9 External Trade

9.1 Introduction
In the previous lesson you have learnt about internal trade which means buying and selling of goods within the boundaries of a country. But when buying and selling of goods and services take place between nationals of different countries it is called external trade or foreign trade. Every country, big or small, buys and sells different goods from and to other countries. Goods worth crores of rupees are bought and sold every year. Foreign trade is an important economic activity because both the countries participating in it benefit in the process. For some countries, external trade is the most essential economic activity because most of their industrial activities depend on it. For example economic development of Hongkong, Singapore, South Korea and Japan has been possible largely due to their foreign trade. World trade is dominated by the developed countries and the developing countries of Asia, Africa and Latin America have a small share. Like other countries, India imports and exports a large number of goods. After independence, foreign trade of India has considerably expanded. For economic development, it was necessary to import machinery, raw materials and fuel oil. As a result, imports into India increased. However, it was also necessary to increase exports to pay for the imports. Suitable export promotion measures were adopted by the Government to increase India's exports. In the present lesson we shall discuss external trade in detail.

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9.2 Objectives
After studying this lesson you will be able to recall the meaning of external trade; enumerate the advantages and difficulties in external trade; identify the middlemen in external trade; describe the procedure in export trade by sea routes; describe the procedure in import trade by sea routes; enumerate the main documents used in external trade.

9.3 External Trade : Meaning

External trade refers to buying and selling of goods and services between nationals of different countries, or trade between agencies of the governments of different countries. External trade consists of export trade and import trade. Export involves sale of goods and services to other countries. Import consists of purchases from other countries. When goods are traded by way of imports and exports the transactions are regarded as visible trade. External trade in service is referred to as invisible trade. Thus, for example, if Indian exporters avail of British shipping services for transportation of goods, they have to pay for transport services. Hence, services used may be called invisible imports by India. Sale of services would be regarded as invisible exports. Likewise, other services such as warehousing, insurance, banking and finance, and railway services are also required in external trade. When goods are imported into a country with the purpose of re-exporting them to some other country, it is known as entrepot trade.

9.4 Advantages and Difficulties in External Trade

Advantages
Advantages of external trade are enumerated below :

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1.

Availability of a large variety of goods : External trade enables a country to avail of the use of a variety of goods which cannot be produced in the home country or can only be produced at a higher cost. In this way, a country can get the benefit of using goods which it is not able to produce due to certain natural, physical or other limitations, by importing them from other countries. Export of surplus production : External trade facilitates export of surplus production of a country and import necessary items. This results in development of large scale industries. Specialisation based on resources endowment : The quantity and quality of resources available in countries differ on account of climate and geographical formation. External trade enables each country to specialise in the production of those commodities for which it enjoys relative advantage. Specialisation leads to increase in productivity and superior quality of goods. Higher standard of living : It improves the standard of living of people in different countries. Exchange of goods and consumption thereof leads to a higher standard of living of the people in the world. Price equalisation : External trade leads to equalisation of prices of commodities in the world markets after making allowance for transport and other costs. It brings stability and uniformity in the prices of commodities in all the countries of the world. Security from natural calamaties : Natural calamities such as flood, famine, drought etc., adversely affect the productive capacity of a country. External trade ensures adequate supply of those commodities which are in short supply within the country due to such natural calamities. For instance, medicine and food can be imported from other countries during an emergency. International relations : External trade develops business relations among different countries of the world which facilitate exchange of ideas and enrichment of culture. For example, the carpets of middle east countries, leather goods of Africa, batik art of Indonesia and brassware of India are known all over the world.

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There is always a demand for these goods specially in developed countries. Thus, external trade promotes cordial relations and understanding among nations of the world. 8. Development of trade promoting services : Foreign trade has led to development of modern means of communication and efficiency in banking and insurance services. These services have enabled countries to have trade even in voluminous goods like food grains, wood, coal, and perishable goods, like fruits, flowers, vegetables, meat, etc.

