International Trade: A Comprehensive Guide to Global Commerce
WORLD TRADE ORGANIZATION History Originally set up in 1947 as the GATT (general agreement on Tariffs and Trade) → replaced by WTO in 1995 Currently there are 164 member countries and 23 observers General Agreement on Tariffs and Trade GATT: a multilateral trade agreement aimed at abolishing quotas and reducing tariffs among member countries. → established after WWII to promote world trade → was supposed to be an interim agency for a specialized agency of the UN called the International Organization (ITO) but never created because the US refused to assign the agreement → consisted of 9 rounds → Rounds 1-6: reducing tariffs & anti-dumping legislation → Round 7: resulted in an average ⅓ cut in custom duties → Round 8: extended to services, IP, agriculture, and textiles & established WTO → Round 9: focused on the needs and interests of developing countries WTO Functions Trade Negotiations → Cover goods, services and IP → Set procedures for settling disputes Implementation and Monitoring → require governments to have transparent trade policies → WTO councils and committees to ensure policies are being followed Building Trade Capacity → aid developing countries by helping the country’s skills and infrastructure Outreach → WTO maintains relationships with non-government organizations to increase awareness → disaster relief/recovery Principles of Trading System Without Discrimination: a country should not discriminate between its trading partners → Most-Favored Nation Status: the contracting nations bind themselves to grant to each other in certain matters the same terms granted to the nation which receives from it the most favorable terms in respect of those matters (ex. Lower tariffs; no duty) →National Treatment: treating foreigners and locals equally Freer: barriers coming down through negotiation Predictable: foreign companies, investors and governments should be confident that trade barriers should be raised arbitrarily; tariff rates and market-opening commitments are “bound” More Competitive: discouraging unfair practices such as dumping and export subsidies More Beneficial for Less Developed Countries: special privileges and greater flexibility Voting → One country one vote → Decision making is generally by consensus Specific Situations → an interpretation of any trade agreements can be adopted by a majority of ¾ of members → the Ministerial Conference can waive an obligation by trade agreement by ¾ majority → decisions to amend provisions in an agreement can be adopted either by: all members or ⅔ majority depending on the nature of the provisions → admit a new member: ⅔ majority in the Ministerial Conference or the General Council Accession Process Any state or customs territory having full control of its trade policies may become a member of the WTO but the WTO members have to agree Members 164 members and 23 “observers” negotiating membership Pros Cons Globalization Ability to sanction members Lack of transparency Drastic wealth inequalities between members (pressure on developing countries to catch up) HARMONIZATION IN INTERNATIONAL TRADE Harmonization Modifies domestic provision in law and customs in countries that are dissimilar Lex Mercatoria Customs and practices developed between 9th-16th century that emphasized contractual freedom, alienation of property and deciding cases ex aequo et bono (what is equitable and “good”) Uniform Commercial Code Facilitates domestic commercial transactions Article 2 governs the Sale of Goods → preempts common law; where the UCC is silent, common law governs Sale: passing of title of “goods” to/from a “merchant” (seller or buyer)
For a price (money, goods, services etc.) Goods: tangible and movable at the time of sale Merchant: has a special business expertise (high standards) UCC 2-204: open terms: “indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy Gap Fillers under the UCC Open price: if the parties have not agreed on pricing, court can determine “reasonable price at the time of delivery” Open payment: payment is due on delivery (COD) Open delivery term:
Buyer takes delivery at the seller’s place of business Open quantity: generally courts will not impose a quantity (there are exceptions): → requirement contract: buyer agrees to purchase what the buyer has expressed that she needs or requires → outputs contract: buyer agrees to buy all of seller’s production or output Merchant’s Firm Offer: offer made by a merchant in signed writing is irrevocable for a reasonable period of time but no more than 3 months and no consideration is necessary Acceptance: promise to ship or prompt shipment is acceptance → shipment of non-conforming goods can be an acceptance and a breach (only a breach if the goods are sent as an “accommodation”) Acceptance: Additional Terms: → if either party is a non-merchant, the contract is formed according to the original terms of the offer → if both parties are merchants, contract incorporates new terms unless: Original offer expressly limits changes, or Represents a material change or Offeror objects within a reasonable time Consideration: UCC requires consideration and modifications to consideration must be made in good faith → modifications must be in writing (SOF) Statute of Frauds: sale of goods over $500 must have a signed writing to be enforceable Exceptions: (1) specially manufactured goods; (2) admissions by breaching party (3) partial performance (4) merchant does not object in writing within 10 days Parol Evidence Rule: terms of a written agreement intended to be the final expression of parties’ intentions, cannot be contracted by prior or contemporaneous agreements → exceptions: consistent terms; course of dealing and trade Unconscionability: contract is one that is so unfair and one-sided it is unreasonable to enforce it → Court has 3 options: set it aside, refuse to enforce the unconscionable provision, limit the contract UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INT’L SALE OF GOODS (CISG) Scope: convention only applies to contracts for the sale of goods between parties in contracting states; cross-border commercial sales, excluding consumer contracts Overview: governs the formation of the contract, obligations of seller (conformity of goods) & buyer, and consequences of breach Remedies of the buyer (breach by seller): Supplementary performance by repair or substitute Avoidance of the contract Reduction of price damages Obligations of the buyer: must examine the goods and notify seller of lack of conformity (failure to do so: no remedies) Buyer/Seller not liable if: he can prove an impediment beyond his control (could not reasonably take into account/avoid/overcome) CISG: → binds more than 80 countries → US is the largest partner-member of the Convention; also Canada, Mexico, most EU countries; most countries in South America Subject Matter of CISG: Formation and performance of contracts Remedies available to buyer and seller ONLY APPLIES TO SALES TRANSACTIONS BETWEEN MERCHANTS Exclude from CISG: Auction sales; sales by authority of law Sales of stocks, shares, investment securities, negotiable instruments or currency exchange Sale of ships, vessels, hovercrafts, aircrafts and electricity Terms not covered by CISG: Fraud Validity of contracts Conditions precedent Specific warranties Passing of title to Property Intention of parties Reservation of the right of disposal (whatever the fuck this means) How the CISG affect your company’s business? Lack of, or ambiguity of sales terms can lead to the cancellation of a contract that would be valid under the UCC INTERNATIONAL TRADE THEORY Free Trade:
An environment in which the government does not attempt to influence commerce through quotas or duties MERCANTILISM → Emerged in mid-16th century → advocated government intervention to achieve a surplus in the balance of trade → zero-sum game ABSOLUTE ADVANTAGE Smith Trade Theory:
Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism and came up with principal of absolute advantage → absolute advantage: better for nations to engage in free trade and become specialized in a specific trade (the ability of a party to produce a greater quantity of a good, product, or service than other competitors using the same amount of resources) Example: Ghana and South Korea (cocoa and rice)
Ghana (200 units of resources) South Korea (200 units of resources) 10 units = 1 ton of cocoa (max. 20 tons of cocoa) 20 units = 1 ton of rice (max. 10 tons of rice) Absolute advantage: cocoa 40 units = 1 ton of cocoa (max. 5 tons of cocoa) 10 units = 1 ton of rice (max. 20 tons of rice) Absolute advantage: rice Export: 6 tons of cocoa Import: 6 tons rice Total: 14 tons of coca 6 tons of rice Increase: 4 tons of cocoa & 1 ton of rice Export: 6 tons of rice Import: 1 ton of rice Total: 14 tons of rice & 6 tons cocoa Increase: 4 tons of rice & 3.5 tons of cocoa COMPARATIVE ADVANTAGE Ricardo argued that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and buy 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 Example: Ghana v. South Korea Ghana is more efficient in the production of both cocoa and rice Ghana (200 units) South Korea (200 units) 10 units = 1 ton of cocoa (max. 20 tons of cocoa) 13 ⅓ units = 1 ton of rice (max. 15 tons of rice) 40 units = 1 ton of cocoa (max. 5 tons of cocoa) 20 units = 1 ton of rice (max. 10 tons of rice) Export: 4 tons of cocoa to SK in exchange for 4 tons of rice (15-4) Import: 4 tons of rice (3.75 + 4) Total: 11 tons of cocoa & 7.75 tons of rice Before trade: 10 cocoa & 7.5 rice Export: 4 tons of rice (10-4) Import: 4 tons of cocoa (0+4) Total: 6 tons of rice & 4 tons of cocoa Before trade: 2.5 tons of cocoa & 5 tons of rice Assumptions of Comparative Advantage
