International trade is a narrow term and part of international business. International trade includes export, import and entrepot trade. It also includes contracts related to services such as international travel and tourism, transportation, communication, banking, warehousing, advertising etc.

International business on the other hand is a much broader term. In additional to international trade it includes all the activities related to foreign investments and overseas production of goods and services.

International Trade is beneficial for all the trading partners. The principle of comparative advantage shows that if different countries specialise on the basis of their comparative costs, all the trading countries will be better-off compared to a situation where they do not trade at all.

Learn about:-


1. Introduction and Meaning of International Trade 2. Features of International Trade 3. Importance 4. Reasons 5. Modes 6. Theories

7. Gains 8. Forms 9. United Nations Conference (UNCTAD) 10. General Agreement on Tariffs and Trade (GATT) 11. Advantages 12. Limitations 13. Barriers.

International Trade: Meaning, Features, Importance, Reasons, Modes, Theories, Gains, Forms and Advantages


  1. Introduction and Meaning of International Trade
  2. Features of International Trade
  3. Importance of International Trade
  4. Reasons of International Trade
  5. Modes of International Trade
  6. Theories of International Trade
  7. Gains of International Trade
  8. Forms of International Trade
  9. United Nations Conference (UNCTAD) of International Trade
  10. Counter-Trading of International Trade
  11. General Agreement on Tariffs and Trade (GATT) of International Trade
  12. Advantages of International Trade
  13. Limitations of International Trade
  14. Barriers of International Trade


International Trade – Introduction and Meaning

Foreign trade in India includes, all imports and exports to and from India. At the level of Central Government it is administered by the Ministry of Commerce and Industry.


In India, the composition of India’s foreign trade has changed tremendously since liberalisation. There is a structural shift in India’s exports to diversified with non-traditional items and differential products from primary, agricultural and traditional exports like textiles.

Within this category, some of the prominent export items are, Transport Equipment (including Automobiles and Auto components), Iron and Steel and Machinery and Instruments. Readymade garments Textiles Chemicals and related products, Agricultural and allied products, Gems and jewellery, Petroleum and crude products, engineering goods.

International trade is the exchange of capital, goods, and services across international borders or territories.

International trade is a narrow term and part of international business. International trade includes export, import and entrepot trade. It also includes contracts related to services such as international travel and tourism, transportation, communication, banking, warehousing, advertising etc. International business on the other hand is a much broader term. In additional to international trade it includes all the activities related to foreign investments and overseas production of goods and services.


International business includes all the activities that relate to both production as well as trading of goods and services across the national frontiers. It also involves dealings related to exchange of capital, personnel, technology and intellectual property like patents, trademarks, know-how and copyrights.

Foreign trade is an important part of the economic activities of any nation. This is because of the simple reason that no country can be self-sufficient in all aspects. If it is endowed with certain resources, it may be lacking in others. It can offer its surplus commodities to other countries and in return ask for those commodities which are required by its people. Sale of goods to other countries is known as – ‘export’ and purchase of goods from other countries is known as – ‘import’. Both export and import constitute the external or foreign trade of the country.


Foreign trade is also known as – ‘external trade’ or ‘international trade’. It refers to the exchange of goods and services between two or more countries or their nationals. It involves the use of foreign currency (called foreign exchange) for receiving the payment of the price of the exported goods and for making payment of the price of the imported goods.


Foreign trade means trade with foreign countries. It implies buying and selling of goods by one country with other countries beyond its national frontiers. In other words, foreign trade is the external trade of a country and consists of the exchange of commodities between the citizens of different countries.

International Trade – 7 Special Features

International trade or foreign trade refers to trade between two or more countries. It is of three types – (a) import trade which means buying goods from abroad, (b) export trade which implies selling abroad, and (c) entre-pot trade which involves both imports and exports.

International trade has some special features which are given below:

Feature # 1. Rules and Regulations:


Licenses and quotas are required in import and export of goods. Prior permission of the Government is necessary for the use of foreign exchange, etc. Importers and exporters have to comply with complex formalities relating to customs, exchange control, etc. A number of documents have to be prepared. Such formalities involve expense of time and money.

Feature # 2. Risk in Transit:

In foreign trade, air and sea transport are used in which risks involved are comparatively high. Goods have to be insured.

Feature # 3. Physical Distance:


As goods have to be transported over long distances, time, and cost involved in transportation are high. Personal or face-to-face contact between buyers and sellers is rarely possible on account of the physical barrier.

Feature # 4. Creditworthiness of Dealers:

In the absence of reliable and full facts the parties have to depend upon the references supplied for this purpose. Due to lack of personal contact, an exporter does not correctly know the creditworthiness of the importer.

Feature # 5. Differences in Language and Customs:

Every country has its own language and scripts. This creates a problem of communication between importers and exporters.

Feature # 6. Currency:

Different currency systems are used in different countries and the currency of one country is not in circulation in the other country. Therefore, foreign trade involves the exchange of currency first and the exchange of goods afterwards. The rate of exchange between two currencies is subject to fluctuations. Differences in currencies, weights and measures, etc., create difficulties in the settlement of accounts.

Feature # 7. Time Lag:

In foreign trade, traders have often to depend upon a chain of intermediaries. There is a long-time gap between the dispatch of goods by the exporter and their receipt and payment by the importer. Therefore, the capital of the exporter is blocked for a long period.

International Trade – Importance

It is a known fact that no country is capable of producing everything efficiently for the consumption of its people. This is due to the unequal distribution of natural resources and skills among different countries of the world. Foreign trade enables every country to specialise in the production of those goods for which it has relatively more resources, facilities and skills as compared with other countries.

It may thus be in a position to export its surplus production of such goods. It can import other goods from the countries which possess greater relative advantages of production. In this way, every country can derive the benefit of geographical specialisation from external trade.

Foreign trade makes available the goods to the consumers of countries where they are not produced. Thus, it improves the standard of living of the people. Foreign trade is also important for economic development of a nation. Capital equipment and scarce raw materials can be imported. Similarly surplus commodities can be exported to other countries and foreign exchange may be earned.

International Trade – Major Reason Underlying Trade between Nations

The major reason underlying trade between nations are as follows:

1. The Unequal Distribution of Natural Resources:

Since the natural resources are not evenly distributed all over world, some countries are most endowed then other – for instance, some regions have easy access to ocean and seas, minerals, crude oil, forestlands etc.