Difficulties in external trade

The various difficulties which are faced by a trader engaged in foreign trade are enumerated below: 1. Distance : External trade involves transport of goods over long distances except for neighbouring countries. Distance between various countries makes it difficult to establish quick and close trade contact between the importers and exporters. Even though trade directories provide information regarding the markets for various products, procurement of information regarding individual products and their market is a tedious task. There is a long time lag between placing of indent and receipt of goods from foreign countries. Diversity of languages : Different languages are used in different countries of the world. This diversity of language creates another problem in the external trade. Price-lists and catalogues are to be prepared in foreign language. So the traders who wish to establish trade relations with foreigners, must know the language of that country. Greater risk : Foreign trade involves transport of goods over long distances. Goods are thus exposed to greater risk. Goods are transported by ships which may sink due to storm or hidden rocks. The ships or goods may also be captured by the enemies. These risks may be covered through marine insurance, but that increases the cost of goods. Difficulties of transport and communication : Long distances

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incidental to foreign trade create difficulties of proper and quick means of transport and communication. Though modern means of communication has solved this problem, it is quite costly and cannot be used for securing all sorts of information. Loading and unloading of goods often take long time and also involve large expenses which increases the cost of goods. 5. Difficulties in payments : Each country has its own currency which makes it difficult for exporters to get payment for the goods sold. Various formalities are required to be completed for this purpose. Exchange rates are determined for different currencies in each country. Devaluation of a country's currency may mean a great loss to its importers as imports become costlier. There is loss to exporters also if the volume of export does not increase adequately after devaluation. Restrictions : Foreign trade is subject to various restrictions by way of customs, tariff, quotas and exchange regulations, which restrict the scope of foreign trade. Lack of personal touch : In foreign trade, the transactions are made with unknown persons through correspondence and other means of communication. There is no direct contact between the buyer and seller. In the absence of personal contact, settlement of disputes becomes difficult. So long as the disputes are not settled on the basis of mutual trust and faith, there is always a risk of bad debts. Study of foreign markets : Markets for different products have their own characteristics as regards demand, intensity of competition, buyers' preferences, etc. Thus, an extensive study of foreign markets is required for success in foreign trade, which is not easily possible from an exporters as well as importer's point of view. Cost : Both import and export of goods involve very costly operations due to high cost of transport, insurance, intermediaries and cost of formalities to be completed.

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Intext Question 9.1

Fill in the blanks 1. External trade _____________ the standard of living of the people in different countries. External trade leads to _____________ of the prices of commodities in the world market. External trade facilitates export of ________ production of a country. In general, the greatest difficulty in foreign trade is of ____________ between the countries. Goods are exposed to greater ____________ in external trade. When goods are imported with an idea of re-exporting to some other country it is know as ____________ trade.

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9.5 Middlemen in External Trade

1. Indent Houses/Indent firms : They help importer and exporter in sending and receiving the order of goods alongwith other instructions. Export Houses : These are organisations involved in Export promotion activities, such as STC, MMTC, Handicrafts and Handloom Export Corporation (H.H.E.C) and Central Cottage Industries Corporation (CCIC) etc. When an exporter is given a licence to import goods, it is called replenishment licence. Forwarding and Clearing Agents : Forwarding agents acting on behalf of exporters complete all the formalities for loading the goods on the ship. Clearing agents act on behalf of the importer and complete all the formalities required for clearing the goods from the port of destination. He sends the goods by rail/road to the place of importer after taking delivery of the goods from the customs authority. Both these agents act on an agreed commission to be paid.

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Shipping Company : It carries goods on behalf of exporters on payment of freight charges, and undertakes to deliver the same to the importer. For example, in India this service is provided by Shipping Corporation of India and other shipping lines. Insurance Company : It also acts as an agency which facilities external trade as it is ready to bear the loss or damage to the goods against insured risks right from the godown of the exporter to the godown of the importer. Merchant Exporter : Wholesalers and retailers are middlemen engaged in external trade. Wholesalers import or export goods in large quantities while retailers import or export goods in small quantities. Trade Commissioners : These are officials appointed by the Government to represent the countrys interests abroad. They collect information relating to trade relations and disseminate the same among traders. They also advise merchants on matters relating to imports and exports. Trade Representatives : They are officials who provide guidance to exporters abroad on behalf of the government of their own country. They make efforts to secure payment for goods and also advise on legal matters.

