International Trade

TOPIC OF THE CASE: TRADE IN INFORMATION TECHNOLOGY AND US ECONOMIC GROWTH INTRODUCTION: The assignment is about the case where the organizations in the US were responsible for the development and advancement of information technology which also included the invention of Mainframe and Midrange computers in the era of 1960s and 1970s. Companies such as IBM and Dell were one of the first companies which led to advancement of information technology.

However, with the high cost of production in US regarding the production of basic components, such were then offshored to foreign companies. PROBLEMS AND SOLUTIONS: 1. During the 1990s and 2000s computer hardware companies in certain developed nations progressively moved the production of hardware components offshore, often outsourcing them to producers in developing nations. What does international trade theory suggest about the implications of this trend for economic growth in those developed nations? SOLUTION: INTRODUCTION:

The theory illustrates that developed nations despite having resources to produce, have pursued in buying the commodities from the foreign manufacturers. This is because of the low cost of importing rather than producing such components. The theory may be described as Comparative Advantage Theory. Such theory states the ability of a nation to produce goods at a lower opportunity cost than other nation. The developed countries were only focusing on producing on high value added components whereas developing nations were improvising on manufacturing basic hardware components.

The demand of these different components were being met by each nation and hence the international trade commencement to meet the demands were utilized by such nations. IMPLICATIONS: The developed nations by practicing the outsource methodology for production of basic hardware commodity benefited it for many different reasons. Such reasons are as follows: * The internal resources which could have been utilized at exorbitant costs can be curtailed and such resources could be used for alternative purposes.

This would mean that the factors of production shall be available for other developments and advancement. * The decrease in cost of a final product would result in increase in the sales volume of such product as demand will increase. This increase in demand would result in an increase in the supply of a commodity therefore, more revenue shall be generated for the government. * An increase in the overseas supply of a final product would implicate a favorable balance of trade.

This shows that exports shall increase over imports during a period. * Productivity of a major industry in regard to an increase in sales will enlighten the economic development of a nation by enhancing its Gross Domestic Product (GDP). This means if information technology industry of a nation improves then the contribution to the GDP of a developed nation shall also enhances. * Development in an industry promotes the job opportunities of developed nations.

This means that with the advancement of information technology sector came with a high demand of related jobs such as computer software engineers and other kinds of computer based services. With this unemployment also reduced and proved a considerable contribution to the economy. CONCLUSION: With the outsourcing of production of basic commodities to developing nations in the era of 1990s and 2000s, developed nations were greatly benefited by both time and cost to allow them to produce even more technical commodities and exert their skills on advancing in the information technology sector.

Currently such companies like Dell, Intel, Apple etc. are generating even more new products into the world market of information technology and simultaneously contributing to the economy of their respective nations. 2. IS THE EXPERIENCE OF THE UNITED STATES, AS DESCRIBED IN THE CASE CONSISTENT WITH THE PREDICTIONS OF INTERNATIONAL TRADE THEORY? SOLUTION: INTRODUCTION: Computer companies in the United States like Dell, Intel, Apple etc. have been manufacturing computers in the late 1970s.

However, during the early 1980s, such companies decided to offshore production of basic components like dynamic random access memory chips (DRAMs) to Japan and other countries manufacturers, yet they kept the production of the highest value added components such as microprocessors to themselves and the final assembly. This trend implicates that US companies were producing the final product and in the light of international trade, demand for such computers was also increasing momentarily by other nations.

Also, US was also advancing in other industries which started to utilize IT based products. Altogether, productivity expansion was shown in the US economy. ADVERSE IMPACT ON THE US ECONOMY: Ricardo’s insight on comparative advantage theory stated that all countries come out ahead when they trade with each other because if a developed nation like the US trade more with a developing nation like Japan with each country specializing in different products then they have a relative advantage.

But this effect had an adverse implication on the job losses in US. By the continuation of globalization, many of the US white collar jobs were at stake. This is because of the production shifting to offshore countries like Japan, China, India, etc. A census by Harvard University labor economist showed that every 1% drop in employment due to imports or factories gone outsourced curtails about 0. 5% off pay for remaining workers. And if white collar outsourcing expands, the concluding job losses could cutoff a massive swath of US consumers.

As there is minor doubt that globalization will relatively break in and would cause around 14. 5 million workforce loss and more than half the US workforce of around 130 million could feel the blow. DEVELOPMENTS IN THE US INDUSTRIES: Many economists thought that the new offshoring is an accumulated advantage. For one thing, bosses’ cost savings should be more than enough to uphold for any remuneration loss impact. By the reduced prices of software and other goods outsourcing could enlighten a new cause of US productivity increments.

This is agreed to say that surely that developing countries like Japan, China etc. will specialize in producing IT commodities and are obtaining jobs in IT related services, but US will still outrun them in areas like drug research or nanotechnology which the developing countries are not even close to achieving. Thus US will have space, technology and other resources to work on the developments of new and technical industries. PRODUCTIVITY GROWTH IN THE US ECONOMY: Globalization of IT hardware production also created an impact on IT services and software.