2. The Differences in their Productivity Levels:

All the countries cannot produce neither equally nor economically all that they need. This is not only due to a difference in availability of various factors of production such as labour, capital and raw materials that are required for producing different goods and services but also socio-economic, geographical and political reasons. The major countries with whom India trades are China, United States, United Arab Emirates, Saudi Arabia, Switzerland, Germany, Hong Kong, Indonesia and South Korea.

The items that are exported from India are petroleum products, jewellery, automobile, machinery, bio-chemicals, pharmaceuticals, cereals, iron and steel, textile and electronics

International Trade – 5 Modes of Payments in International Trade

The terms of credit or payments in international trade refer to contractual matters of prior arrangement between the buyer and seller.

Their determination depends upon a number of factors including exporter’s knowledge of the buyer, buyer’s financial standing, the degree of risk involved in receiving payment, speed of remittance, cost involved in receiving payments, exchange restrictions in the importing country, competition in the foreign market the type availability and demand of the merchandise to be exported, the country of importer, new or old account, the availability of freight space to the country of destination and many other considerations.

There are five modes of payments in international trade:

Mode # 1. Advance Payment:

When the exporter receives the bank draft or bank advice before the contractual obligation of shipment is fulfilled. The payment may be received either as soon as the order is confirmed or any time before shipment. This method is obviously the most advantageous from exporter point of view. But this form is very rarely adopted and is essential only when the buyer’s credit worthiness is open to question. The exporter may be willing to impose the term as a pre-condition only when he knows that –

(a) The goods are in heavy demand, and

(b) The goods are tailor made for the customer, or

(c) Goods are rare.

Even in such cases, compromises are very often made taking into many other considerations. There are certain situations where this type of payment is common. There are some large buying organisations in USA and the continent which have their buying agent all over the world. These agents sometimes pay in advance for the goods procured.

Mode # 2. Open Account:

Under this method, the exporter sends the invoice and other documents relating to transfer of title and possession of goods direct to the buyer (importer) and on receipt of such documents, the importer remits the amount involved immediately. In case a credit period is allowed the importer will make the payment at the expiry of the credit period.

This method is very simple and avoids many complications and additional charges. The entire risk in this case is of exporter.

But this method of payment presupposes that:

(a) There is long established relationship between the importer and the exporter and exporter has faith in him,

(b) The exporter has the necessary financial strength to bear the risk,

(c) There is no exchange regulations in the importing country otherwise payment may not be received in time, and

(d) The foreign exchange regulations of exporting country should permit such an arrangement.

In India, the RBI has permitted the facility for inter-company transactions against ‘Round Sum Remittances’.

Thus, under this method of payment, the burden of finance is carried by the exporter and it also carries the real risk for the exporter. Generally, this method is not followed unless parties are well known to each other and there is a keep competition among the sellers.

Mode # 3. Documentary Bills:

The above mentioned two forms of payment—advance payment, and payments on open account are not very common in foreign trade. The documentary bills, however, is a very common method adopted for payment in international trade. These bills act as a bridge between –

(a) The unwillingness of the exporter to part with the goods until he is paid for, and

(b) The unwillingness of the importer to pay for the support unless he is sure of receiving the goods.

Banks act as a via-media by giving the necessary assurance to both the parties. Under this form of payment, the exporter submits the documents to his bank along with the bill of exchange. The exporter’s bank then sends the bill along with the documents to its correspondent bank in the importer’s country and presents the bill before the importer either for payment or for acceptance as per terms of the bill. The documents along with bill are full set of bill of lading, invoice and a marine insurance policy.

There are two types of documents under this method:

(a) Documents against Payments (D/P), and

(b) Documents against Acceptance (D/A).

(a) Documents against Payment (D/P):

In such cases goods are shipped and the documents of title of goods along with the bill of exchange are surrendered to his bank by the exporter. The bank will send the documents and bill to its correspondent bank in the importer’s country. The bank in the importing country will present the documents along with the bill to the buyer and on making the payments of the bill of exchange, will hand over the documents to the importer. Until the payments are made, the title to the goods vests with the exporter.

(b) Documents against Acceptance (D/A):

In case of documents are sent to the importer through banker, the banker presents the bill to the importer for acceptance and if he accepts the bill, the bank will deliver the documents of title to the buyer (importer) so that he may take possession of goods. On due date, the bank will again present the bill to the buyer for payment and if payment is received, the collecting banker sends the amount to the exporter through normal banking channels to be credited to his account.

Normally under D/A bills the exporter will have to wait for payment till the final payment is received on due date. This may take time and the commercial banks very often discount such acceptances and thus the exporter receives the payment of the bill immediately after shipment of goods.

Both the types of bill—D/A and D/P—are common in export trade, there are various commercial risks which the exporter must take into account before he agrees to accept payment on such basis. Even when the documents are against payment (D/P), the exporter runs the risk of non-payment by the importer.

As the documents in this case, will not be handed over to the importer unless he accepts the documents by making the necessary payments. The documents will remain in the hands of the banker and the exporter will not lose possession of and title to the goods. Therefore, he would be able to find the alternative buyers for his goods or in extreme case, ship the goods back to his own country.

Though the latter alternative obviously will be very costly and even in the former, he may have a recourse to distress sales. In the case of D/A bill, the risk is even greater as the importer has already taken the possession of goods which may or may not be in his custody.

If he fails to meet his obligation of payment on due date, the exporter will not have any other alternative except to start civil proceedings for the recovery of amount. This course will also prove a costly and time consuming affair. Institutional facilities are available almost in every country which undertake responsibility and provide cover for such commercial risks. In India ECGC (The Export Credit Guarantee Corporation) offers such facilities.

Mode # 4. Documentary Credit under Letter of Credit:

This is the most popular form of payment now-a-days. Under this system, the banker of the importer undertakes the responsibility to pay the exporter, under instructions from the importer, if the exporter presents certain shipment and payment documents covering the goods, within a specified period.

In effect, the credit of the issuing bank is substituted for that of the buyer. Such written undertaking of the importer’s banker to the exporter is known as Letter of Credit (L/C). This will be dealt with in the next question.

Mode # 5. Shipment on Consignment Basis:

Under this method the exporter makes shipment of goods to overseas consignee/agent without making any claim for payment for the goods shipped but retains the title of the goods with him and also the risk attached thereto even though the possession of goods is with the overseas importer. The payment under such contracts will be made only when goods are sold.

Under such contracts, the risk is of great amount because –

(a) His payment will be due on a date which is quite uncertain as nobody knows the date of sale;

(b) If the consignee fails to sell the goods, he may return the goods without any liability and at exporter’s expenses;

(c) The price to be realised is also uncertain and will depend upon market condition; and

(d) The consignee may not observe the terms of consignment agreement.