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Intext Questions 9.2

Match the following phrases given in column A and B A (1) (2) (3) (4) (5) Payment of freight Import of goods Export of goods Placement of order Export promotion activities (a) (b) (c) (d) (e) B Clearing Agent Forwarding Agent Shipping company Export House Indent house

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9.6 Procedure in Export Trade

The procedure generally adopted for exporting goods to a foreign country is as follows : 1. Receipt of an indent or order : After trade enquiry, receiving the indent/order is the first step in export procedure. Order may be received either directly from the importer or through some specified agency like indent houses. Credit Enquiry : The exporter must ensure that there is no risk of default in payment. He should verify the credit worthiness of the importer. For this purpose he may ask the importer to send a letter of credit, bank guarantee or any other guarantee. Obtaining export licence : Each and every country has its own import and export policy for free goods and restricted goods. An exporter in India has to complete various formalities such as submission of G R Form with Reserve Bank of India, furnishing declaration for surrender of foreign exchange and getting registration number in order to get an export licence. Collection of goods : The exporter has to assemble the goods specified in the indent. The goods must be in accordance to the instructions given in the indent regarding the quality, quantity, price, etc. Packing and marking of the goods : Packing should be done strictly according to the instructions given in the indent. If loss arises due to defective packing, the exporter may have to bear it. If necessary, grading should be done before packing. The packages should be properly marked according to instructions, if any, so that they may be easily recognised. Appointment of forwarding agent : Packed goods may be despatched to the port directly by the exporter or through a forwarding agent. If the goods are stored in any location, he may appoint a forwarding agent who will perform all the formalities on behalf of the exporter before shipping the goods, for a commission.

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Despatch of goods by rail/road : The exporter has to despatch the goods by rail/road to the port town. He will send the R/R (railway receipt) to the forwarding agent alongwith other instructions. The agent will take delivery of the goods and complete other formalities before shipping them to the importer. Formalities to be completed by Forwarding agent : (i) Obtaining the custom permit : The agent has to apply to the customs office giving full details of the goods and also their destination in order to receive the custom permit. If goods are duty free then custom permit is given immediately, otherwise it will be necessary to complete other formalities. Obtaining shipping order : The agent has to secure adequate space in the ship for loading goods. For this purpose he has to sign an agreement with the shipping company for issue of the shipping order which will enable him to put the goods on board the ship. If the entire ship is hired it is called Charter party. Completion of Shipping Bill and payment of export duty : The Agent has to fill in three copies of shipping bill and submit them to the custom house. On the basis of the bill, duty is calculated by the customs authority. The agent has to make payment of the duty and get the original and third copy of the Shipping Bill from the customs authorities. Payment of dock dues : The agent has then to make arrangement for carrying the goods to the dock. For this purpose, two copies of properly completed Dock Challan are submitted to the dock authorities alongwith one copy each of shipping bill and shipping order. After dock charges are received, the dock authorities retain one copy of dock challan and return the second copy duly signed to the agent. Customs verification before loading of goods : As soon as the ship touches the port, the dock authorities start loading the goods on it. Before the goods are actually loaded, custom officials verify them to know if there is anything on which

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duty remains to be paid or which is not mentioned in the shipping bill. The captain or his assistant (mate) will receive goods on board the ship only when shipping order has been produced before him. (vi) Mate's receipt : The captain or mate will issue a receipt known as mates receipt after the goods have been loaded. This receipt contains particulars like quantity of goods, number of packages, condition of packing, etc. Bill of lading : The forwarding agent has to present the mates receipt at the office of the shipping company and in exchange will get a document known as Bill of lading. He has to fill in three blank forms of bills of lading giving details regarding the goods, destination, name of the ship, date and place of loading and, name and address of the person to whom delivery is to be made. If the frieght is paid in advance the bill of lading is marked Frieght paid otherwise it is marked frieght forward which means frieght will be paid at the port of destination.

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(viii) Insurance of cargo : As a safeguard against marine risks, it is necessary to insure the goods. Insurance must be done strictly according to the instructions of the importer, if any, given in the indent. If there is no instruction, the exporter himself should insure the goods. The insurance policy is sent to the importer alongwith the bill of lading and other documents. (ix) Advice to the exporter: The agent has then to inform the exporter about the shipment of goods and other related matters. He will send the bill of lading, insurance policy, shipping bill etc., to the exporter alongwith a statement showing his expenses and remuneration.

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Preparation of export invoice and consular invoice : Having received the advice from the forwarding agent, the exporter prepares an export invoice known as foreign invoice. It is prepared in triplicate according to the agreed terms and conditions of sale.