With the decrease in the prices of both hardware and software from 10 to 30 percent, these lower prices led into higher productivity growth and an accumulated $230 billion in additional Gross Domestic Product. Many other industries also started to use computers in their businesses which shown 2. 8% percent growth in the productivity of their sales and profits. 3. WHAT ARE THE IMPLICATIONS OF THE THEORY AND DATA FOR a) GOVERNMENT POLICY IN ADVANCED NATIONS SUCH AS THE UNITED STATES, AND b) THE STRATEGY OF A FIRM IN THE COMPUTER INDUSTRY, SUCH AS DELL OR APPLE COMPUTER?

SOLUTION: INTRODUCTION: Comparative Advantage Theory states that countries should specialize in economic activities in which they have a comparative advantage and trade with others. The government policies should also revert on focusing on that specific area which the country specialize. a) United States government on realizing the productivity growth in information technology trend, promoted the IT related industries on importing basic commodities such as DRAMs and other PC components and by the end of 1990s, IT developed so much so that GDP raised to $230 billion.

The US government was mastering in information technology very early. In 1990s, it issued an agenda to articulate and implement a vision for a national information infrastructure (NII). This initiative was widely praised at the time as a forward looking technology policy initiative that would simultaneously promote economic growth, improve the lives of citizens, and allow governments to provide better services and information to the public- all without new expenditures by the government.

The agenda embraced information technology as an enabling and indeed as transformative means for achieving a broad range of economic, social and political goals. The agenda characterized the US as having become primarily in information based economy and asserted a bright future for computer industries and other related IT industries. b) During the heyday of the technology boom throughout the 1990s many companies experienced enormous success for a few years, however without creating a solid internal framework many of these companies did not survive.

An exception to that business trend is dell, which was able to address its problems associated with rapid growth and build itself into a lasting profitable company. Dell in later 1990s manufactured PCs which no one else could think of, it was specializing in producing tailor made computers for users all over the world. Because of advancing in technical fields and continuing research, Dell proved to be one of the market leaders in computer industry and accounted for much market share in the overall world market of computer industry.

After the era of 1980s, advanced companies in the US computer industries were in business to make a profit and do well for other stakeholders such as investors. Because of this notion, many industries to offshore white collar jobs to developing countries like Japan, India, etc. Many of the economists argued that the loss of white collar jobs was merely a manifestation of companies viewing the world as a borderless market- where they seek resources wherever they are cheapest, produce in the optimal location, and sell wherever there is demand. CONCLUSION:

USA being the pioneer of Information Technology, developed most of the gadgets that we use today and have provided an ease of access to the computer industry. Despite the job losses after the offshoring process in the US itself, it provided a gain for other developing countries like Japan, China, India and many others. The core aim for the US companies was to maximize profits and expand production to overseas markets to enhance profits and sales. In the end still US economy in the IT related industry tops out in comparison to the rest of the world.

MKT 310 : Exam 2 Study Guide BOOK Ch. 5 : International Trade Theory An Overview of Trade Theory: * The Benefits of Trade – Some international trade is beneficial, exchange products you can produce at a low cost for some products you cannot produce at all * Free Trade – The absence of government barriers to the free flow of goods and services between countries. * International trade allows a country to specialize in the manufacture and export of products it can produce most efficiently while importing products that can be produced more efficiently in other countries. Climate and natural resources explain why Ghana exports cocoa, and Saudi Arabia exports oil * Product Life-Cycle Theory – Early in their life cycles, most new products are produced in and exported from the country in which they were developed. As the product becomes accepted internationally, production begins to start in other countries. Thus suggesting that the product may ultimately be exported back to the country of its original innovation. New Trade Theory – Theory that sometimes countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms. Mercantilism: * Mercantilism – Originated in England, An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. It was in the countries best interest to maintain a trade surplus, to export more than it imported. Also advocated government intervention to achieve a surplus in the balance of trade. Zero-Sum Game – A situation in which an economic gain by one country results in an economic loss by another. The flaw with Mercantilism is that it is viewed as a Zero-Sum Game. * Critics think China is pursuing a neo-mercantilist society, deliberately keeping its currency value low against the U. S. dollar in order to sell more goods to the U. S. , thus creating a surplus and foreign exchange reserves. Absolute Advantage: * Absolute Advantage – A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. According to Smith countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries. (Countries should never produce goods at home that it can buy at a lower cost from other countries. Comparative Advantage: * Comparative Advantage – It makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself. Basic Message of Comparative Trade – Potential world production is greater with unrestricted free trade than it is with restricted free trade. * Immobile Resources – Resources do not always shift easily from on activity to another, some friction is involved. Belief that a country will produce less of some goods but more of others, however not everyone has the skills and knowledge to produce the greater good, thus some people may lose their jobs. * Diminishing Returns – When more units of a resource are required to produce each additional unit.

