Chapter 1 General Introduction to International Trade Practices

Learning Objectives

In this chapter, you will learn：

（1）The concept of international trade practices；

（2）General procedures of an import-export transaction；

（3）Introducing the parties to an import-export transaction.

Case Study

Country A notifies Country B that Country B is forbidden to export mutton to Country A. The reason is that mutton hormone content exceeds the allowed amount, which will affect people's health. After investigation, Country B finds out that the mutton hormone content is as the same amount as that in Country A, and Country B also gets the information that Country A is unceasingly importing the similar quality mutton from Country C.

Country B believes that Country A has violated the GATT principles and their benefits have been violated.

Country A refutes that they adopt the measures which do not violate the GATT principles, but belong to the general exception to be permitted.

Questions：

（1）Do you think Country A has violated the GATT principles? What kind of principles? Why？

（2）Do you think Country A's rebuttal is right? Why？

1.1 The Concept of International Trade Practices

1.1.1 International Trade

Trading is one of the most basic activities of mankind. It has existed in every society, every part of the world, and in fact every day since the caveman came into being.

For example, the United States is a major consumer of coffee, yet it does not have the climate to grow any of its own. Consequently, the United States must import coffee from the countries（such as Brazil, Colombia, and Guatemala）that grow coffee efficiently. On the other hand, the United States has a wide range of large industrial plants capable of producing various goods, such as automobiles and airplanes, which can be sold to the nations that are in need of them. If the nations traded item for item, such as one automobile for 10,000 bags of coffee, this kind of trade would be extremely troublesome and restrictive. But instead of barter, which is the trade of goods without an exchange of money, the United States receives money in payment for what it sells. It pays for Brazilian coffee with dollar, which Brazil can then use to buy wool from Australia, which in turn can buy textiles from Great Britain, which can then buy tobacco from the United States. This is a typical case of what we call international trade.

Therefore, international trade can be defined as the exchange of goods or services produced in one country with those produced in another. Yet nowadays in most cases, countries do not trade the actual goods or services, but trade in exchange for money or currency.

When viewed from the business relationships and outcomes among different countries, international trade can be called world trade or global trade; when viewed from those between a country and the other countries or its externals, international trade may also be called foreign trade. A country's foreign trade can sometimes be called overseas trade, external trade, abroad trade or import and export trade, etc., because of the country's geographical characteristics or historical traditions.

1.1.2 International Trade Practices

Therefore, in this work international trade transactions can relate to the exchange of goods or services from one country to another. These transactions are referred to as exchange transactions and are divided into two categories:those based on a contract for the international sale of goods and those based on the supply of manpower and techniques to another country, such as the construction of plants and the transfer of a patent.

1.2 General Procedures of an Import-Export Transaction

The procedures of an import or export business are so complicated that it may take quite a long time to conclude a transaction. Varied and complicated procedures have to be gone through in the course of import or export transaction. From the very beginning to the end of the transaction, the whole operation generally undergoes four stages:preparing for exporting or importing, business negotiation, implementing the contract, and settlement of disputes（if any）. Each stage covers some specific steps.

Since the export and import trades are two sides of the same coin, and one country's export is another country's import, we will take the procedures of export transaction in the following diagram to illustrate the general procedures of export and import transaction.

Consider a Chinese firm exporting to a buyer in Singapore. Due to the lack of trust between the two parties, each has its own preferences as to how they would like the transaction to be configured. To make sure he is paid, the manager of the Chinese firm would prefer the Singaporean buyer to pay for the products before he ships them. Alternatively, to ensure he receives the products, the Singaporean buyer would prefer not to pay for them until they arrive. Thus, each party has a different set of preferences. Unless there is some way of establishing trust between the parties, the transaction might never occur.

The problem could be solved by using a third party trusted by both—normally a reputable bank—to act an intermediary. What happens can be summarized as follows.

First, the Singaporean buyer obtains the bank's promise to pay on his behalf, knowing the Chinese seller will trust the bank. This promise is known as a letter of credit. Having seen the letter of credit, the Chinese seller now ships the products to Singapore. Title to the products is given to the bank in the form of a document called a bill of lading. In turn, the Chinese seller tells the bank to pay for the products, which the bank does. The document for requesting this payment is referred to as a draft. The bank, having paid for the products, now passes the title on to the Singaporean buyer, whom the bank trusts, at that time or later, depending on their agreement.

Typical Procedures of an International Trade Transaction：

Now that we have reviewed the elements of an international trade transaction, let us see how the process works in a typical case, sticking with the example of the Chinese exporter and the Singaporean importer.

Stage one:preparing for exporting or importing

Stage two:business negotiation

（1）The Singaporean importer places an order with the Chinese exporter and asks the Chinese exporter if he would be willing to ship under a letter of credit.