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Custom regulations of many countries require consular invoice for the purpose of easy clearance of goods at the port of destination in the importing country. If it is required by the importer, then the exporter has to arrange for such a document also. 10. Securing Payment: There are two alternative methods by which payment can be received by the exporter. (i) Letter of credit: The exporter can get immediate payment on the strength of the letter of credit which is issued by the importer's bank in favour of the exporter. The exporter has to draw the bill in order to get the payment from the local branch of the bank (in home country) which has issued the letter of credit on behalf of the importer. Letter of hypothecation: If the exporter wants to receive payment immediately, he can get the bill (bill of exchange) accepted by the importer and given to the exporter, discounted with his bank. In that case he gets the amount stated in the bill (minus the discount charges of the bank). But for this purpose he has to give a letter of hypothecation to his bank. Letter of hypothecation is a letter addressed to a bank attached with the bill of exchange (accepted by the importer) drawn by the exporter for the goods shipped by him. Through his letter of hypothecation, the exporter authorises the bank to sell the goods in case of dishonour of the bill by the importer so that the bank can realise the amount advanced by it to the exporter. Thus, a letter of hypothecation gives the bank a charge on the goods and its sales proceeds. In the letter of hypothecation it is clearly mentioned that if the sales proceeds of goods (after meeting expenses of selling the goods) exceeds the amount advanced, the excess will be returned to the exporter, but if it is less, then the exporter has to pay the difference (sales proceeds expenses of selling the goods amount advanced) to the bank.

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Intext Questions 9.3

Fill in the blank : 1. The exporter has to bear the _________ if goods have not been packed according to the instructions of the importer. Forwarding agent acts as an agent of the __________. Goods are marked according to the instructions so that they can be easily __________. Letter of hypothecation gives the bank the right to sell the goods if bill of exchange is _________ by the importer. Last step in export procedure is to send an ______ to the importer.

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9.7 Procedure in Import Trade

The steps involved in importing goods are discussed below : 1. Obtaining the import licence: An importer cannot import goods without having a valid licence from the Import Licensing Authority. He has to get a valid licence according to the import policy announced by the Government of his home country from time to time. Obtaining foreign exchange : As foreign exchange transactions are controlled by Reserve Bank of India, the importer has to submit an application along with a duly filled G R Form to the Exchange Control department of R B I. After scrutinising the application, the Reserve Bank of India will sanction the release of foreign exchange. Placing the Indent : Indent is the purchase order to the exporter by an importer for specified goods. The indent may be sent directly to the manufacturer of goods or to the exporting agent. Sending letter of credit : Generally, the parties in foreign trade are not known to each other. So the exporter wants to be sure of the

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credit-worthiness of the importer. Usually, the exporter asks the importer to send a letter of credit. An importer can get a letter of credit issued as per terms and conditions of his banker and send it to the exporter. It ensures payment of bill of exchange drawn by the exporter upto the amount specified in the letter of credit. 5. Procuring the shipping documents: The importer will arrange to obtain necessary documents such as bill of lading, shipping bill, etc., after receiving the advice letter from the exporter. The documents are procured to take delivery of the goods. He has to go to the exporters bank to make payment in order to get the necessary documents for taking delivery of the goods. Appointment of clearing agent : The importer may take delivery on his own or appoint an agent (clearing agent) to take delivery of the goods. The importer sends necessary documents to his agent to clear the goods. The clearing agent charges commission for his services for clearing the goods. Formalities to be completed by the clearing agent (i) Endorsement for delivery. When the ship arrives at the port, the clearing agent approaches the concerned shipping company and gets the bill of lading endorsed in his own name from the shipping company. If the frieght has not been paid by the exporter, it will have to be paid before endorsement of the bill of lading. Bill of entry and Bill of sight. The agent has to fill in and submit three copies of the bill of entry to the custom authorities. The custom authorities will calculate the duty and receive the same from the clearing agent. If the agent does not have detailed information of the imported goods, he has to prepare a document known as Bill of sight. The bill of sight must contain as much information as the agent possesses and the document is completed by the custom authorities on the arrival of goods. (iii) Payment of dock charges. The agent has to complete and file two copies of Port Trust receipt and three copies of

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Bill of entry to the landing and shipping dues office. After receiving the dock charges, the dock authority will return one copy of Port Trust receipt and two copies of the Bill of entry to the agent. Then the agent has to submit this copy alongwith two copies of Bill of entry to the custom office. If customs duty is to be paid, he will make the payment and take delivery of the goods. (iv) Despatch of goods by Rail/Road. The clearing agent has to arrange carriage of the goods to the railway station or the transport authority after taking the delivery from the dock authority. He will despatch the goods by rail/road to his principal and get the railway receipt/carrier receipt. Advice to the importer. The clearing agent has to write a letter of advice to the importer after despatch of goods. In this letter of advice, information regarding arrival of goods and their despatch by rail/road are specified. He has to enclose with it the railway receipt/carrier receipt and a statement of his expenses and charges.

