Important Questions and Answers International Business - Business Studies

Q.1. Explain the importance and advantages of foreign trade.

Ans:

Importance of External Trade:

Foreign trade is essential because resources, skills and production capacities are unevenly distributed across countries. It enables nations to specialise in producing goods and services in which they have an advantage and to exchange surplus production for items they cannot produce efficiently. This exchange increases the availability of goods and improves the standard of living of people.

Foreign trade also supports economic development by allowing countries to import capital goods, technology and scarce raw materials needed for industrial growth. Exports earn foreign exchange, which can be used to finance imports and to invest in development.

Advantages of Foreign Trade:

• Optimum Use Of Resources: International specialisation and the division of labour lead to better allocation of global resources and reduce waste from producing uneconomic goods.
• Higher Standard Of Living: Consumers gain access to a wider variety of goods and services, including items that cannot be produced economically at home.
• Better International Relations: Trade creates interdependence among nations, encouraging cooperation and goodwill as countries buy and sell what they need from one another.
• Stabilisation Of Prices: By adjusting supply and demand internationally, trade helps stabilise prices of many commodities across markets.
• Employment Generation: Export-oriented industries create jobs, reducing unemployment and supporting incomes.
• Economies Of Large-Scale Production: Specialisation allows firms and countries to expand production for both domestic and foreign markets, gaining cost advantages from large-scale production.
• Economic Growth: Developing and under‐developed countries can utilise idle resources by importing technology and machinery from advanced economies, thereby accelerating growth.

Q.2. Differentiate between Internal (Home) Trade and Foreign (external) Trade.

Ans:

Difference between Home Trade and Foreign Trade:

Aspect	Home (Internal) Trade	Foreign (External) Trade
Area	Trade carried on within the boundaries of a country.	Trade between residents of different countries.
Currency	Transactions use the domestic currency.	Transactions involve foreign currencies and exchange rate considerations.
Legal System	Single legal and regulatory framework of the country applies.	Multiple legal systems, regulations, customs and international agreements apply.
Documents	Simple documents such as invoices and receipts.	Complex documents like bill of lading, export/import licences, certificates of origin.
Risk	Lower commercial and political risk.	Higher risk due to exchange rate fluctuations, political changes and transport risks.
Transport	Usually domestic transport; generally lower cost and time.	International transport; involves higher cost, insurance and longer transit times.

Q.3. Explain the various terms used in foreign trade.

Ans:

Terms Used In External Trade:

Some important terms used in export-import trade are explained below.

• Free On Board (FOB): The exporter delivers the goods on board the ship at the port of shipment. The exporter bears costs and risks up to loading; the importer bears costs and risks from the ship's rail or from the point the goods are on board.
• Cost And Freight (C&F): The exporter pays for freight to the port of destination, but the risk of loss or damage passes to the importer once the goods are on board at the port of shipment. C&F price = FOB price + freight charges.
• Cost, Insurance And Freight (CIF): The exporter pays freight and insurance to bring goods to the destination port. The exporter bears costs and insurance until arrival; risk usually passes as per the agreed term.
• Joint Ventures: Business arrangements in which two or more parties pool resources and share ownership, risks and profits for a specific foreign‐market objective.
• Wholly Owned Subsidiaries: A foreign enterprise completely owned (100%) by a parent company from another country.
• Export Processing Zones (EPZ): Special areas where goods may be imported, processed and re‐exported with relaxed customs procedures.
• Export Promotion Capital Goods Scheme (EPCG): A scheme allowing import of capital goods at concessional duty rates to boost export competitiveness.
• Customs Appraiser: An official who assesses the value of imported or exported goods to determine duties and taxes.
• Bank Certificate Of Receipt: A document issued by a bank confirming receipt of goods or shipping documents.
• Duty Drawback: A refund of customs duties paid on imported inputs that are subsequently exported as finished goods.
• Export Finance: Financial assistance (credit, pre-shipment and post-shipment finance) to exporters to meet production and shipping costs.

Q.4. Differentiate between the Bill of Lading and Charter Party.

Ans:

The distinction between Bill of Lading and Charter Party is summarised below.

Aspect	Bill of Lading	Charter Party
Definition	A document issued by the carrier acknowledging receipt of goods and constituting evidence of the contract of carriage; it is also a document of title.	A contract between the shipowner and charterer for hiring the whole ship or part of it for a specified period or voyage.
Parties	Carrier and shipper; used by exporters and importers.	Shipowner and charterer.
Nature	Document of title and shipping document used in trade and banking.	Contract of hire governing terms for use of the vessel.
Use	To transfer title to goods, claim cargo and for negotiation in trade (e.g., with banks).	To fix the terms for carriage such as freight, period/voyage and liabilities.
Negotiability	Often negotiable (order bill), enabling transfer of ownership while goods are in transit.	Generally not a negotiable document of title.
Documentation	Essential for customs, banking (letters of credit) and delivery of cargo.	Defines the commercial terms of hiring the vessel; may be supported by voyage or time charters.

Q.5. Explain the various methods of payment in External Trade.

Ans:

Payments in international trade can be made by several methods. Major methods are explained briefly below.