Thus everything is uncertain until the payment is received. But there is an advantage of such agreements that |he goods may fetch a handsome price for the goods if the buyer is satisfied with the quality of the product.

Two points in this connection may be marked:

(a) Shipment on consignment basis is done only to trusted agents. In India, diamonds, tea, wool and tobacco are usually shipped on consignment basis.

(b) The exporter will have to declare the expected value of consignment in the GR form to meet the requirements of the Foreign Exchange Regulations Act.

Thus, the best form of international payment is the documentary credit against letter of credit and D/P or D/A come to next. All other methods are rarely adopted under terms of contract and under special circumstances.

International Trade – Classical and Modern Theories

No country has abundance of all the resources and each country tends to specialise in the production of those goods which it can produce most efficiently with its resources. It then exchanges the surplus production of these produced goods with the surplus production of other countries.

Thus international trade suffers from some natural and artificial barriers. Each country has its own currency and banking system. Movement of goods between countries is subject to certain government restrictions. Inspect of all these factors against international trade, it has been steadily growing.

First two theories are classical theories of International Trade:

(i) According to the Principle of Absolute Advantage, basis of trade between two countries exists when each of these can specialise in the production of a good which it can produce cheaper than the other.

(ii) According to the principle of comparative advantage, each country specialises in the production of those goods and services in which it has greater comparative advantage and imports those goods in which it has greater comparative disadvantage.

For example—India can produce textile garments at a cost much lower than sophisticated Air Crafts, these fibre will produce and export textiles and imports Being/AIRBUS air crafts.

Following is also known as Heckscher-Ohlin Theorem:

According to Modern theory of International Trade, a country specialises in the production of goods and exports it, which uses more of the relatively abundant factor and imports those goods which use more of relatively scarce factors. For example, a country having abundant labour but scarce capital, will tend to specialise in the production of labour-intensive goods and will tend to import capital intensive goods in exchange. Diamond is produced in S. Africa and cut and polished in India, since latter job is labour-intensive.

International Trade – Gains from International Trade Can be Classified as Static Gains and Dynamic Gains

International Trade is beneficial for all the trading partners. The principle of comparative advantage shows that if different countries specialise on the basis of their comparative costs, all the trading countries will be better-off compared to a situation where they do not trade at all.

Gains from International Trade can broadly be classified as Static gains and Dynamic Gains:

1. Static Gains:

Static gains from trade are the increase in well-being of the countries entering into trade with each other.

Both trading partner countries are benefitted by specialisation and trade.

The principle of comparative advantage leads to an important conclusion that free trade among nations encourages international specialisation among nations.

Following are the benefits for countries participating in International Trade:

a. Relatively more efficient allocation of resources of the trading partners.

b. Increased production of goods and services in the countries specialising in the goods and services where they enjoy comparative advantage.

c. Product prices find to get equalised among trading partners and

d. Resources prices among trading countries find to get equalised as relative demand for resources finds to adjust so as to correspond with relative demand of goods and services.

2. Dynamic Gains:

International trade has a very significant role to play in economic growth of nations. According to Robertson, International-Trade is an ‘engine’ of growth.

Major dynamic gains are as follows:

a. International trade results in increasing output and income of the nations and thus it leads to economic growth.

b. Through International Trade, the world economy can achieve a more efficient allocation of resources and a higher level of well-being of its people.

c. The underdeveloped countries can take advantage of the superior technology of advanced countries. It is possible only when the former import capital goods from the later.

d. When underdeveloped countries establish trade relations with ‘advanced countries, the former are not only able to procure advanced technology but the latest technical know how and managerial skills, which are extremely important for growth.

Thus, if each nation specialises according to its resource endowments and enters into trade with other nations, the world economy and economy of each of these trading partners can realise greater output and income and can maintain a higher level of economic growth. To the extent that countries are not able to trade freely, they are forced to shift their resources from more efficient (i.e., higher cost) production in order to meet their domestic demands.

International Trade – 3 Main Kinds of Restrictions on International Trade

Following are the main kinds of restrictions on international trade:

1. Tariffs of Customs Duties – This is the most common form of trade restriction. Customs duty is imposed as a percentage of the value of goods being imported either in terms of physical units or in terms of weights in tons.

2. Quantitative Restrictions – These restrictions limit the physical quantity of goods to be imported during a given period. For this purpose, generally the system of licensing and quota are used. Quota limits the total quantity of goods to be imported, while import licensing limits the imports of an individual importer.

The quantitative restrictions have become very common in the recent time.

3. Foreign Exchange Restrictions – This involves control and restrictions of sale and purchase of foreign exchange. Though this system was originally used to mitigate the situation of foreign exchange shortage, over time it has been increasingly used to control and restrict imports.

The general practice under exchange control, and regulations is to release foreign exchange on the basis of set priorities of imports of different goods.

Most of the underdeveloped countries are following an active economic policy, in the sense that there is control and regulation of the economy by the government. In such a case, foreign trade control and regulation also becomes one of the instruments of growth and economic development.

Protection is, therefore, used as one of the devices to influence the direction and rate of planned economic development.

International Trade – United Nations Conference (UNCTAD): Characteristics and Objectives

The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 in order to provide a forum where the developing countries could discuss the problems relating to their economic development.

This was set up essentially because it was felt that the existing institutions like GATT and IMF ware not properly organised to handle the peculiar problems of the developing countries. With 167 members UNCTAD presently is the only body where developed as well as centrally planned countries are members.

It is a forum to discuss the problems of developing countries concerning their economic development. Although most of the developing nations joined the GATT, they were critical of it, insisting that more was required then the application of the most favoured national principle and the more reduction in tariff.

They complained that in spite of the best endeavour to reduce or even eliminate trade barriers, the attempts have benefited the developed nations of the world. The prices of manufactured goods they had to import from developed nation were high whereas the prices of the primary commodities that they produced for export were low, thus frustrating their efforts to achieve a rapid growth.

International Monetary Fund (IMF) had also failed to handle the peculiar problems of the developing countries. These frustrations and dissatisfactions led to the formation of UNCTAD. Presently it is the only body with member from developing, developed as well as centrally planned countries.

Important Characteristics of Common Fund

Two important characteristics of the common fund are:

(i) This is the first institution which has been formed by all members of the United Nations, including the East European countries and China.

(ii) This is the only organisation where the developing countries have a major say in the decision-making system. The developing countries as a group account for 47 per cent of the total votes whereas the percentages for the developed countries and the East European countries are 42 and 8 respectively.