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Delivery of goods from Railway/Transport Authority. The importer can take delivery of the goods and carry them to his godown. Thus the whole procedure of importing goods is completed.

Intext Questions 9.4

Fill in the blanks. 1. An importer has to complete various formalities with the Reserve Bank of India in order to get ______exchange. Letter of Credit ensures payment to the ______. The agent appointed for the importer to complete various formalities in importing goods is known as _____ agent When the clearing agent does not have details of the goods

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imported, he has to fill up a document known as Bill of _______ 5. Indent is a document which is sent by the ______ to the ______.

9.8 Documents to be used in External Trade

The documents which are used in external trade are classified under three heads. 1. 2. 3. Documents used in both import and export trade Documents used in export trade Documents used in import trade

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Documents used in both import and export trade

Indent It is an order placed for import of goods. It is sent to the exporter for supply of the goods. It contains full information regarding the goods to be imported: quantity, quality, mode of packing and marking, period of delivery, mode of payment and other instructions regarding shipment and insurance, etc. An indent is a closed indent when the price at which goods are to be purchased and the source from where they are to be purchased are clearly specified. Indent is said be open when no price is specified and it is left to the discretion of the exporter to purchase goods at the lowest price.

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Letter of credit In external trade, the importer has to prove his credit-worthiness to the exporter, who may demand a certain amount of deposit or even full payment of due price before the shipment of goods. For this purpose, the importer arranges with his bank for issuing a letter of credit in favour of the exporter. Thus a letter of credit is issued by a bank in the importers country in favour of the foreign dealer. It contains an undertaking by the bank concerned that the bill of exchange drawn by the foreign dealer on the importer will

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be honoured on presentation to the extent of amount specified in it. Thus it establishes the credit-worthiness of the importer and guarantees payment of price to the exporter for the goods exported by him. (iii) Bill of Lading It is a document prepared by the ship owner or by the master of the ship acknowledging the receipt of goods on board the ship and undertaking to deliver the goods at the port of destination. This is, on the one hand, proof of the receipt of goods specified therein and, on the other, a document of title to the goods. The document is sent by the exporter to the importer who can take delivery of the goods at the port of destination on presentation of the bill of lading and other shipping documents. (iv) Advice letter It is a document which is prepared by the forwarding agent and sent to the exporter indicating that all the formalities for export of goods have been completed and goods have been shipped. Along with this letter the forwarding agent sends a statement showing expenses incurred on the goods exported and his remuneration. Similarly, a letter of advice is also prepared by the clearing agent and sent to the importer stating that all the formalities for clearing the imported goods have been completed. Along with this letter the clearing agent sends the railway receipt as a proof of goods sent to importer as well as his statement of account for expenses incurred and commission charged. Thus, it is a document used both in export and import trade. (v) Documentary Bill When the documents of title to goods are sent along with the bill of exchange drawn by the exporter on the importer, it is called a documentary bill. It may be of two types (a) Documentary bill against payment (b) Documentary bill against acceptance. In case of documentary bill against payment, the documents of title to exported goods are delivered to the importer only when the importer has paid the amount specified in the Bill of exchange. In case of

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documentary bill against acceptance, the documents of title to the exported goods are delivered to the importer after he has accepted the bill of exchange drawn by the exporter (vi) Insurance Policy The insurance policy is issued by the insurance company to cover the risks of loss or damage to goods due to specified causes. If there is no insurance then the loss will have to be borne by the owner of the goods, the exporter or importer. Under CIF (Cost Insurance Freight) contract, insurance is generally taken by the exporter while under FOB (Free on Board) contract, insurance is taken by the importer. There are different types of insurance policies to cover different types of risks in foreign trade.