First not all resources are of the same quality, and different goods use resources in different proportions. * Constant Returns to Specialization – The units of resources required to produce a good are assumed to remain constant no matter where one is on a country’s production possibility frontier. * Dynamic Effects and Economic Growth – Opening an economy to trade, might increase a countries stock of resources as increased suppliers of labor and capital from abroad become available for use within the country, and free trade might increase the efficiency with which a country uses its resources. When a rich country(U. S. ) enters in free trade with a poor country(China) the lower prices that U. S. consumers pay for goods imported from China may not be enough to produce a net gain for the U. S. economy if the dynamic effect of free trade is to lower real wage rates in the U. S. * Evidence for the Link between Trade and Growth – Countries that adopt a more open stance toward international trade enjoy higher growth rates than those that close their economies to trade. Heckscher-Ohlin Theory: Comparative advantage arises from differences in national factor endowment, and by factor endowment they meant the extent to which a country is endowed with such resources as land, labor, and capital.. The Heckscher-Ohlin Theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. * The Leontief Paradox – Since U. S. was relatively abundant in capital compared to other nations, the U. S. would export capital intensive goods and import labor-intensive ones. However he found that the U.

S. exports were less capital intensive than the imports. The Product Life-Cycle Theory: * Most new products were initially produced in the U. S. and sold in the U. S. markets first, the wealth and size of the U. S. can them strong incentives to develop new consumer products. , in addition the high cost of U. S. labor gave U. S. firms an incentive to develop cost-savings process innovations. These expensive goods are only appealing to the wealthy of other nations, thus there isn’t that much overall global interest, so no other countries feel it is necessary to start producing the product as well. New Trade Theory: The ability of firms to attain economies of scale might have important implications for international trade. * Economies of Scale – Unit cost reductions associated with a large scale of output * New Trade Theory makes 2 important points: * 1) Through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average costs of those goods. * 2) In those industries where the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises. First-Mover’s Advantage are the economic and strategic advantages that accrue to early entrants into an industry. The ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure, is an important first mover’s advantage. * Implications of New Trade Theory – generates for government intervention and strategic trade policy, a nation may befit from trade even if they do not differ in resource endowments or technology, trade allows a nation to specialize in the production of certain products—attaining scales of economy and lowering cost.

National Competitive Advantage: Porter’s Diamond * Porter theorizes that 4 broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitve advantage. These attributes are…… * Factor Endowments – A nations’ position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry (Advanced factors are the most significant competitive advantage. ) * Demand Conditions – the nature of home demand for the indutry’s product or service. Relating and Supporting Industries – the presence or absence of supplier industries and related industries that are internationally competitive. * Firm strategy, Structure, and Rivalry – The conditions governing how companies are created, organized, and managed and the nature of domestic rivalry. * He argues that firms are most likely to succeed in nindustries or industry segments where the diamond is most favorable.. The diamond is a mutually reinforcing system – meaning the effect of one attribute is contingent on the state of others. ———————————————— Ch. 6 : The Political Economy of International Trade Instruments of Trade Policy: * Tariffs – A tariff is a tax levied on imports (or exports. ) In most cases tariffs are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods. Tariffs also produce revenue for the government. The government and the domestic producers gain from having tariffs, whereas the consumers lose. * 2 conclusions can be made about tariffs: First, tariffs are pro-producer and anti-consumer.

Second, import tariffs reduce the overall efficiency of the world economy. (Tariffs encourage domestic products to be sold at home when they could be more efficiently sold in the global market. ) * Export tariffs raise money for the government, and they reduce exports from a sector, often for political reasons. * 2 Types of Tariffs: * Specific Tariffs – Levied as a fixed charge for each unit of a good imported (ex. $3 per barrel of oil) * Ad Valorem Tariffs – Levied as a proportion of the value of imported goods. Subsidies – A subsidy is a government payment to a domestic producer. By lowering production costs, subsidies help domestic producers in 2 ways: 1) competing against foreign imports and 2) gaining export markets. * Agriculture is the largest beneficiary of subsidies. * Non-Agriculture subsidy ex. Money given to Boeing and Airbus * The main gains from subsidies accrue to domestic producers, whose international competiveness is increased as a result. * Subsidies protect the inefficient and promote excess production. Import Quotas and Voluntary Export Restraints – An import quota is a direct restriction on the quantity of some good that may be imported into a country * Tariff Rate Quota – The process of applying a lower tariff rate to imports within the quota than those over the quota. * Voluntary Export Restraint – A quota on trade imposed by the exporting country, typically at the request of the importing country’s government. Ex. Limitation on auto exports to the U. S. enforced by the Japanese automobile producers. * Quota Rent – The extra profit producers make when supply is artificially limited by an import quota. Local Content Requirements – A requirement that some specific fraction of a good be produced domestically. Ex. Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage. * Administrative Policies * Administrative Trade Policies – Bureaucratic rules designed to make it difficult for imports to enter a country, as it has been argues that the Japanese are masters of this trade barrier. * Antidumping Policies Dumping – Selling goods in a foreign market at below their costs of production or below their “free” market value. Ex. 2 South Korean manufacturers of semiconductors were accused of selling microchips in the U. S. market at below their cost of production. * Anti-Dumping Policies – Policies designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition. * Countervailing Duties – Antidumping duties. Political Arguments for Intervention: * Protecting Jobs and Industries – Tariffs placed on steel in 2002 by G.

W. Bush were supposed to do this. * National Security – Protect the area of technological advancement, and the defense industries. * Retaliation – Use threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to “play by the rules. ” Ex. U. S. has used threat of punitive trade sanctions to try and get the Chinese government to enforce its intellectual property laws – China cost Microsoft hundreds of millions of dollars per year in lost sales revenues. * Protecting Consumers – Ex.