UNCTAD is also endeavouring to reduce the debt burden of the developing countries. These countries have taken large amounts of loans from bilateral and multilateral sources. As a result, the servicing of the accumulated debts, i.e., the interest payments and repayments, now account for a very substantial proportion of their foreign exchange realisation from exports.

In fact, for some of the developing countries, the out go of foreign exchange on account of debt servicing is more than the current inflow of loans and credits. UNCTAD is trying to persuade the developed creditor countries to write off a part of the accumulated debts. Some of the developed countries, mostly Scandinavian group, have accepted the proposal. Further progress in this regard is expected in the coming years.

One major achievement has been the contribution by several countries to the creation of a commodity development facility, which aims at the development of product adaptation, processing and marketing skills and infrastructure in the developing countries. Popularly known as the Second Window, this facility is a part of the Integrated Programme on Commodities.

The central theme of UNCTAD VI held at Belgrade in 1983 was development and recovery. The meeting took place against the continued stagflation in the West which adversely affected the performance in the developing countries. The interdependent character of the world economy was never more evident.

The UNCTAD Secretarial proposed to the world body that a two-pronged approach be initiated- a set of short-term measures for reactivating the world economy and long-term measures for structural adjustments in trade, money, finance and commodity trading.

The major problem with the UNCTAD has been that it has been trying to tackle too many problems at the same time. Partly it is due to the widely divergent interests of the developing country-members of the UNCTAD. As a result, due to the lack of any specific focus, it has not been able to achieve any tangible results.

Experience shows that whenever UNCTAD discussed specific issues, it has been able to achieve significant success. GSP is one such example. It now appears that “UNCTAD has lost the initiative on trade to GATT, on debt to the IMF, on development to the world Bank.”

Objectives of UNCTAD:

(i) Reduction of Barriers and Restrictions:

UNCTAD has prevailed upon the developed countries into progressively reducing and eliminating trade barriers and other restrictions which seriously limit trade with developing nations. It has worked on getting preferential terms of trade for the products of developing countries while they are exported to developed nations.

(ii) Formation of Principles and Policies:

UNCTAD must meet at least once in four years.

The trade and development board is its permanent organ with four subsidiary organs:

(a) The committee on commodities;

(b) The committee on manufactures,

(c) The committee on shipping; and

(d) The committee on invisibles and financing.

The divisions have been made on the basis of administrative convenience for the smooth functioning of the Board. The priorities for any action programme are decided in each of the plenary session and translated into action programme by the Trade and Development Board.

One of the principal achievements of UNCTAD has been to conceive and implement the Generalised System of Preferences (GSP). It was argued in UNCTAD forums that in order to promote exports of manufactures from the developing countries, it would be necessary to offer special tariff concessions to such exports.

Accepting this argument, the developed countries formulated the GSP Scheme under which exports of manufactures and semi-manufactures and some agricultural items from the developing countries enter duty-free or at reduced rates in the developed countries.

Under the GSP, export of hand tools from India to the United States will not be subjected to that customs duty, whereas exports from Japan will be subjected to the 15 per cent customs duty. Thus Indian exports can be 15 per cent cheaper via-a-vis Japanese exports. The GSP Scheme had been introduced initially for a period of 10 years but has since been extended beyond 1985.

Another major achievement of UNCTAD has been to formulate the integrated Programme on Commodities. As is well known, prices of primary products undergo high level of fluctuations in the international market. This causes hardship to many developing countries as their total foreign exchange realisation from the export of primary products becomes uncertain.

To stabilise the prices of primary products, UNCTAD has suggested the creation of a common fund which will stabilise the prices of primary products through buffer-stock. This fund, when it starts operations, will be of considerable benefit to the exporters and importers in the developing countries.

Exporters of primary products will then be able to realise higher prices for primary products like rubber, cocoa, tin, copper, etc. Similarly, imports of such primary products also will not be subjected to the uncertainties of price fluctuations which sometimes are the result of speculative activity. India which is a major importer of nonferrous metals is likely to benefit from the operation of the common fund.

International Trade – General Agreement on Tariffs and Trade (GATT): Origin, Principles, Measures and Multilateral Trade Laws

GATT is the short form for General Agreement on Tariffs and Trade. As a multilateral treaty among the member countries it lays down certain agreed rules for conducting international trade. It came into being on 1st January 1948. At this time it was considered an interim arrangement pending the formation of U.N. agency to supersede it.

When such agency failed to emerge, GATT was amplified and further enlarged at several succeeding negotiations. The member countries contribute together to four-fifth of the total world trade. Underdeveloped countries form a sizable majority in GATT.

‘Ever since its creation in October, 1947 the GATT has been a major force in the reduction of tariffs and restrictions on imports. The GATT is also the meeting place of world’s trading nations where the present day issues closely bearing on the world trade are discussed and decisions taken. The GATT has played, and will continue to play, in increasingly important role in the expansion of international trade.’

Origin of GATT:

The GATT owes its existence to the efforts made by the Allied Powers during World War II to create new international institutions that would help promote more liberal system of international trade and payment and discourage the adoption of restrictionist practices. The depressed trade conditions that followed the great depression of 1929-33 and prompted the Governments of many countries to erect various kinds of protective trade barriers, high tariff protection, quota restrictions on imports, exchange controls and the like.

The GATT, which had been originally intended as a purely temporary arrangement, has now developed into a permanent international arrangement whose rules have been accepted by the greater proportion of the lending trading countries. The GATT is a treaty that is collectively administered by the contracting parties. Representatives of the contracting parties meet from time to time to discuss matters of common interest and give to effect to the provisions of the Agreement requiring joint action.

The increasing responsibilities of the GATT made it necessary to strengthen the organisation entrusted with task of administration, consequently at their sixteenth session in May and June 1960, following a review by a special group into the working methods and organisational structure of the GATT, the contracting parties decided to set up a Council of Representatives.

The function of the Council is to consider urgent matters between the sessions of GATT’s contracting parties, as well as to conduct regular business consisting of the supervision of the work of committees and preparation for sessions.

Basic Principles of the GATT:

(1) Trade without Discrimination:

Trade must be conducted on the basis of non-discrimination. All contracting parties are bound to grant to each other treatment as favourable as they would to any country (most favoured nation) in the application and administration of import and export duties and charges. Exceptions to this basic rule are allowed only in the case of regional trading arrangements and the developing countries.