There are only 2 countries and 2 goods Differences in the prices of resources in different countries Resources can move freely from one country to another Each country has a fixed stock of resources HECKSCHER-OHLIN THEORY Comparative advantage arises from differences in national factor endowments Factor endowments: the extent to which a country is endowed with resources (the more abundant a factor, the lower the cost)
Exports: countries will export goods that make intensive use of factors that are locally abundant Import: any goods that make intensive use of factors that are scarce Theory Weaknesses Poor predictor of real-world international trade pattern Assumes countries have the same technology NEW TRADE THEORY Economies of Scale → a proportionate saving in costs gained by an increased level of production → the ability to spread fixed costs over a large volume Examples of economies of scale: Chemical industry Heavy construction equipment industry Heavy truck Tire Consumer electronic First Mover Advantages
The commercial aerospace industry Government Intervention
It might be effective for a nation to shelter infant industries Using protectionist measures to build up a huge industrial base in certain industries MARKET-ENTRY STRATEGIES Companies looking to enter into a new market have to make decisions about: Target product/market The goals of the target markets Mode of entry / timing of entry Legal / regulatory requirements/barriers Control system to check the performance in the entered markets Screening Process for Target Market Selection: Select indicators & collect data Determine importance of those indicators Rate the countries on each indicator Compute overall score for each country Identify target segment within market Decision Criteria for Mode of Entry: Market size & growth Risk Government regulations Infrastructure Company objectives Need for control Internal resources, assets and capabilities How to obtain an optimal licensing arrangement: Seek patent or trademark protection Make sure to do a profitability analysis Contract parameters (technology package, use conditions, compensation, etc.) Market Entry Type Exporting
Licensing
Franchising
Pros Indirect: low commitment & low risk
Direct: more control & more sales push Little to no investment Rapid way to gain entry Means to bridge import barriers Low risk Little or no investment Rapid way to gain entry Managerial motivation Cons Indirect: lack of control and contact w/ foreign market No learning experience Direct: need to build up export organization & more demanding on resources Lack of control Need for quality control Risk of creating a competitor Limits market development Need for quality control Lack of control Risk of creating competitor Contract Manufacturing
Joint Ventures
Wholly-Owned Subsidiaries
Pros Little or no investment Overcome import barriers Cost savings Risk sharing Less demanding on resources Access to local distribution network Greater control & profits Strong commitment to the local market Investor can manage and control marketing, production and sourcing decisions Cons Need for quality control Risk of bad press (e.G. Child labor) Diversion to gray/and or black markets Risk of conflict with partner Lack of control Risk of creating a competitor Risks of full ownership Developing a foreign presence w/o support of an in-country partner Risk of nationalization Cultural and economic sovereignty issues2 JV Agreement Issues: Governance Contributions Responsibility & Risk Technology Transfers Force Majeure Governing Law/ language Dispute Resolution Reasoning for Exiting a Market: Sustained losses Volatility Premature entry Ethical reasons Intense competition Resource re-allocation Risks of Exit: Fixed costs of exit Disposition of assets Signal to other markets Long-term opportunities Residual legal liability INTERNATIONAL COMMERCIAL TERMS (INCOTERMS) INCOTERMS establish: Geographical location where the buyer becomes responsible for the goods Who pays for shipping, handling, insurance, inland freight, export and import customers clearance Together with payment terms, the point where the seller has satisfied its obligation to the buyer and payment is due APPLIES TO CONTRACT OF CARRIAGE NOT CONTRACT OF SALE TERMS: “E” Term: seller’s obligation is minimal EXW: seller delivers the goods when he places at the disposal of the buyer at the seller’s premises or another named place (i.E. Works, factory, warehouse) not cleared for export and not loaded on any collecting vehicle Seller and buyer share the same amount of risk (loss), costs and delivery “F” Term: requires the seller to deliver as instructed by the buyer FCA (free carrier alongside): seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. (can be used irrespective of