Many countries decided to ban imports of American beef after one case of Mad Cow Disease was found. * Furthering Foreign Policies Objectives – Governments sometimes use trade policy to further support their foreign policy objectives. * Helms-Burton Act – This act allows American to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution. * DAmato Act – Act passed in 1996, similar to the Helms-Burton Act, but this one is aimed at Libya and Iran. * Protecting Human Rights – Ex.

Debate over many years on whether to grant the “Most Favorable Nation” to China — this is controversial bc many think China doesn’t regard human rights per the Tiananmen Square Massacre. * Protecting the Environment – Strong relation between income levels and environmental pollution/degradation. Ex. Carbon Emissions Tariff, etc. Economic Arguments for Intervention: * The Infant Industry Argument – New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations. Skepticism because protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient. Second, the infant industry argument relies on an assumption that firms are unable to make efficient long term investments by borrowing money from the domestic or international capital market. * Strategic Trade Policy – A Government policy aimed at improving the competitive position of a domestic industry or domestic firm in the world market. It is argued that by appropriate actions, a government can help raise national income if it can somehow ensure that the firm(s) that gain first-movers advantage within an industry are domestic rather than foreign enterprises. * The second component of the strategic trade policy is that it might pay a government to intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped the benefits of first-movers advantage. Development of the World Trading System , GATT, WTO: (Look in PPT slides for this info. )

No: 1 BPO – BANE OR BOON ? Answers: 1. Which of the theories of international trade can help Indian services providers gain competitive edge over their competitors? 1. Suggested Theory to gain dynamism and competitiveness  in Operation A. Developing executive leadership at three levels • top team, • the personal development of individual executives as leaders and • the Chief Executive Officer (CEO) B.

Success Brand Development and Brand Strategy : An effective brand strategy will create a unique identity that will differentiate from the competition. That is why it’s often deemed as the heart of a competitive strategy C. Strategies for Working : Work avoidance is one of the major paradoxes, Making a complete Plan to work, setting a quota for a week or month and making them to execute will increase the overall growth D.

Achieve learning through knowledge management: Knowledge Management efforts typically focus on organizational objectives such as improved performance, competitive advantage, innovation, the sharing of lessons learned, integration and continuous improvement of the organization. Knowledge Management efforts overlap with organizational learning, and may be distinguished from that by a greater focus on the management of knowledge as a strategic asset and a focus on encouraging the sharing of knowledge. E.

Achieve supply chain excellence : “ The basis of competition for winning companies in today’s economy is supply-chain superiority,” “ These companies understand that value-chain performance translates to productivity and market-share leadership. They also understand that supply-chain leadership means more than just low costs and efficiency, it requires a superior ability to shape and respond to shifts in demand with innovative products and services. 2. Productivity for   INTERNATION  TRADE  Competitiveness:

The rapid changes in the context of the process of economic reform, globalization and liberalization have created greater compulsions for India to be productive and competitive than ever before. With rapid advancement in technology as well as Management Theory and Practice, the concept & techniques of productivity have undergone a change over time, thereby creating a need for devising fresh approaches, coining new message and adopting a new idiom to spread the message to the stakeholders.

There is an urgent need to redefine and re-structure the Productivity Movement in such a way that it becomes a self perpetuating process, more so, because the general environment earlier was not very congenial for the desired productivity growth as lots of non-productive barriers & protective walls surrounded our economic system for a very long time. All these protective walls have come crashing down and now competition is the name of the Game.

Keeping in view the stage at which it stands on the road to economic progress, promotion of productivity, its awareness creation and benefitable implementation should be the corner stone of productivity movement. Productivity in its new manifestation, as a culture of accepting and bringing about continuous change through teamwork having continued focus on the customer-need is an inescapable imperative. These Concepts have come to acquire greater significance in the current context of changes economic environment. 3. BUILDING  Brand India’s Need Perspectives  STRATEGY: Need to move up the value chain- better R&D • Need to project greater ROI on investment – better profitability • Need to remove revenue dependence on any single resource such as human capital • Need to carve a niche – IPR and Licensing • Need for technological prowess and market knowledge – focused domain expertise • Need to brand products and services – better marketing Every organization has its own distinctive approach towards development. Connecting these initiatives, there should be a commitment to enlarge the scope of innovation and to create environment conducive to Productivity.

Productivity may be the outcome of techno-managerial practices, but eventually is the result of a mindset. Basic to this approach is the conviction that there is no limit to improvement. Even the best can be improved. The crucial ingredient is the preparedness of the human mind to change. Therefore, workers, managers, policy makers and others should be ready to continuously and collectively work for productivity improvement, not only in every economic activity, but also in every human endeavor for the development of the society as well as the country.

Needless to mention, as we graduate further into knowledge era, traditional methods and principles will become increasingly ineffective and we will have to innovatively augment productivity both at micro as well as macro level to realize a global competitive edge. 2. Pick up some Indian services providers. With the help of Michael Porter’s diamond, analyses their strengths and weaknesses as active players in BPO. The Diamond Model of Michael Porter for the competitive advantage of Nations offers a model that can help understand the comparative position of a nation in global competition.