(2) Protection Only through Tariffs:

Protection should be given to domestic industries only through customs tariffs and not through other commercial measures. The aim of this rule is to make the extent of protection clear and to make competition possible. Exception is, however, made in the case of developing countries where the demand for imports generated by development may require them to maintain quantitative restrictions in order to prevent an excessive drain on their foreign exchange resources.

(3) A Stable Basis of Trade:

A stable and predictable basis for trade is provided by the binding of the tariff levels negotiated among the contracting countries. Binding of tariffs means that these cannot be increased unilaterally. Although provision is made for the renegotiation of bound tariffs, a return to higher tariffs is discouraged by the requirement that any increase be compensated for.

(4) Consultation:

A basic principle of GATT is that member countries should consult one another on trade matters and problems. They can call on GATT for a fair settlement of cases in which they feel that their rights under the GATT are being withheld or compromised by other members.

The GATT Council has established panels of independent experts to examine trade disputes among member States and they are making increasing use of these panels. Panel members are chosen from countries which have no direct interest in the dispute being investigated. The panel procedure has often led to mutually satisfactory settlement.

Measures of GATT:

Since its inception the GATT has adopted the following measures to cut the tariffs:

1. Trade Negotiations under GATT:

The GATT has organised seven trade negotiations so far. They are-1947 (Geneva), 1949 (Annecy, France), 1951 (Torquay, England), 1956 (Geneva), 1960- 61 (Geneva, Dillon Round), 1964-67 (Geneva, Kennedy Round), and 1973-79 (Geneva, Tokyo Round). As a result of these negotiations, the tariffs rates on thousands of items entered into world trade were reduced or bound against increase.

i. Kennedy Round Negotiations (1964-67):

In 1964-67 Kennedy Round negotiations reduced the average level of the world industrial tariffs by about 1/3rd. Efforts were made to move toward linear or across the board tariff reduction for industrial products, some countries achieved a 50 per cent reduction in many industrial products. Countries making tariff concessions in the 1964-67 negotiations were responsible for about 75 per cent of world trade.

ii. The Tokyo Round (1973-79) or Multilateral Trade Negotiations:

This was a landmark in the history of GATT. The negotiations were concluded in 1979. Ninety-nine countries participated. The agreements concluded in this round of negotiations include an improved level framework for the conduct of world trade. It includes recognition of tariff and non-tariff treatment in favour of and among developing countries as a permanent legal feature of the world trading system.

It includes various non-tariff measures covering subsidies and countervailing measures, technical barriers to trade, custom valuation, import licensing procedures and revision of the 1967. GATT antidumping code on bovine meat; dairy products; tropical products and an agreement on free trade in civil aircraft. The agreements contain most favourable treatment to developing countries.

a. Tariff Measures:

The participating countries agreed to cut tariffs of thousands of industrial agricultural products. The cuts were to be implemented gradually over a period of seven years commencing from January 1, 1980. The total value of trade affected by Tokyo Round MFN (most favoured nations) reductions, by bindings of prevailing tariff rates, amounted to more than US 155 billion, measured on MFN imports in 1977.

It was estimated that the weighted average tariff on manufactured products in the world’s nine major industrial markets will decline from 7.0 per cent to 4.7 per cent.

b. Non-Tariff Measures:

The distorting effects of non-tariff barriers on world trade became more pervasive as the general level of tariff declined in Post-World War II period. The Tokyo Round tackled the problem of non-tariff barriers in a new perspective and aimed, at reducing and bringing these non-tariff measures (binding agreements or codes) under more effective international discipline. All the agreements provide for special and more favourable treatment for developing countries.

The negotiations led to the following non-tariff measures:

(i) Restriction on Use of Subsidies:

The signatories are committed not to use subsidies against the interest of any other signatory. Each has ensured that countervailing measures do not unjustifiably impede the international trade. These measures may be applied only if the domestic industry requests the Government that the subsidised imports are, in fact, responsible for causing material injury or threatening such injury.

(ii) Technical Barriers:

The agreements provide certain technical barriers to trade (also known as tan-yards code). These barriers commit the signatories to ensure that if any Government or body adopt technical regulations or standards, and testing and certification schemes related to them, they should not create unnecessary obstacles to international trade.

(iii) The Import Licensing Procedures:

These should be used in a neutral and fair way. The agreement aims at ensuring the procedures do not in themselves act as restrictions on imports. The signatory Governments are committed to adopt simple import licensing procedures and to administer them fairly.

(iv) Government Procurement:

The provision of agreement will apply to individual Government contracts worth more than SDR 150,000 (about US dollar 1,70,000). It aims at securing greater international competition in the bidding for Government procurement contracts. It contains detailed rules as an invitation and award procedures and practices regarding Government procurement more transparent, and to ensure that they do not protect domestic products or suppliers or discriminate among foreign suppliers or products.

(v) Custom Valuation:

It sets a fair, uniform and rental system for the valuation of goods for customs purposes. It prohibits the signatory Governments to use arbitrary or fictitious custom values. It provides a precise revised set of valuation rules.

(vi) Permission of Anti-Dumping Code:

The agreement revised GATT anti-dumping code. The new code interprets the provisions of GATT’s Article VI which lays down the conditions under which anti-dumping of duties may be imposed as a defense against dumped imports. The code brings some of its provisions in line with the relevant provisions of the code on subsidies and countervailing measures.

2. Safeguards:

The agreement provides proper safeguards for the domestic industry. Trade Article XIX of the General Agreement permits a member country to impose restrictions on imports or suspend tariff concessions on products if they are imported in excessive quantities and are pausing or threatening to cause serious injury to competing domestic producers.

The Tokyo declaration called for an examination of the adequacy of the multilateral safeguard system particularly the way in which Article XIX is applied. This issue was not resolved in Tokyo Round. A Committee was formed within GATT to continue the safeguards negotiations.

3. Trade Negotiations among Developing Countries:

In order to increase the trade among developing nations eighteen GATT members joined in an agreement in 1973, known as the ‘Protocol’ relating to trade negotiations among developing countries, providing for an exchange of mutually advantageous tariff and trade concessions. These eighteen countries accounted for about half of the total exports of manufactured goods of developing nations.

These are Bangladesh, Brazil, Chile, Egypt, India, Israel, S. Korea, Mexico, Pakistan, Uruguay, Peru, Philippines, Romania, Spain, Tunisia, Turkey; Uruguay and Yugoslavia. All developing countries whether or not they are members of GATT are allowed to join it. The participants negotiated for concessions on about 500 tariff headings or sub headings including agricultural, processed and manufactured goods and raw materials.

GATT has been successful in the accomplishment of its objectives. It contains an enabling clause that recognises the principle of granting special and differential treatment to the developing countries. It is helping to solve trade disputes among member countries impartially, amicably and quickly.