（2）The Chinese exporter agrees to ship under a letter of credit and specifies relevant information such as prices and delivery terms.

Stage three:implementing the contract

（1）The Singaporean importer applies to Bank of Singapore for a letter of credit to be issued in favor of the Chinese exporter for the merchandise the importer wishes to buy.

（2）Bank of Singapore issues a letter of credit in the Singaporean importer's favor and sends it to the Chinese exporter's bank, Bank of China（Beijing Branch）.

（3）Bank of China（Beijing Branch）advises the exporter of the opening of a letter of credit in his favor.

（4）The Chinese exporter ships the goods to the Singaporean importer on a common carrier. An official of the carrier gives the exporter a bill of lading.

（5）The Chinese exporter presents a 60-day time draft on Bank of Singapore in accordance with its letter of credit and the bill of lading to Bank of China（Beijing Branch）. The exporter endorses the bill of lading so title to the goods is transferred to Bank of China（Beijing Branch）.

（6）Bank of China（Beijing Branch）sends the draft and bill of lading to Bank of Singapore. Bank of Singapore accepts the draft, taking possession of the documents and promising to pay the now-accepted draft within 60 days.

（7）Bank of Singapore returns the accepted draft to Bank of China（Beijing Branch）.

（8）Bank of China（Beijing Branch）tells the Chinese exporter that it has received the accepted bank draft, which is payable in 60 days.

（9）The exporter sells the draft to Bank of China（Beijing Branch）at a discount from its face value and receives the discounted cash value of the draft in return.

（10）Bank of Singapore notifies the Singaporean importer of the arrival of the documents. He agrees to pay Bank of Singapore within 60 days. Bank of Singapore releases the documents so the importer can take possession of the shipment.

（11）Within 60 days, Bank of Singapore receives the importer's payment, so it has funds to pay the maturing draft.

（12）Within 60 days, the holder of the matured acceptance（in this case, Bank of China, Beijing Branch）presents it to Bank of Singapore for payment. Bank of Singapore pays.

Stage four:settlement of disputes（if any）

With the fundamental knowledge of export procedures, we can grasp the essential points of import procedures easily and manage import trade well and smoothly.

1.3 Introducing the Parties to an Import-Export Transaction

The core of every business transaction are the buyer and the seller. However, in international transactions, a number of other individuals, organization and entities are involved. Each party may have a minor or major role depending upon the goods or services being bought or sold, the countries of import or export, and the method of payment. The following participants will be introduced one by one.

The Importer / Buyer

The Exporter / Seller

The Country of Export（Export Authority）

The Country of Import（Import Authority）

The Freight Forwarder / Logistics Company

The Customs Broker

The Freight Carrier（Shipping Line, Airline, Railroad, Barge Line, Courier）

The Government Regulatory Agency

The International Banks

The Insurance Company

The Attorney

The Notary Public

The Chamber of Commerce

The Consular Office

1.3.1 The Buyer and the Seller

The importer / buyer is an individual or company engaged in the business of purchasing raw materials, component parts, finished goods or services from the exporter / seller for import to a domestic market for manufacture, assembly, resale, or direct consumption.

The exporter / seller is an individual or company engaged in the business of manufacturing, selling, or brokering raw materials, component parts, finished goods or services from the importer / buyer for manufacture, assembly, resale, or direct consumption.

Fundamentally, the concerns of the buyer and the seller are the same in both domestic and international transactions:the buyer wishes to get goods ordered and paid for, and the seller wishes to get paid for the goods shipped. Both want to profit from the transaction and to expose themselves to the least risk possible. International transactions, however, add a layer of uncertainty and risk for the buyer and seller that do not exist in purely domestic transactions.

The cost and particulars of transaction and insurance will be of great concern to the buyer or seller, especially if great distances are involved and if the risk of loss is great. International contracts for the sale of goods or services need to specify in what currency the payment is to be made. If the specified currency appreciates between the contract date and payment date, it has the effect of increasing the cost of the goods or services purchased by the buyer.

1.3.2 The Export Authority and the Import Authority / Customs

The export authority and the import authority / customs have three major responsibilities：

（1）Law enforcement. To enforce the export and other laws and regulations of the country, and in the process regulate the flow of exported goods.

（2）Revenue collection. To collect export duties, tariffs and fee, etc.

（3）Census. To collect statistical data on the country's exports including the type, value and destination of exported products.

1.3.3 The Freight Forwarder / Logistic Company

International freight forwarders are in the business of moving goods from one country to another. Logistics firms are in the business of planning and controlling the flow of raw materials, work in progress, or finished products from point of origin to point of destination. The destina tion can include a factory for further processing, a warehouse for storage, or the marketplace for sale. With significant industry consolidation in recent years almost all companies in this field are now offering logistics services that include the services of import customs brokerage as well.