The model can also be used for major geographic regions. Traditional country advantages : Traditionally, economic theory mentions the following factors for comparative advantage for regions or countries: 1. Land 2. Location 3. Natural resources (minerals, energy) 4. Labor, and 5. Local population size. Because these 5 factors can hardly be influenced, this fits in a rather passive (inherited) view regarding national economic opportunity. Porter says that sustained industrial growth has hardly ever been built on above mentioned basic inherited factors.

Abundance of such factors may actually undermine competitive advantage! He introduces a concept called “clusters” or groups of interconnected firms, suppliers, related industries, and institutions,that arise in certain locations. Porter Diamond Nations: According to Porter, as a rule competitive advantage of nations is the outcome of 4 interlinked advanced factors and activities in and between companies in these clusters. These can be influenced in a pro-active way by government.

PORTER   argued  that  a  nation  can create new  advanced  factor endowments  such as  skilled  labor, a  strong technology  and knowledge base, government  support, and culture. PORTER used  a  diamond  shaped  diagram  as a  basis  of   a  framework to illustrate  the  determinants   of  national  advantage. The  diamond represents   the   national playing   field  that  the countries  establish  for their industries. The points of the diamond are described as follows FACTOR CONDITIONS: • a country creates its own important factors such as skilled resources and technological base. these factors are upgraded / deployed over time to meet the demand. • local disadvantges force innovations. new methods and hence comparative advantage. DEMAND CONDITIONS: • a more demanding local market leads to national advantage. • a strong trend setting local market helps local firms anticipate global trends. RELATED AND SUPPORTING INDUSTRIES: • local competition creates innovations and cost effectiveness. • this also puts pressure on local suppliers to lift their game. FIRM STRATEGY , STRUCTURE AND RIVALRY. local conditions affect firm strategy. • local rivalry forces firm to move beyond basic advantages. THE DIAMOND AS A SYSTEM • the effect of one point depends on the others. • it is a self-reinforcing system. THE ROLE OF THE GOVERNMENT IN THIS MODEL • to encourage • to stimulate • to help to create • growth in industries. • In Terms and Conditions Let us take the organization “TCS”’ 1. BPO/ KPO Business BPO is established and is on development stage. KPO is on Threshold of Growth The Passive Analysis of The Active/Proactive Analysis of

FACTOR CONDITIONS: • TCS has created its own important factors such as skilled resources and technological base for expanding BPOs / KPOs • TCS is upgrading / deploying resources over time to meet the demand. • New innovations. New methods has given the local industry the comparative advantage. DEMAND CONDITIONS: • a more demanding local/ global market has given ‘TCS’ the international / national advantage. • a strong trend setting local market has helped local firms anticipate global trends.

RELATED AND SUPPORTING INDUSTRIES: • local competition has created innovations and cost effectiveness for the TCS . • this has also put the pressure on local suppliers to lift their game. FIRM STRATEGY , STRUCTURE AND RIVALRY: • local conditions have affected TCS various strategy. • local rivalry have forced TCS to move beyond basic advantages. THE ROLE OF THE INDIAN GOVERNMENT IN THIS MODEL: • INDIAN GOVERNMENT is encouraging more TCS . • INDIAN GOVERNMENT is stimulating with paperwork reforms. INDIAN GOVERNMENT is helping to create more skilled labors. • INDIAN GOVERNMENT is providing infrastructures to attract more industries. 3. Compare this case with the case given at the beginning of this chapter. What similarities and dissimilarities do you notice? Your analysis should be based on the theories explained. • If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal. • The idea is to concentrate our strength against our competitor’s relative weakness. The opportunities and threats existing in any situation always exceed the resources needed to exploit the opportunities or avoid the threats. Thus, strategy is essentially a problem of allocating resources. If strategy is to be successful, it must allocate superior resources against a decisive opportunity. • It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. • Organizations pursue strategies that will disrupt the normal course of industry events and forge new industry

International trade is the backbone of our modern, commercial world. Producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders. There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes. This trend is attributable to the increased globalization of the world economies and the availability of trade payment and finance from the international banking community.

Although banks also finance domestic trade, their role in financing international trade is more critical due to the additional complications involved. First, the exporter might question the importer’s ability to make payment. Second, even if the importer is creditworthy, the government might impose exchange controls that prevent payment to the exporter. Third, the importer might not trust the exporter to ship the goods ordered. Fourth, even if the exporter does ship the goods, trade barriers or time lags in international transportation might delay arrival time. There are a number of methods of trade payment.

Before importers and exporters decide to do business with each other they need to understand and adopt a method suitable to meet their specific needs. The contract between buyer and seller will specify the way in which payment is to be made. Certain methods of payment are less risky than others. It is up to the buyer and seller to agree on a method that suits them both. The choice of payment method is affected by several factors like requirements of the seller and buyer, relationships between the trading partners, the operating environment and associated risks, object of transaction and market conditions etc. Once acceptable risks have been determined then the most appropriate payment method can be selected.

Exporters use different methods of financing international trade, depending upon the resources they have available and the transactional risk they are able to absorb. The ability to access international markets is an important strategic opportunity for manufacturers and sellers because it expands a company’s customer base exponentially. International trading is much more complicated than making domestic sales, and comes with internal and external stress factors that often determine whether a company can effectively operate in the global arena.