The agreement identifies the measures to solve the problems of balance of payment without distorting or upsetting international trade. For balance of payment purposes developed countries have been restrained from imposing trade curbs as far as possible.

In November 1982 the GATT Ministerial meeting held in Geneva assessed the functioning of the multilateral trading system. The points noted were the protectionist pressures on Governments have multiplied; disregard of GATT disciplined has increased, and certain shortcomings of the GATT system have been accentuated.

To overcome these threats the contracting parties of the GATT agreed to make concentrated efforts to ensure that trade policies and measures are consistent with GATT principles and rules and to resist protectionist pressures in the formulation of national trade policy and in proposing legislation.

They undertook to restrain the Governments of signatory countries from adopting measures which are not consistent with GATT principles and which distort international trad

Multilateral Trade Laws – An Overview of GATT:

Founded in 1948 by two dozen industrialized countries, the objective of the General Agreement on Tariffs and Trade (GATT) is to reduce barriers to international trade. By 1994, GATT had nearly 120 member countries, and another 30 countries applied GATT rules to their trade. Over 90% of world trade is carried out by countries who are signatories to GATT.

Unlike agencies such as the World Bank and the IMF, the GATT is not as much a physical institution as it is a comprehensive set of agreements and rules on world trade, administered and governed by a small secretariat in Geneva, Switzerland. Parties to GATT are governed by voluntary acceptance of its jurisdiction, and the organization does not have any formal enforcement powers. In other words, GATT is nothing more than an “agreement” among signatory countries to follow a collectively agreed upon set of rules.

The workings of GATT are based on five underlying principles, which form the basis for almost all of its rules:

(1) Non discrimination:

This principle states that countries should not grant prefer­ential treatment to any one group of member countries over other member countries. This is the basis for the “most favored nation” (MFN) rule, which simply means that every member country will be treated alike by all GATT members. In other words, MFN does not imply preferential treatment; rather it implies that every country should be treated as favorably as every other country.

(2) Reciprocity:

This means that if one country lowers its tariffs against another country, the other country should do likewise; any concession that is made will be reciprocated. Combined with the idea of MFN, it is the means by which GATT tries to get all members to lower their tariffs Jo each other.

(3) Transparency:

This principle asks countries that do impose protection to do so through tariffs, and not non-tariff barriers or quantitative restrictions. Even if there are non-tariff barriers, GATT urges their “tariffication”, so that they can be made more transparent, and subsequently reduced through the principle of reciprocity.

(4) Dispute Settlement:

GATT members are expected to use the dispute settlement mechanisms of GATT. There is, however, no enforcement mechanism in the event that a member country refuses to abide by GATT rules in dispute settlement.

(5) Exceptions:

Countries are granted exceptions to GATT rules under special or emergency circumstances. These exceptions include special treatments for regional trading arrangements, for developing countries, for trade in certain industries such as agriculture and textiles, for dumping, for domestic firms seriously injured by imports, and for balance- of-payments difficulties.

Despite some criticisms of the rules and GATT’s apparent lack of enforcement authority, these rules have combined to work remarkably well for world trade in the past few decades, at least in reducing tariff barriers worldwide. In 1947, the average tariffs on imported products worldwide stood at about 40%; by 1990, they had declined to about 5%. It is estimated that, by the year 2000, the average tariff will have fallen to about 2%.

These tariff reductions have been achieved through various “rounds” of negotiations among the member countries. The earliest round of negotiations was the “Geneva” round, in 1947; more recently, the sixth and seventh rounds of negotiations, the “Kennedy” round (1964-67) and the “Tokyo” round (1973-79) were particularly effective in achieving tariff reduction agreements.

The Uruguay Round:

The most ambitious round of world trade negotiations, however, was the recent “Uruguay” round. Initiated in Punta del Este, Uruguay, in 1986, this round of negotiations went through repeated roller-coaster rides – at points, looking almost certainly like it would fail – but was finally concluded, nearly eight years later, in December 1993. On April 15, 1994, the signatory governments met in Marrakech, Morocco and formally ratified the agreement.

The Uruguay round was considered ambitious in as much as it sought to address numerous issues that GATT had previously sidestepped since its creation in 1948.

These issues included:

(1) Trade in services.

(2) A consistent set of rules governing trade in intellectual property rights (“TRIPs”).

(3) A consistent set of rules to govern trade-related investment measure of (“TRIMs”).

(4) Trade in textiles, which had previously been protected (under the auspices of GATT) through the “Multifibre agreement”.

(5) Trade in agricultural products.

(6) The creation of a new entity whereby GATT would be renamed the “World Trade Organization (WTO)” with improved dispute settlement processes, and improved “functioning of the GATT system” (“FOGS”).

At the conclusion of the Uruguay round in December 1993, many of these issues were successfully addressed, resulting in a 22,000-page (385-pound) document.

Jerry Junkins, CEO of the US Company, Texas Instruments, sees the importance of the agreement as follows:

For American business, the Uruguay Round means increased fairness and order in the marketplace, not a perfect marketplace. For Texas Instruments, the increase in trade resulting from a more open world market could translate into additional revenues of roughly $ 5 billion over the next ten years. For another way, the implementation of the Uruguay Round agreement could contribute 6 percent of TI’s revenues by the year 2004, and support 2000 to 3000 new jobs, most of them in the United States.

The specific achievements of the Uruguay round agreements, which will start to take effect starting 1995, are as follows:

(1) Agreements on services trade were reached in the areas of banking, insurance and tourism; however, agreement in areas such as shipping, telecommunications, air­lines and audiovisual products were postponed.

(2) The new rules tighten antidumping laws and follow US practices in this regard (Section 731, which we discussed above) rather closely.

(3) The protection of intellectual property rights has been made uniform and substan­tially strengthened, in the areas of patents, copyrights, trademarks, industrial designs, trade secrets, and integrated circuits.

(4) The TRIMs text establishes GATT oversight in investment matters and prohibits imposition of local content rules and trade-balancing rules.

(5) Industrialized countries agreed to a 10-year phase-out of the Multifibre agreement, which was originally intended to protect the textile industries of the US, Japan, and Western European countries from low-wage textile exporters, primarily in Asia.

(6) Existing tariffs on both industrial and agricultural products will be cut by an average of 40%, most of them over 5 years starting 1995; in some industries, (for example, construction equipment, medical equipment, beer, steel, pharmaceuticals), tariffs are completely eliminated among major trading partners in the industrialized world; in electronics, tariff cuts range from 50% to 100% worldwide.