the mode of transport) Buyer has a higher risk but minimal responsibility for delivery compared to seller; seller has a lower risk but shares the same costs as buyer FAS (free alongside ship): seller delivers when the goods are placed alongside the vessel at the named port of shipment. The buyer has to bear all costs and risks of loss of or damage to the goods from that moment. This term requires the seller to clear the goods for export Seller and buyer share the same amount of risk, costs and delivery FOB (free on broad): seller delivers when the goods are delivered to the named port and loaded on board the vessel at the named port of shipment. The buyer has to bear all costs and risks of loss of or damage to the goods from that moment. This term requires the seller to clear the goods for export. Seller and buyer share the same amount of risk, costs and delivery “C” Term: requires the seller to contract for carriage at his expense CFR (cost & freight): seller pays the costs & freight necessary to bring the goods to the named port of destination w/o assuming the risk of loss or damage to the goods or any additional costs after the time the goods have been delivered on board the vessel. Can only be used for sea and inland waterway transport Buyer has a higher risk of loss; seller has higher costs requires the seller to clear the goods for export CIF (cost, insurance & freight): means that the seller has the same obligations as under CFR but with the addition that he has to procure marine insurance against the buyer’s risk of loss of or damage to the goods during the carriage Can only be used for sea and inland waterway transport Buyer has a higher risk of loss; seller has higher costs Requires sellers to clear goods for exports CPT (Carriage paid to): seller delivers the goods to the carrier nominated by her but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. Buyer bears a higher risk; seller bears a higher risk for delivery and costs Term requires that the seller clears the goods for export Can be used for any mode of transport CIP (carriage & insurance paid to): means that the seller has the same obligations as under CPT but with the addition that the seller has to procure cargo insurance against the risk of loss of or damage to the goods during the carriage. Requires seller to clear the goods “D” Term: signifies arrival contracts DAF (delivered at frontier): seller fulfills obligation when goods have been made available and cleared for export, at the named point and place at the frontier, but before the customs border of the adjoining country. Risk transfers when seller place goods at the disposal of the buyer at the named place of delivery at the frontier Primarily used for rail or road transportation DES (delivered ex ship): seller delivers when the goods are placed at the disposal of the buyer on board the ship not cleared for import at the named port of destination Seller bears all costs and risks involved in bringing the goods to the named port of destination Used when goods are delivered by sea or inland waterway or multimodal transport DEQ (delivered ex quay): seller delivers when the goods are placed at the disposal of the buyer not cleared for import on the quay at the named port of destination. Seller bears costs and risk bringing and discharging the goods on the quay Buyer must clear goods for import DDU (delivered duty unpaid): seller delivers the goods to the buyer, not cleared for import and not unloaded from any arriving means of transport at the named place of destination Buyer takes care of import duties, costs and risks DDP (delivered duty-paid): seller delivers the goods to the buyer, cleared for import and not unloaded from any arriving means of transport at the named place of destination. Seller bears all costs and risks BILL OF LADING & DOCUMENTARY ELEMENTS Documentary Sale:
Contract for the sale of goods in which possession and ownership of goods are transferred from seller to buyer through negotiation and delivery of negotiable document of title issued by an ocean carrier. Article 3 UCC & Holder in Due Course
Status (Negotiable Instrument Law) Article 3 of the UCC allows for greater protection for transferees/assignees of negotiable instruments The instrument must be: Negotiable in form and Must be duly negotiated, and the holder (transferee) must be a holder in due course Due course: someone who gave value for it and took it in good faith without knowledge of any defects Good Faith Purchasers of Documents of Title A holder by due negotiation: one who purchases a negotiable document for value, in good faith, and in the ordinary course of business. Usually have greater rights in documents and goods than the transferor had. The Bill of Lading → issued by the carrier to a shipper when the goods are transferred to the carrier → signed by the c