These firms are familiar with the rules and regulations of both the country of export and the country of import. They can provide pre-shipment and pre-bidding advice on the costs of insuring, packing, and shipping goods, as well as documentation compliance, inspection services, fees, tariffs and taxes, thus allowing the exporter to make more accurate costs. In most countries, freight forwarders are required to be licensed by an agency of the national government.

1.3.4 The Customs Broker

A customs broker is an individual or company licensed by a government authority to act on behalf of others in customs（generally import）transactions. The customs broker assists in all aspects of clearing imported goods through customs.

1.3.5 The Freight Carrier（Shipping Line, Airline, Railroad, Barge Line, Courier）

International freight carriers are in the business of moving cargo from one country to another. Carriers range from huge ocean shipping lines that move ship load quantities of crude oil or grain, to courier companies that handle small package shipments of less than one-half kilogram（1.1 pound）.

In the past, only large-scale shippers went to the shipping lines and airlines directly, because small shippers needed the additional services that freight forwarders and logistics firms provided. Today, however, the distinctions have been blurred between the freight forwarder, the customs broker and the carrier.

All carriers wish to provide the most comprehensive service possible to their clients in an attempt at full integration of logistics services. Many carriers now routinely provide export documentation and clearance as well as import documentation and clearance for both exporters and importers.

1.3.6 The Government Regulatory Agency

Government regulatory agencies exist to enforce specific laws and regulations designed to protect the economic well-being in addition to the health and safety of their citizens.

1.3.7 The International Bank

International banks handle all aspects of international payments for exporters and importers, including documentary collections and letters of credit. In the course of fulfilling their responsibilities, international banks process checks, drafts, credit cards and bank wires in payment for transactions, structure documentary collection transactions for exporters and importers, and structure documentary letter of credit transactions for exporters and importers.

1.3.8 The Insurance Company / Agent

Insurance companies provide coverage by contract to indemnify or guarantee another party against risk of loss for a stated peril, such as the risk of loss or damage to shipments of cargo in international trade.

Insurance coverage against risk of loss or damage to cargo is a requirement in nearly all international transactions. Importers and exporters can work directly with an insurance company or an agent. In many cases, freight forwarders, customs brokers, shipping lines, railroads and other carriers act as agents for insurance companies. Some of the larger logistics firms have an insurance company as a subsidiary.

1.3.9 The International Attorney

Attorneys and law firms are in the business of providing legal advice to clients. Individual attorneys and firms have developed different areas of specialization.

The particulars of an international contract can differ significantly from domestic ones. The prudent trader will have an attorney who is familiar with international trade law consult while negotiating a contract of sale.

1.3.10 The Inspection Companies

Inspection companies are in the business of providing testing services for exporters, importers, export authorities and import authorities. Inspection companies are often licensed by government agencies or have professional affiliations with recognized industry groups.

1.3.11 The Document Authenticator（Notary Public）

Import authorities may require some documents to be certified or notarized. Most countries have appointed or commissioned individuals who are given authority to identify and certify the identity of persons who sign documents with proof of their signature. In the United States, these individuals are called notaries public.

1.3.12 The Chamber of Commerce

Chambers of commerce provides a wide range of services to the international trader. These include export education, country market information, assistance with export documentation and trade leads. With regard to international trade documentation, many chambers of commerce can assist the exporter by certifying certain documents.

1.3.13 The Consular Official

The consular official or office of the country of importation, located in the country of export, is often empowered to certify certain documents or forms required for the eventual import of goods.

Exercises

1. Explain the following terms.

（1）International trade

（2）Exporter / Importer

（3）Freight carrier

（4）Customs broker

（5）Attorny

（6）Logistics company

2. Answer the following questions.

（1）How many categories can international transactions be divided into？

（2）Who are involved in the import-export transactions？

（3）How many general procedures are there in an import-export transaction？

3. Ture or false.

（1）（　）Exporting is only an extension of doing business with the customers living in your own country.

（2）（　）No exports, no imports.

（3）（　）Supply of manpower and techniques to another country is also a part of international trade.

（4）（　）Exporting chiefly aims at marketing profit.

（5）（　）There are only two parties involved in an export transaction:the exporter and the importer.

4. Case analysis.

（1）The United States imposed interim protection measures, from April 18,1995, to restrict imports of wool fabric for men's and women's shirts from India. Before the measures' implementation, the United States and India had discussed the possibly serious damage to US domestic enterprises resulting from the import of wool fabric for men's and women's shirts. The two sides did not reach a satisfactory solution. So, India submitted the case to the World Trade Organization for settlement. Will the United States remove the interim protection measures？

（2）In November 1998, the Germany Daimler-Benz's acquisition of one of the three US auto makers, Chrysler Corporation, was thought by the world media as the“marriage of heaven”. Daimler-Benz AG, which is one of the strongest companies of Germany, is known to the world as the brand owner of“Mercedes”. Chrysler is the biggest among the three US auto makers in making profits and is the most efficient company.