Documents used in export trade

Besides the documents used both in export and import trade, the documents used in export trade are as follows : 1. Export Permit : It is received by the exporter by applying to the Chief Controller of Exports. The licence is issued according to the Import and Export Policy of the Government of the home country. Such a policy is announced from time to time by the Government in India. When the exporter is given a licence to import goods it is called a Replenishment Licence Shipping order : In order to hire space in the ship, the exporter or his agent has to enter into an agreement with the shipping company. The shipping company on the conclusion of the agreement gives a shipping order which contains instruction to the captain of the ship to receive on board the specified quantity of goods from the exporter. Shipping Bill : The shipping bill is a document prepared in triplicate by the exporter. There are three different forms for different classes of goods. Goods are classified as (i) Free goods, (ii) Dutiable goods, and (iii) Goods for re-export or Bonded goods. The copies of shipping bill along with the export licence and G R forms are carefully checked by the custom

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authorities. They assess the duty payable on dutiable goods which the exporter has to pay. 4. Mates receipt : When goods are brought to the docks for shipment, the document issued by the dock authority is known as a dock receipt. It is the duty of the dock authority to load the goods in the ship. But if goods are directly taken into the ship, the captain or his assistant (mate) gives a receipt as a proof of goods loaded in the ship. This receipt is known as Mates receipt. If the mate is not satisfied regarding the packing of goods, he issues a foul Mates receipt, otherwise he issues a clean Mates receipt. Charter Party : It is a formal agreement for hiring the whole ship or a substantial part of it to carry the goods for a special voyage for a particular time. When the entire ship is hired by the exporter it is known as charter party. Here it should be noted that the bill of lading is an acknowledgement of the receipt of goods on board the ship as well as a document of title to the goods. It does not indicate hiring of ship. But in case of charter party, the ship owner loses his control on the ship for some time because the crew begin to act as agents of the charterer. Dock Challan, Dock Warrant and Dock Receipt : The exporter has to fill up a form in duplicate for the payment of dock charges. This form is known as Dock Challan. It is after completion of this process that the exporter can bring the goods for loading in the ship. For this purpose, a document is issued permitting the goods to be brought to the docks for loading. This document is known as Dock Warrant. After the goods are actually brought to the docks and handed over to the dock authorities for loading in the ship, the document issued as a proof of delivery is known as Dock Receipt. Consular Invoice : The exporter fills a special invoice form available from the office of the consul of the importers country stationed in his (exporters) country and gets it signed by the consul. In this document the exporter or his agent enter all the particulars about the goods shipped and certify the accuracy of the prices shown. The special invoice bearing the signature of the

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consul of the importers country stationed in the exporters country is known as Consular invoice. This document is obtained to avoid under and over invoicing as well as to save time of custom authorities in the importers country. 8. Certificate of origin : It is a document issued as a proof of the fact that the goods have been produced in the country mentioned in it, that is, a certificate about the genuine origin of the goods exported. This document is issued on the basis of trade agreements between the countries in which they agree to levy lower rates of import duties on the goods produced by them. Some chambers of commerce are also authorised to issue such certificates. Airway bill : When goods, specially perishable ones, are sent to the importer by air, then this document is needed.It is a receipt given by the airline for the goods it is carrying. At the destination it has to be surrendered by the importer to the airline for releasing goods. It contains such information as name and address of exporter, name and address of importer or his agent, description of goods, number of packages, weight and volume of goods, rate of frieght and total frieght, airport of loading and destination, flight number and date, etc. Export Invoice/Foreign Invoice : The foreign invoice is prepared by the exporter in duplicate at agreed price quotations. The invoice contains details such as the name of the ship, port of shipment, port of destination, number of indent, details regarding packing and marking, price of goods and other expenses including frieght, dock dues, and insurance charges.

