa Cruz Electronic Export Processing Zone.
- Cochin Expert Processing Zone
Benefits of EPZ’s
- It helps to earn maximum foreign exchange.
- It employee more employment opportunities for the domestic people.
- It diversifies export.
- It helps to attract more people in the field of international business.
10 Hundred percent (100% )Export Oriented Units
- They are eligible for all benefits provided to the units in the EPZ.
- These units can be established anywhere in the country.
- They are established with the main purpose of exporting their entire production.
11 Set up Market Development Assistance (MDA)
The Government of India established the Market Development Assistance for the following purposes.
- Market research, product promotion and commodity development
- Export publicity
- Participation in trade fairs and exhibitions.
- Trade delegations and study teams
12- Appointment of trade representatives
- The government of India has also appointed trade representatives in its embassies.
- They conduct survey and explore possibilities of exports.
- Government of India has also set up from time to time various institutions in order to facilitate the process of foreign trade in our country.
Some of the important institutions are as follows:
1- Department of Commerce
- Department of Commerce in the Ministry of Commerce, government of India is the apex body responsible for the development of county’s external trade and all maters concerned with it.
- This may be in the form of increasing commercial relations with other countries, export promotional measures and the development, and regulation of certain export oriented industries and commodities.
2- Export Inspection councils (EIC)
- Export Inspection Council of India was set up by the Government of India under Section 3 of the Export Quality Control and Inspection Act 1963.
- The council aims at sound development of export trade through quality control and pre shipment inspection.
3- Export Promotion Council (EPC)
- Export promotion Councils are nonprofit organizations and their basic objective is to promote and develop the country’s exports of particular products falling under their jurisdiction.
- At present there are 21 EPC’s dealing with different commodities.
4- Commodity board
- Commodity Boards are the boards which have been specially established by the Government of India for the development of production of traditional commodities and their exports. Eg. Rubber Board, Spices Board, Coffee Board etc.
5- Indian Trade Promotion Organization (ITPO)
- ITPO is a service organization and maintains regular and close interaction with trade, industry and Government.
- It serves the industry by organizing trade fairs and exhibitions-both within the country and outside.
6- Indian Institute of Packaging (IIP)
- It is a training-cum research institute pertaining to packaging and testing.
7- State Trading Organisations
- STC was setup in May 1956.
- The main objective of STC is to stimulate trade, primarily export trade among different trading partners of the world.
International Trade Institutions and Agreements
At the international level there are various international organizations such as world bank, IMF, WTO etc. for boosting economic, investment and trade cooperation among countries.
1- World Bank
- The International Bank for Reconstruction and Development (IBRD) i.e World Bank was established in 1945.
- Its headquarters is situated at Washington D C. The main objectives of world bank were to aid the task of reconstruction of the world war affected economies of Europe and assist in the development of the under developed nations of the world.
- After 1950 World Bank turned its attention to the development underdeveloped nations.
Objectives of World Bank (IBRD)
Functions of world bank (IBRD)
2- International development Association (IDA)
- IDA was set up in 1960 as part of the World Bank.
- IDA was established soft loans primarily to provide soft loans to the poorest countries.
- So it is called soft loan window of the IBRD.
Objectives of IDA
- To provide development finance on easy terms to the less developed countries.
- To provide assistance for poverty education in the poorest countries.
- To provide finance at concessional interest rates in order to promote economic development raise living standards in less developed nations.
3- International Finance Corporation (IFC)
- IFC was established in July 1956 in order to provide finance to private sector of developing countries.
4- The Multinational Investment Guarantee agency (MIGA)
MIGA was established in 1988 to supplement the functions of World Bank and IFC.
Objectives of MIGA
- To provide insurance coverage to investors against political risks.
- To encourage direct foreign investment into the developing countries.
- To provide guarantee against noncommercial risks.
- To ensure new investments and expansion of existing investments.
- To provide promotional and advisory services.
5- International Monetary Fund (IMF)
- It is the second international organization next to the World Bank.
- It was established in 1945 and its objective is the maintenance of exchange rates and providing short term loans to the countries facing short term foreign exchange problems.
Objectives of IMF
- To facilitate expansion of balanced growth of international trade and to promote and maintain high levels of employment.
- To promote exchange rate stability among member countries.
- To help in the establishment of international payment system.
- To provide international monetary cooperation through a permanent institution.
6. World Trade Organisation (WTO)
- Agreement for Tariffs and Trade (GATT) was transformed into World Trade Organisation (WTO) with effect from 1-1-1995.
- The headquarters of WTO are situated in Geneva, Switzerland.
- WTO deals with global rules of trade between nations.
- Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
- It is concerned with solving trade problems between countries and providing forum for multilateral trade negotiations.
- India is a founding member of WTO.
Objectives of WTO
- To ensure reduction of tariffs and other trade barriers imposed by different countries.
- To engage in activities which improve the standards of living, create employment, increase income facilitate higher production and trade.
- To facilitate optimal use of the world’s resources.
- To promote integrated, more viable and durable trading system.
Functions of WTO
- To remove barriers of international trade.
- To act as a dispute settlement body.
- To ensure that all the rules and regulations prescribed in the Act are duly followed by the member countries for the settlement of their disputes.
- Laying down a commonly accepted code of conduct for international trade.
- To consult with IMF, IBRD and its affiliated agencies to bring better understanding and cooperation in global economic policy making.
Benefits of WTO
- It helps to promote international peace and facilitates international business.
- All disputes between member nations are settled with mutual consultations
- Free trade improves standard of living of the people increasing the income level.
- Free trade provides an opportunity for getting varieties of qualitative products.
- Economic growth has been increased.
Deemed Export: The transactions in which the goods supplied do not leave the country is called deemed export.
- The goods supplied to EOU,EPZ, projects funded by United Nations etc. are treated as deemed export.
- Such transactions are eligible for various duty drawbacks scheme as in the case of export.