The assignment has two objectives

1) To discuss conceptual issues of international trade payment and finance 2) To discuss international trade payment and finance practice of Bangladesh

Conceptual Issues of International Trade Payment and Financing Methods To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms supported by the appropriate payment methods. Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer.

Financing methods use a variety of trade finance products that are available to exporters to increase cash flow and reduce the risk associated with shipping products overseas. Importers and exporters usually need to resort to trade payment and financing mechanisms, coursed through third parties such as banks or specialized financial institutions that help guarantee both the payment to exporters and the delivery of products to importers.

There are four common methods of payment available to firms engaged in International trade: Cash in Advance, Open Account / Supplier credit, Documentary Collection, and Documentary Credit / Letters of Credit LC. Cash in advance means payment in advance, or advance payment, refers to a situation in which the seller requests payment from the buyer before he will ship the goods. The seller only ships out the goods to the buyer after receiving the payment. With cash in advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.

Payment is usually made in the form of an international wire transfer to the exporter’s bank account or foreign bank draft. As technology progresses, electronic commerce will allow firms engaged in international trade to make electronic credits and debits through an intermediary bank. In cash in advance process, at first, there will be a purchase sale agreement between exporter and importer. In payment procedure there will be three steps, first, importer makes payment to the exporter. Second, exporter will make the shipment of goods and third, exporter will send the documents to the importer.

1. Purchase Sale Agreement
2. Payment
3. Shipment of Goods
4. Documents

Figure 1: Process of Cash-in-Advance
There are some features of this method: interest of exporter is fully protected and interest of importer is not protected. Banks are involved in the process of transferring payment. Documents and shipments are directly handled by the exporters. There is no universally accepted regulation to guide cash-in-advance. It is guided by the purchase or sale agreement. It is one of the cheapest forms of trade payment method but it is the least popular form of trade payment method in the world. It is used in the world less than 1%.

Cash-in-Advance should be used only under the following conditions: The importer is a new customer and/or has a less-established operating history. The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable. The political and commercial risks of the importer’s home country are very high. The exporter’s product is unique, not available elsewhere, or in heavy demand. The exporter operates an Internet-based business where the acceptance of credit card payments is a must to remain competitive.

Open account is the reverse of cash-in-advance, in which the goods, along with all the necessary documents, are shipped directly to the importer who has agreed to pay the exporter’s invoice at a specified date, which is usually in 30, 60 or 90 days. The exporter should be absolutely confident that the importer will accept shipment and pay at the agreed time and that the importing country is commercially and politically secure.

1. Purchase Sale Agreement
2. Shipment of goods
3. Documents
4. Payment

Figure 2: Process of Open Account

In open account method, interest of importer is fully protected and interest of exporter is not protected. Banks are involved in the process of
transferring payment. Documents and shipments are directly handled by the exporters. There is no universally accepted regulation to guide open account. It is guided by the purchase or sale agreement. It is also the cheapest forms of trade payment methods. It is the most popular form of trade payment method in the world. It is used in the world more than 85%. Open account terms may help win customers in competitive markets and may be used with one or more of the appropriate trade finance techniques that mitigate the risk of non-payment. It helps to establish and maintain a successful trade relationship.

Involvement of bank is insignificant and thus it’s not costly for the traders. Documentary collection (D/C) is the process of collection of payment by a bank on behalf of exporter from importer against documents. The importer is not obligated to pay for goods before shipment. It offers some protection to the seller. It is more secure than shipping on an open account basis but less secure than using a letter of credit or an advance payment. In documentary collection process, the very initial step is contract between exporter and importer where it is decided that payment will be collected against documents.

Next step is shipment of the goods and preparation or collection of the documents by the exporter. After collection and preparation of documents exporter is supposed to submit documents along with a set of collection instruction at the counter of Remitting Bank. Remitting Bank is the bank at the counter of which documents are submitted by exporter to collect payment from importer on its behalf. Remitting Bank generally collects payment and forward documents using the service of collecting and/or presenting bank.

Presenting bank is the bank that presents documents to the importer. And collecting bank is the bank that is involved in the process of documentary collection. Then as per the collection instruction importer receives documents either DP (Documents against payment) or DA (Documents against acceptance). Then the importer will release the goods against documents and exporter will receive payment either immediately or as per the accepted terms through banking channels.

Figure 3: Process of Documentary Collection

In this method, interest of importer is protected and interest of exporter is better protected than Open account. It is guided by the purchase-sale agreement and URC 522 (Uniform Rules for Collections). URC is published by International Chamber of Commerce (ICC) under the document number 522 (URC 522). All the banks involved in the documentary collection are the agent of exporters. Documentary Collection process could be risky for the exporter, if documents are not received by the importer. The exporter’s bank (remitting bank) and the importer’s bank (collecting bank) play an essential role in Documentary Collection process. Although the banks control the flow of documents, they neither verify the documents nor take any risks.

It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system. With documentary collection transactions, the exporter has little recourse against the importer in case of non-payment. Thus, documentary collection should be used only under the following conditions: The exporter and importer have a well-established relationship. The exporter is confident that the importing country is politically and economically stable. An open account sale is considered too risky, and an LC is unacceptable to the importer.