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Documents used in import trade

Besides the documents used in both export and import trade, the documents used in import trade are as follows:1. Import licence : The Government of India announces the import and export policy of the country from time to time. Everybody is not free to import anything he likes. He has to obtain a valid import licence for the import of required quantity and value of goods by completing various formalities with the Reserve Bank of India

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(RBI) and other concerned authorities. Import Licence is the document which enables the importer to import goods upto a specified quantity and value from a specific country. 2. Bill of Entry and Bill of sight : It is a document which acts as a proof that the goods of stated value and description in specified quantity are being entered into the country from abroad. Three copies of this document are prepared in which the importer has to give each and every detail of goods imported. Separate bill of entry forms are used for (a) free goods i.e. those goods on which customs duty is not payable, (b) bonded goods or dutiable goods which are subject to payment of customs duty. Import duty payable may be specific duty when it is payable on the basis of weight or measurement of the goods, or ad valorem duty when it is payable on the basis of market value or the invoice value of the goods. If the importer or his agent does not have details of the goods to complete the form of Bill of entry, he has to file a document called Bill of sight. The bill of sight gives him permission to examine the goods in the dock in the presence of customs officers and collect the details about the goods to be recorded in the bill of entry form. If the goods are not subject to custom duty, this Bill of sight is converted into a Free entry, and delivery of the goods is given to the importer. If the goods are liable to duty, it is converted into a Prime entry and on payment of the duty, goods are delivered. 3. Dock Challan : It is a document which acts as proof of payment of dock charges on the imported goods. This document is issued by the dock authorities in the imported country to the importer.

Intext Question 9.5

State which of the following statements are true or false. 1. Insurance policy is used as a document both in export trade and import trade. Certificate of origin is used in export trade.

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3.

Dock Challan is a proof of payment of dock charges in import trade. Letter of credit is sent by the exporter to the importer. Bill of lading is a document of title sent by the importer and is used as a document in both import and export trade.

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What You Have Learnt

External Trade means buying and selling of goods and services between nationals of different countries across the boundaries of two nations. It includes import trade, export trade and entrepot trade.

Advantages of external trade

(1) Availability of large variety of goods; (2) Export of surplus production; (3) Resource endowment; (4) Higher standard of living; (5) Price equalisation; (6) Relief in case of natural calamities; (7) International relations; (8) Development of trade promoting services.

Difficulties in external trade

(1) Distance; (2) Diversity of language; (3) Greater risk; (4) Difficulties in transportation and communication; (5) Difficulties in payments; (6) Restrictions; (7) Lack of personal touch; (8) Study of foreign markets; (9) Cost

Middlemen in foreign trade

(1) Indent house, (2) Export houses, (3) Forwarding and Clearing agents, (4) Shipping company, (5) Insurance company, (6) Merchant exporter, (7) Trade Commissioners, (8) Trade representatives

Procedure in export Trade

In the export procedure the following steps are taken: (1) Receipt of an indent, (2) Credit enquiry,(3) Obtaining export licence, (4) Collection of goods, (5) Packing and marking of goods, (6) Appointment of forwarding agent, (7) Despatch of goods by rail/road. (8) Formalities to be completed by forwarding agent : (i) Obtaining the

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custom permit, (ii) obtaining the shipping order, (iii) completion of shipping bill and payment of export duty, (iv) payment of dock dues, (v) custom verification before loading of goods, (vi) Mates receipt, (vii) Bill of lading, (viii) Insurance of cargo, (ix) advice to the exporter (9) Preparation of export invoice and consular invoice; (10) Securing payment : (a) Letter of credit, (b) Letter of hypothecation; (11) Advice to importer

Procedure in import trade

In import procedure the following steps are taken in sequence; (1) Obtaining the import licence, (2) obtaining foreign exchange, (3) placing the indent, (4) sending letter of credit, (5) procuring the shipping documents, (6) appointment or clearing agent, (7) formalities to be completed by the clearing agent, (a) Endorsement for delivery, (b) Bill of entry and Bill of sight, (c) payment of dock charges, (d) despatch of goods by rail/road, (e) advice to importer. (8) Delivery of goods from Railway/Transport authority.

Documents used in external trade

These are classified under three heads 1. (i) Documents used in both import and export trade Indent : It is an order sent by the importer to the exporter. It is received by the exporter for supply of goods. Letter of Credit : It is issued by a bank in the importers country in favour of the foreign dealer certaining an undertaking to honour the bills of exchange drawn by the latter on the former. It is a proof of the credit worthiness of the importer. Bill of Lading : It is a proof of goods received and specified the document to be carried and to be delivered at the port of destination. It is issued by the shipping company to the exporter who sends it to the importer. It is also a documents of title to the goods. Letter of Advice : It is sent by the forwarding agent and indicates that all the formalities for export of goods have been completed and goods have been shipped. It is prepared by the forwarding

(ii)

(iii)

(iv)

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agent and is sent to the exporter. Similarly a letter of advice is prepared by the clearing agent which indicates that all the formalities have been completed and delivery of the imported goods have been taken. It is sent by the clearing agent to the importer. (v) Documentary Bill : When a bill of exchange drawn by the exporter on the importer is sent alongwith other documents of title to the goods, it is known as documentary bill. Insurance Policy : It is issued by the insurance company to cover the risks of loss or damage to goods when the goods are in voyage. The exporter insures the goods to be exported and sends the policy to the importer.