• Advance Payment: The importer pays the exporter before shipment. Payment may be made by bank draft, international money order, telegraphic/mail transfer or electronic transfer. This protects the exporter but is risky for the importer.
• Open Account: The exporter ships goods and sends documents to the importer; payment is made later on agreed dates or periodically. It is convenient for both parties but increases the exporter's credit risk.
• Documentary Bills: The exporter draws a bill of exchange on the importer and attaches shipping documents (bill of lading, insurance policy, invoice, certificate of origin, etc.). Documentary bills are sent through banks and may be:

• Sight Bill (D/P - Documents against Payment): The importer must pay immediately on presentation to obtain the documents.
• Usance Bill (D/A - Documents against Acceptance): The importer accepts the bill and obtains documents; payment is due at a future maturity date.

• Letter of Credit (L/C): A bank (opening bank) undertakes to pay the exporter on behalf of the importer, provided the exporter complies with the terms and presents specified documents. L/Cs reduce payment risk for the exporter and are widely used in international trade. The exporter may get the accepted bill discounted by its bank.
• Direct Remittance: The importer remits payment to the exporter after receiving documents. Methods include:

• Bank Draft: A bank draft is an instruction by a bank to its foreign branch to pay a specified sum to the named person; the issuing bank charges a commission.
• Telegraphic Transfer: A rapid transfer by cable or electronic message to a correspondent bank abroad. It is fast but relatively costly.

• International Credit Card: Issued by multinational banks to financially sound importers, allowing payment to exporters via card transactions in international trade where accepted.

Q.6. What are Special Economic Zones (SEZs)? Explain their benefits in brief.

Ans:

Special Economic Zones (SEZs) are designated areas created to encourage free trade and promote exports. They are treated as foreign territories for trade operations, duties and tariffs. Goods sent to an SEZ are often treated as deemed exports, while goods coming from an SEZ to the Domestic Tariff Area (DTA) are treated as imports.

Structure & Establishment

• SEZs may be set up by the public sector, private sector, joint ventures or state governments under government notification.
• Existing Export Processing Zones (EPZs) can be converted into SEZs. Unlike EPZs, SEZs generally allow freer movement of raw materials without separate customs permission.

Functions & Activities

• Manufacturing, services, trading, assembly, repair and re‐engineering of products.
• Production of jewellery and other high‐value goods for export.

Key Exemptions & Benefits

• No rigid value‐addition or wastage norms in many cases; freedom in operations.
• Exemption from customs duties and various domestic taxes within the SEZ.
• Income‐tax concessions and other fiscal incentives under relevant EXIM policies for specified periods.
• Offshore banking, allowing SEZ units to hold foreign currency accounts and borrow at international rates.
• Freedom to hedge commodity risks, make overseas investments from export earnings and obtain international finance.

Banking & Financial Reforms

• Overseas Banking Units (OBUs) in SEZs permit raising funds such as ADRs and GDRs without going abroad.
• SEZ bank branches can be treated as overseas branches and may be exempt from CRR, SLR and priority sector lending norms.
• SEZ units can hold dollar accounts, transact in multiple currencies and access finance at international cost rates.

Benefits To SEZ Units

• Duty‐free import of goods for approved activities.
• Reimbursements and exemptions such as central sales tax and excise duty on eligible goods.
• Other specified duty reimbursements as notified by the Directorate General of Foreign Trade (DGFT).

Q.7. Explain the various agreements of WTO.

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The World Trade Organization (WTO) succeeded GATT and extends multilateral rules to trade in goods, services and intellectual property. WTO agreements require members to make policies and procedures transparent and provide a framework for resolving trade disputes. Major WTO agreements include:

• GATT 1994 and Related Agreements: The General Agreement on Tariffs and Trade (substantially revised under the Uruguay Round) is part of WTO rules. GATT 1994 covers general principles of trade liberalisation and also includes specific agreements to deal with non‐tariff barriers.
• Agreement On Textiles And Clothing (ATC): Phased out quota restrictions imposed under the Multi‐Fibre Arrangement (MFA). As a result of ATC, textile and clothing trade has been largely quota‐free since 1 January 2005, helping developing countries expand exports.
• Agreement On Agriculture (AoA): Seeks fairer trade in agricultural products by disciplining tariffs, export subsidies and other measures that distorted agricultural trade. Developed countries agreed to reduce tariffs and certain subsidies; developing countries have longer timeframes and special provisions.
• General Agreement On Trade In Services (GATS): Extends multilateral trade rules to services. Key provisions include:

1. Members make commitments to liberalise specific service sectors over defined periods; developing countries have flexibility in timing and scope.
2. Most‐Favoured‐Nation (MFN) obligation prevents discrimination among foreign suppliers and services, unless exemptions are stated.
3. Members must publish relevant laws and regulations affecting trade in services to ensure transparency.

• Agreement On Trade‐Related Aspects Of Intellectual Property Rights (TRIPS): Establishes minimum standards for protection of intellectual property such as copyrights, trademarks, geographical indications, industrial designs, patents, layout designs of integrated circuits and trade secrets. TRIPS was negotiated during the Uruguay Round and integrated intellectual property rules into the multilateral trading system.