It was believed that this was the most powerful combined strength across the Atlantic and it would be a ride to be an invincible giant at the world auto market. Who would have thought, however, that this“hopeful and powerful marriage”did not seem to be happy. Mergers and acquisitions failed to achieve the desired goal of the company. By 2001, the company's loss amounted to 2 billion US$. Its stock prices were way down, and laid off its staff. The company's running had been in a very difficult situation. Why did good prospects turn out to be a failure？

（3）Sea turtles were ranked as the highest level protected endangered rare animals in“Convention on International Trade Endangered Species of Wild Fauna and Flora”in 1970s. In the past, sea turtle's manslaughter during shrimp trawling was the number 1 threat to the survival of the rare animal. In order to protect rare sea turtles, the US Congress passed“Endangered Species Act”in 1973, all kinds of possession, processing and hurt by mistakenly shrimp trawl for marine turtles were listed as illegal. In 1989, the United States added one more article in the Act—Article 609 in order to encourage other countries to use TED—turtle escape device. This device can help to enhance the shrimp catch, and also to enable the strayed turtles to escape from the shrimp nets（escape rate of 97%）. The meaning of the article was to promote the use of TED in other countries to improve the degree of protection of sea turtles. In certain sea areas, if a country's shrimp net was not equipped with the TED, or a country failed to reach the standards of the United States to protect sea turtles, the United States would ban the imports of wild shrimp and shrimp products captured by that country.

In 1996, the United States extended this prohibition to all countries, which triggered trade disputes. More than 20 countries filed complaints with WTO, asking the WTO or as the third party to intervene. Complaining party believed that the US legislation to protect sea turtles deserved recognition and support, but if the United States prohibited imports of shrimp products captured from countries without similar legislation, it constituted a unilateral action to apply domestic law globally, which endangered the multilateral free trade principles and injured other countries.

（4）According to the Korea liquor tax law, South Korea levied 35% tax on the domestic soju, while tax on other imports distilled spirits（whiskey, vodka, rum, etc.）was 100%. EU and US believed that South Korea violated Article 2 in SectionⅢof GATT 1947—the national treatment provisions of the domestic tax. The key issue in this case was to determine whether the whiskey, vodka and other distilled spirits were the same products as the traditional Korean soju. According to Article 2 in SectionⅢof GATT, only when the tax for the imported product is higher than the same domestic products, is it considered a violation of the national treatment principle. For different products, of course, different tax is taken for granted.

In preparation stage, that South Korea attorney consulted the Japanese experts（Japan had a similar case before）what kind of person was suitable to be the experts of this case. Japan gave a very practical suggestion:since the case was about alcohol, the experts should be people who drink alcohol. They could tell the difference between whiskey and soju. In addition, Korea believed that in order to prove the soju and whiskey were not the same products, the price difference should be identified. Whiskey was 12 times expensive than soju. In accordance with the rules of anti-trust law, since the price gap between the two products was so huge, they were not competitive and replaceable（and thus not the same products）. South Korea believed that if there was an expert with anti-trust background in the group, this expert would be able to prove that the two products were not identical. South Korea also prepared materials from all aspects. For example, they found a very convincing evidence from a publication by EU. This book explained the significant differences between soju and whiskey and other liquor. In addition, the South Korea paid attention to every detail. For example, in order to overcome language difficulties in hearing, they carefully prepared written materials and answered all questions according to the written materials.

What can we learn from this case？

（5）The case happened under extreme conditions—the Uruguay Round negotiation. Japan promised to reduce its import tariff of color and black-white film to zero, meaning that foreign competitors, such as the US Kodak can enter into the Japanese market without any barriers. Fuji and Kodak are the world's two dominant players in the film industry. In Japanese market, Kodak had been looking for opportunities to beat the opponent all the time.

In the market access issues, it's difficult for Kodak to find fault with Japan. So how did Kodak to use WTO rules to find a breakthrough to defeat opponents? Kodak utilized the Article 1 in Section 23 of GATT. The United States claimed that Japan did not violate WTO obligations of a particular provision and the Japanese achieved tariff reduction commitment in previous rounds of negotiations. However, the Japanese Government adopted measures on film sales and distribution. Accordingly, the United States rights and benefits generated from Kennedy Round. Tokyo Round and the Uruguay Round about tariff concessions had been impaired or deprived. This is contrary to Article 1 in Section 23 of GATT.

Specifically, the United States has accused Japan for restricting distribution, encouraging and promoting the Japanese film market system's transition from variety selling（brand department store）to a single-trade-mark franchising system, which restricted the sales of imported films and hampered Kodak market development capacity.

The United States lost the case.

Why did the United States lose the case？