(7) Subsidies are more clearly defined and categorized, and these definitions and categories largely follow those used in relation to US countervailing duty laws.

(8) The agreement establishes international rules between governments regarding product and technical standards and in matters such as testing, inspection, and certification.

(9) Most of the existing voluntary export restraints will be eliminated (although each country is allowed to “grandfather” one such agreement until 1999).

(10) A framework for the successor to GATT, the WTO, has been put in place.

It is estimated that the successful implementation of the Uruguay round agreements will result in approximately a 3.5% growth in gross world product during the next ten years; this translates to roughly an additional $ 235 billion in global income each year. From the standpoint of MNEs, the progress achieved in specific areas (and their implementation) during the course of the next few years bears careful scrutiny.

International Trade – Advantages

The advantages of foreign trade are discussed below:

(1) Optimum Use of Resources – Foreign trade leads to international division of labour and specialisation. It reduces wastage of resources resulting from the production of uneconomic goods. The resources are also used efficiently.

(2) Economies of Large Scale – Foreign trade facilitates specialisation of a country in the production of certain goods. This will help to carry on production of some commodities not only for home consumption but also for external consumption. This will lead to several economies of large-scale production. The resources will also be utilised in a better way.

(3) Improvement of Standard of Living – Foreign trade increases the standard of living of the people living in different countries. It provides those commodities to the people of a country which cannot be produced economically in that country. Foreign trade also makes them available the products which are not produced in that country.

(4) Stabilisation of Prices – Foreign trade leads to stabilisation of prices of commodities throughout the world by adjusting demand and supply. This would not have been possible in the absence of foreign trade.

(5) Generation of Employment – Foreign trade helps in generation of employment opportunities in the export-oriented industries.

(6) Increased Competition – External trade enhances competition in the domestic market. To compete with foreign goods, domestic companies improve their standards of quality. They also start using latest production and marketing techniques. Healthy competition brings benefits for customers.

(7) Technological Up gradation – The domestic companies have to modernise their plan and make use of latest technologies in order to compete with foreign products. This results in up gradation of technology. Firms keep updating their technology to produce better quality products.

(8) International Relations – Foreign trade makes different countries dependent upon each other. A country having surplus products can sell its surplus stock to the deficient countries and a country having deficiency of a product can import it from another country. This promotes goodwill and cordial relations among the nations of the world.

(9) Growth of Economy – Under-developed and developing countries can exploit their unutilised natural resources with the import of technical know-how, machinery and equipment from the advanced countries.

International Trade – Limitations

International trade also suffers from certain limitations as outline below:

1. Restricts the Growth of Indigenous Industries – The presence of foreign business firms pose a greater threat to the survival and growth of indigenous business concerns. This creates a more adverse effect on the wellbeing of new and small business firms.

2. Depletion of Natural Resources in the Home Country – Sometimes in pursuit of earning higher profits in the short run, the business firms may exploit the natural resources in the home country beyond repair. Such an approach is likely to create an adverse effect on the economy of the home country in the long run due to depletion of its natural resources.

3. Import of Harmful Goods – Many a times it has been observed that the firms make an attempt to market those products in international market which they are not allowed to offer in their home country. These products may cause a harm to the well-being of the people and also on the economy of the countries which import them. It may include spurious drugs, luxury articles, harmful cosmetics etc.

4. Shortage of Goods – Sometimes the business firms may extensively promote their goods in order to earn higher foreign exchange. This may lead to shortage of goods and inflation in the home country.

5. Political Dependence – Sometimes if a firm indulges in excessive imports its political interests may be affected greatly due to economic dependence of one country over another.

This is because free international trade has following limitations:

a. Cheap imported goods may destroy local industries manufacturing those goods.

b. Specialisation resulting from trade may lead to lop sided growth of the economy.

c. If trade is uncontrolled, it may lead to economic handicap in the long run. For example – a country may export some strategic raw materials (whose supply is limited) in large quantities, thus jeopardising future developments.

d. Dependence on other countries may prove fatal in situations like war.

International Trade – Trade and Non-Trade Barriers Faced by Exporters

International trade is done beyond the national boundaries.

So exporters face certain kind of barriers in the form of trade as well as non-trade barriers which are explained below:

I. Trade Barriers:

Trade barriers are restrictions imposed on movement of goods between countries. Trade barriers are imposed not only on imports but also on exports. Trade barriers are the planned obstacles imposed by the government to protect their own country.

Some of the objectives behind trade barriers are:

1. To protect domestic industries.

2. To correct the balance of payment.

3. To restrict the import of goods from a particular country.

4. To preserve foreign exchange.

5. For giving preferential treatment to different countries.

6. To do economic development

Trade barriers can be divided into two parts, i.e.:

1. Tariff barriers (Fiscal Barriers)

2. Non-tariff barriers (Non-fiscal Barriers)

1. Tariff Barriers:

Tariff is a customs duty or a tax on products that move across borders. The most important of tariff barriers is the customs duty imposed by the importing country. A tax may also be imposed by the exporting country on its exports. However, governments rarely impose tariff on exports, because, countries want to sell as much as possible to other countries.

There may be single column tariff (in which same rate of duty is charged on imports from all the countries), two column tariff (in which one column shows the normal duties applied on all imports and second column shows reduced duties applicable for importing from particular countries who are treated as ‘Most Favoured Nation’ (MFN)) and the last is preferential tariff system (in which duties at concessional or zero rate are charged for importing goods from certain countries).

The main important tariff barriers are as follows:

(i) Specific Duty:

Specific duty is based on the physical characteristics of goods. When a fixed sum of money, keeping in view the weight or measurement of a commodity, is levied as tariff, it is known as specific duty. For instance, a fixed sum of import duty may be levied on the import of every barrel of oil, irrespective of quality and value.

It discourages cheap imports. Specific duties are easy to administer as they do not involve the problem of determining the value of imported goods. However, a specific duty cannot be levied on certain articles like works of art. For instance, a painting cannot be taxed on the basis of its weight and size.

(ii) Ad Valorem Duty:

These duties are imposed “according to value.” When a fixed percent of value of a commodity is added as a tariff it is known as ad valorem duty. It ignores the consideration of weight, size or volume of commodity. The imposition of ad valorem duty is more justified in case of those goods whose values cannot be determined on the basis of their physical and chemical characteristics, such as costly works of art, rare manuscripts, etc. In practice, this type of duty is mostly levied on majority of items.