Documentary Credit or Letters of Credit (L/C) is the commitment, guaranty or undertaking by a bank on behalf of importer to the exporter about the payment of certain amount subject to the fulfillment of certain documentary condition. This method is a compromise between buyer and seller because it affords certain advantages to both parties. The exporter is assured of receiving payment from the issuing bank as long as it presents documents in accordance with the L/C. An important feature of an L/C is that the issuing bank is obligated to honor drawings under the L/C regardless of the buyer’s ability or willingness to pay. On the other hand, the importer does not have to pay for the goods until shipment has been made and the documents are presented in good order.

Documentary credit are recommended for new or less established trade relationships because the buyer’s bank is there to guarantee for both exporters (that payment will be made) and importers (that the terms of the contract are met). First step of Documentary Credit process is contract between buyer and seller where it is decided that payment will be made through L/C. Then the importer approaches to a bank (Issuing Bank) to issue L/C. Issuing bank is a bank that issues letters of credit (L/C).If the bank agrees on financing terms then L/C is issued by the issuing bank and sends to the exporter (Beneficiary). While sending L/C, issuing bank generally uses the services of a bank known as Advising Bank. Advising Bank is the bank using the service of which issuing bank advices credit to the exporter on behalf of importer. Advising Bank is selected by the Issuing Bank.

After receiving L/C exporter makes shipment and prepare documents to submit to the issuing bank or its agent (Nominated Bank). Nominated Bank is the bank nominated by the issuing bank at the counter of which documents may be submitted by the exporter in addition to the counter of issuing bank. Nominated bank is selected by the preference of exporter. After the submission of documents to the Nominated Bank or Issuing Bank, documents are examined to a certain ‘Complying Presentation’. Complying Presentation means the documents submitted are in order. Documents are complying if these are in accordance with L/C terms and conditions, UCP 600 and ISBP 681.

The concept of Complying Presentation is particularly important for the examination of documents by the bank and also for the exporter for preparation of the documents. If the documents are in order, there could be negotiation or honor. Negotiation is performed by the Nominated Bank through purchasing or discounting of documents without the consent of Issuing Bank which is a financing technique. When Nominated Bank negotiate documents it is known as Negotiating Bank. Honor means payment. If payment is occurred by issuing bank then it will be honor. Honor could be at sight, deferred basis, or acceptance basis.

Following negotiation or honor documents are forwarded to the Issuing Bank for reimbursement. Issuing Bank is supposed to examine documents and makes arrangement for making payment. Issuing Bank makes reimbursement to the Nominated Bank by using the service of Reimbursing Bank. Then finally, documents are handled to the importer and then, goods are released by the importer. After that importer make payment to the issuing bank for settlement.

From above discussion we can find some responsibilities of issuing bank: Issuance of L/C and making arrangement for advising.
Amendment of L/C if required.
Examination of documents and honoring document.
Making reimbursement to the nominated bank.

In international trade transaction there are various types of Letters of credit (L/C) is used. Broadly there are two types of Letters of credit.

i. Revocable Letters of credit
ii. Irrevocable Letters of credit.

If any Letter of Credit can be amendment or changed of any clause or canceled by consent of the exporter and importer, it is known as Revocable Letter of Credit. In case of seller (beneficiary), revocable credit involves risk, as the credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revocable credit is not widespread.

If any Letter of Credit cannot be amendment or changed of any clause without the consent of all concern parties – importer (applicant), exporter (beneficiary), Issuing Bank, and Confirming Bank (in case of confirmed L/C), is known as Irrevocable Letter of Credit. An Irrevocable Letter of Credit constitutes a firm undertaking by the issuing bank to make payment. It, therefore, gives the beneficiary a high degree of assurance that he/she will pay to his/her goods or services provided he/she complies with terms of the credit. There are also some special types of L/C such as: Transferable L/C, Back to back L/C, Revolving L/C, Confirm L/C, Red clause L/C, and Standby L/C.

The main modes of international trade are export and import. Both of them required financing in order to complete the export and import process properly. Trade financing is financing either to the exporters or to the importers. Exporters use different methods of financing international trade, depending upon the resources they have available and the transactional risk they are able to absorb. Broadly financing is two types: Export financing and Import financing. Export financing means financing facilities to the exporter and financing facilities to the importer is called import financing. Exporters need financing facilities at two stages: i. Pre shipment stage

ii. Post shipment stage
Pre-shipment finance for exporters is the finance required to bring an export transaction to the point of shipment – either to manufacture, process, or purchase merchandise and commodities for shipment overseas. Pre Shipment Finance is issued by a financial institution when the sellers want the payment of the goods before shipment. The main objectives behind Pre-shipment finance or Pre-export finance is to enable exporter to: Procure raw materials.

Carry out manufacturing process.
Provide a secure warehouse for goods and raw materials.
Process and pack the goods.
Ship the goods to the buyers.
Meet other financial cost of the business.