(vi)

Documents used in export Trade

Besides the documents used in both import and export trade, the following documents are used in export trade. (i) Export permit : This document permits the exporter to export goods specified in it. Shipping order : It is a document which instructs the captain of the ship to receive the specified goods on board the ship. It is prepared by the shipping company and is delivered to the exporter. Mates receipt : It is a document which acts as a proof of goods loaded into the ship. It is issued by the captain or his assistant (mate). Charter Party : When the whole ship is hired by the exporter to carry the goods, the document issued by the shipping company is known as Charter party. It is a contract between the hirer and the shipping company. Dock Challan/Dock Warrant/Dock Receipt : Dock Challan is used to pay dock charges on the goods to be exported. Dock warrant is issued to bring the goods from the port for loading in the ship. Dock receipt is a proof of delivery of the goods to the dock authority for loading into the ship.

(ii)

(iii)

(iv)

(v)

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(vi)

Consular invoice : It is a special invoice issued by the consul of the importers country stationed in the exporters country. This document prevents under and over invoicing of the goods to be exported and saves time of the customs authority in calculating the duties to be charged from the importer at the time of delivery of goods. Certificate of origin : This document acts as a proof of the fact that the exported goods have been produced in the country specified in the document. This document helps to pay lower rate of import duties on the goods imported.

(vii)

(viii) Airway bill : It is a receipt issued by the airline authority to carry and deliver the goods at the particular airport. It contains all the details regarding the exporter, importer, goods, and the freight charged. (ix) Export invoice : It is prepared by the exporter and sent to the importer in which all the details relating to the exported goods including name of ship, port of shipment, freight, insurance charges, dock charges, etc, are specified.

Documents used in Import trade

Besides the documents used in both import and export trade, the following documents are used in import trade: (i) Import Licence : It is a document which entitles the importer named in it to import the specified quantity of goods upto the specified value. Bill of entry and Bill of sight : Bill of entry is filled up when the importer/agent has details of the goods imported. But when he does not have the details, the importer/agent has to fill up a document known as Bill of sight. Bill of sight entitles him to open the packages of imported goods so that he/agent can fill up a bill of entry form and can pay the custom duties on imported goods. Dock Challan : It is a proof of payment of dock dues on the imported goods. It is issued by the dock authority to the importer/ his agent.

(ii)

(iii)

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9.10 Terminal Exercise

1. 2. 3. 4. 5. 6. 7. What do you mean by external trade ? Explain its advantages. What are the difficulties which may be faced in external trade by traders ? Discuss. Explain the procedure for exporting goods to the United States of America by sea route. Explain the procedure for exporting goods from India. Describe the procedure of importing goods by sea from London to Bombay. A Delhi merchant desires to buy tinned milk from Australia. Describe in brief the procedure he will adopt to buy goods. Write short notes on: (i) (ii) (iii) (iv) (v) (vi) Shipping Bill Consular invoice Bill of lading Mates Receipt Letter of Credit Air-way Bill

Short Questions
1. 2. 3. 4. 5. 6. 7. Distinguish between open and closed indent. Distinguish between Bill of Lading and Charter Party. Identify/ Name any three middlemen in external trade. Name any four important documents in export trade. Name any four important documents used in import trade. Name two main difficulties faced by traders in external trade. Name any three documents used both in export and import trade.

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9.11 Answers to Intext Questions

9.1 (i) Improves (2) Equalisation (3) Surplus/excess (4) Distance (5) Risk (6) Entrepot. 9.2 9.3 (1) c, (2) a, (3) b, (4) e, (5) d (1) loss (2) exporter (3) recognised/identified (4) dishonoured (5) Advice 9.4 (i) Foreign, (2) exporter, (3) clearing, (4) sight, (5) importer, exporter. 9.5 (1) True (2) True (3) True (4) False (5) False