(iii) Combined or Compound Duty:

It is a combination of the specific duty and ad valorem duty on a single product. For instance, there can be a combined duty when 10% of value (ad valorem) and Rs.1/- on every meter of cloth is charged as duty. Thus, in this case, both duties are charged together.

(iv) Sliding Scale Duty:

The import duties which vary with the prices of commodities are called sliding scale duties. Historically, these duties are confined to agricultural products, as their prices frequently vary, mostly due to natural factors. These are also called as seasonal duties.

(v) Countervailing Duty:

It is imposed on certain imports where products are subsidised by exporting governments. As a result of government subsidy, imports become cheaper than domestic goods. To nullify the effect of subsidy, this duty is imposed in addition to normal duties.

(vi) Revenue Tariff:

A tariff which is designed to provide revenue to the home government is called revenue tariff. Generally, a tariff is imposed with a view of earning revenue by imposing duty on consumer goods, particularly, on luxury goods whose demand from the rich is inelastic.

(vii) Anti-Dumping Duty:

At times, exporters attempt to capture foreign markets by selling goods at rock-bottom prices, such practice is called dumping. As a result of dumping, domestic industries find it difficult to compete with imported goods. To offset anti-dumping effects, duties are levied in addition to normal duties.

(viii) Protective Tariff:

In order to protect domestic industries from stiff competition of imported goods, protective tariff is levied on imports. Normally, a very high duty is imposed, so as to either discourage imports or to make the imports more expensive as that of domestic products.

2. Non-Tariff Barriers:

A non-tariff barrier is any barrier other than a tariff that raises an obstacle to free flow of goods in overseas markets. Countries impose non- tariff barriers to restrict the import of goods indirectly from certain countries. Non- tariff barriers, do not affect the price of the imported goods, but only the quantity of imports. Non-tariff barriers arise from different measures taken by governments and authorities in the form of government laws, regulations, policies, conditions, restrictions or specific requirements, and private sector business practices, or prohibitions that protect the domestic industries from foreign competition.

Some of the important non-tariff barriers are as follows:

(i) Quota System:

Under this system, a country may fix in advance, the limit of import quantity of a commodity that would be permitted for import from various countries during a given period.

The quota system can be divided into the following categories:

(a) Tariff/ Customs Quota – Certain specified quantity of imports is allowed at duty free or at a reduced rate of import duty. Additional imports beyond the specified quantity are permitted only at increased rate of duty. A tariff quota, therefore, combines the features of a tariff and an import quota.

(b) Unilateral Quota – The total import quantity is fixed without prior consultations with the exporting countries.

(c) Bilateral Quota – In this case, quotas are fixed after negotiations between the quota fixing importing country and the exporting country.

(d) Multilateral Quota – A group of countries can come together and fix quotas for exports as well as imports for each country.

(ii) Licenses:

A license is granted to a business by the government, and allows the business to import a certain type of good into the country. For example, there could be a restriction on imported cheese, and licenses would be granted to certain companies allowing them to act as importers. This creates a restriction on competition, and increases prices faced by consumers.

(iii) Product Standards:

Most developed countries impose product standards for imported items. If the imported items do not conform to established standards, the imports are not allowed. For instance, the pharmaceutical products must conform to pharmacopoeia standards.

(iv) Domestic Content Requirements:

Governments impose domestic content requirements to boost domestic production. For instance, in the US bailout package (to bailout General Motors and other organisations), the US Govt., introduced ‘Buy American Clause’ which means the US firms that receive bailout package must purchase domestic content rather than import from elsewhere.

(v) Product Labelling:

Certain nations insist on specific labelling of the products. For instance, the European Union insists on product labelling in major languages spoken in EU. Such formalities create problems for exporters.

(vi) Packaging Requirements:

Certain nations insist on particular type of packaging materials. For instance, EU insists on recyclable packing materials, otherwise, the imported goods may be rejected.

(vii) Consular Formalities:

A number of importing countries demand that the shipping documents should include consular invoice certified by their consulate stationed in the exporting country.

(viii) State Trading:

In some countries like India, certain items are imported or exported only through canalising agencies like MMTC. Individual importers or exporters are not allowed to import or export canalised items directly on their own.

(ix) Preferential Arrangements:

Some nations form trading groups for preferential arrangements in respect of trade amongst themselves. Imports from member countries are given preferences, whereas, those from other countries are subject to various tariffs and other regulations.

(x) Foreign Exchange Regulations:

The importer has to ensure that adequate foreign exchange is available for import of goods by obtaining a clearance from exchange control authorities prior to the concluding of contract with the supplier.

(xi) Other Non-Tariff Barriers:

There are a number of other non-tariff barriers such as health and safety regulations, technical formalities, environmental regulations, embargoes, etc.

II. Non-Trade Barriers:

Traders engaged in foreign trade come across several kinds of non-trade barriers which are as follows:

1. Language Differences:

In international trade exporter comes across the problem of language. As different languages are followed in different countries. So exporter must make himself aware about different languages.

2. Less Means of Transport and Communication:

Another problem which arises in international trade is that of transport and communication. These are selected on the basis of time and cost. Higher is the time and cost, greater will be the difficulty and vice-versa.

3. Restriction on Imports and Exports:

Different countries follow different rules and regulations regarding imports and exports. It is a difficult process. They have to fulfill all the formalities related to imports and exports of goods.

4. More Risk and Uncertainty:

Foreign trade involves more risk and uncertainty than domestic trade. As during transit goods are exposed to certain kinds of risk like damage of goods. Such risks are covered under marine insurance. But it will add to increased cost.

5. Long Distance:

In foreign trade buyer and seller do not come in contact with one another due to the long distance which creates difficulty in establishing a relationship.

6. Difficulty in Collection of Information:

Customs and traditions vary from country to country. It becomes essential for the exporter to collect information on taste, preference, customs and traditions of a country where he is going to serve which is a difficult process.

7. Excessive Documents and Procedure:

Importers and exporters have to go through a long procedure for fulfilling all the documents required for doing foreign trade. It becomes very difficult for importers and exporters to understand and prepare those documents.

8. Problems in Payment:

Every country has its own currency and exchange of currency takes place in foreign trade. Exchange rates are determined. But as exchange rate keeps on fluctuating, certain problems come in the payment in foreign trade. Moreover, there is gap between the time when goods are dispatched and payment is received. So chances of bad debts arise.

9. Lack of Information on Different Market Facts:

Another problem that arises in foreign trade is the lack of information available on different market facts such as weight, measurement, promotional methods and marketing tactics. If the exporters want to be successful in foreign market then information on various aspects of foreign market must be collected.