Pre-shipment financing is especially important to smaller enterprises because the international sales cycle is usually longer than the domestic sales cycle. Pre-shipment financing can take in the form of short term loans, overdrafts and cash credits. Packing credit, back to back L/C, red clause L/C etc. are the example of pre shipment export financing. Packing Credit is a pre shipment credit offer to the exporters to meet expenses related to the preparation of goods and transportation. It is especially needed when inputs for production must be imported. It also provides additional working capital for the exporter.

Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don’t wait for the importer to deposit the funds. Negotiation or purchasing is the example of post shipment export financing. As like as export financing, import financing also two types: i. Pre import financing

ii. Post import financing.
Pre import financing means financing before buying goods from exporter. L/C is the example of pre import financing which is not covered by the margin. Post Import Financing means financing after shipment of goods arrived. Once shipment of goods arrived, importer may lack the necessary liquidity to pay their issuing bank immediately. The bank can provide them the post import financing facilities. PAD (Payment Against Document), LIM (Loan against Imported Merchandise), LTR (Loan against Trust Receipt), all are the example of post import financing. PAD is created by the issuing bank at the time of making payment to the exporter on behalf of importer. If PAD is not cleared in due time then bank canceled it and convert PAD to LIM.

International Trade Payment and Finance Practice of Bangladesh In the context of Bangladesh, Documentary Credit is the most popular and widely used for making import payments from Bangladesh. In 2012, 85% of import payments from the country are made through letter of credit. The other two methods- open account and documentary collection are used 3% and 10% for international trade payment respectively.

Because of domestic regulation (Import policy order 2009-2012) on import of Bangladesh cash in advance is less used in Bangladesh. It is used 2% in our country for make payment against international trade. In case of export, 30% of payments were received through Documentary Collection, and 65% of payments were received through Documentary Credit. Cash in advanced is used to make domestic trade payment in Bangladesh. As like other countries cash in advance is the least popular method of trade payment in Bangladesh in international trade payment. It is used 2% in our country for make payment against international trade. Open account is the most popular method of trade payment around the world. It is used more than 85% in international transaction. But in case of Bangladesh it is used only 3% of total received payment of export. Bangladesh Trade 2012

Import
Export
Cash In Advance 2% Cash In Advance 2% Open Account 3% Open Account 3% Documentary Collection 10%

Documentary Collection 30% Documentary Credit 85%
Documentary Credit 65%

Source: BIBM Report 2012
So it can be said that most of the export and import transactions of Bangladesh are dominantly settled by documentary credit. The result is that the businesses are paying high for their transaction settlement. As documentary credit has involvements of different parties namely the nominating bank, the reimbursing bank, the confirming bank etc. Some of them are involved only to ensure the creditworthiness of the issuing bank against a certain percentage of commission. Another reason could be that the sovereign rating is lower than that in some countries in LDC group.

Although there is specific guidelines published by the International Chamber of Commerce (Such as UCP-600, ISP98), documentary credit is an inefficient process in terms of time. As a result the businesses of our country are losing their advantage over those of some countries under the class of developing countries. As any L/C opened in our country has to comply with domestic regulations, guidelines on foreign exchange transactions along with Foreign Exchange (FE) circulars issued by Bangladesh Bank and the Import Policy Order and the Export Policy Order of the country are followed, these issues effect scrutinizing of import documents.

However, it is to be remembered that whenever an L/C is established only the ‘L/C terms’ are ‘terms’ and only they are to be considered for examining a set of import documents. As per article 14 of the UCP 600 any bank shall have a maximum of five banking days following the day of receiving of the document to determine if a presentation is complying. In some banks there is a practice of sending the discrepancy notices within 2-3 days after receiving the documents. Banks consider the act as a protective measure on their part. Charging of discrepancy fee appears to be another reason of such practice.

Banks have been observed to approach to the importers to get their opinion before rejecting the documents. In regard to discrepancies, late shipment, late presentation, expiry of the L/C are very common. Other than some exception, whatever we import, we have to follow L/C for making payment. But the margin of L/C is very high for importer in Bangladesh. Margin means the amount of money paid by importer against opening a L/C. More over the repayment of L/C financing is also satisfactory. L/C is a payment technique but it also has financing component. Banks in Bangladesh also provide finance to importer through L/C to facilitate international business.

In the financial year July 2010 – June 2011 the total amount of L/C opened in Bangladesh was Taka 38,582.35. Total import payments of Bangladesh in the financial year July 2010 – June 2011 were Tk. 240,027.90. Total export receipts of Bangladesh (including exports of EPZ) during the financial years, 2010-2011 and 2009-2010 amounted to Tk. 145,007.60 and Tk. 102,148.2 respectively. Total import payments of Bangladesh (including EPZ) during the quarter July 2010-June 2011 stood at Tk. 240,027.9 (or US$ 8,788.5 million).

Concluding Remarks
One of the most important challenges for traders involved in a transaction is to secure financing so that the transaction may actually take place. So Bangladesh Bank imposed regulation to import through LC but most of the export payment is done by documentary collection.

The faster and easier the process of financing an international transaction, the more trade will be facilitated. Traders require working capital (i.e., short-term financing) to support their trading activities. Exporters will usually require financing to process or manufacture products for the export market before receiving payment. In Bangladesh the trade finance is depend upon bankers and importers relationship. Therefore, Bangladesh governments should provide assistance and support in terms of export financing and development of an efficient financial infrastructure.