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ANNAMALAI UNIVERSITY
DIRECTORATE OF DISTANCE EDUCATION
Master of Business Administration (M.B.A.)

First Year
INTERNATIONAL BUSINESS
LESSONS : 1 – 24
Copyright Reserved
(For Private Circulation Only)
MASTER OF BUSINESS ADMINISTRATION (M.B.A.)
FIRST YEAR
Editorial Board
Members
Prof. Dr. M. Nagarajan

Dean
Faculty of Arts
Annamalai University
Annamalainagar
Dr. C. Samuthrarajakumar Prof. Dr. S. Rajmohan

Professor and Head Professor and Head
Department of Business Administration Management Wing, DDE
Annamalai University Annamalai University
Annamalainagar Annamalainagar
Internal
Dr. K. Soundararajan Dr. B. Balamurali
Associate Professor Assistant Professor
Management Wing, DDE Management Wing, DDE
Annamalai University Annamalai University
Annamalainagar Annamalainagar
External
Dr. S. Thirunavukkarasu Dr. A. Jalal
Principal and Professor of Economics Associate Professor of Commerce
Vivekanandha Arts and Science College Khadir Mohideen College
Cehnnai Adirampattinam
Tanjore
Lesson Writer
Units : I to VI
Dr. P. Natraj
Assistant Professor
Economics Wing, D.D.E.
Annamalai University
Annamalainagar
FIRST YEAR
SYLLBAUS
Unit-I
International Trade: Meaning - Definition – Difference between domestic and
international trade – Dynamics of International Business - Gains from Trade and
terms of Trade – Process of Globalization - Balance of Payments.
Unit-II
The outlook for Export Marketing – Tariff and Non-Tariff barriers – Foreign
Exchange Control – PESTEL.
Unit-III
International Economic Organizations and Forums – IMF – World Bank – Asian
Development Bank – International Monetary System – The Euro Dollar Market –
International Liquidity – Role of SDRs – Regional Trade Blocks – WTO agreements
and implications – Risk Analysis.
Unit-IV
Trends in Indian Foreign Trade Export – Promotion and import Substitution –
State Trading Corporation – MMTC – International Marketing – Export Finance and
Credit – Role of ECGC – Measures for Export Promotion.
Unit-V
Export Market Research – Joint ventures abroad – Export Licensing Procedure
– Banking procedure for negotiation of documents.
Unit-VI
Import procedures and controls – Import Policy of the Government - Financing
of imports – Canalisation of import and exports – Desirability – Operating in a
borderless world – Business ethics and CSR.
References Books
1. V.H. Kripalini: International Marketing: Prentice Hall of In dia, 2005.
2. Francis Cherunilam : International Trade and Export Management, Himalaya, 2013.
3. Dr. C.B.Gupta, International Business, S. Chand, Chennai, 2009.
4. Dr.P.Subba Rao, International Business (Text and Cases, Third Edition, Himalaya
Publishing House), 2013.
Journals and Magazines
1. International Journal of Management and Business Studies
2. International Journal of Business Administration
3. International Business and Management
4. Journal of International Business and Entrepreneurship.
5. Journal of International Business Ethics.
6. International Small Business Journal.
7. International Business and Economic Research.
Web Resources
1. www.amazon.com/World-Business-Resources...International
2. www2.etown.edu/vl/intlbus.html
3. www.bpl.org/kbl/websites/international-business
4. global.oup.com/uk/orc/busecon/business/hamilton_webster2e
5. www.lib.uwo.ca/programs/generalbusiness/internationalbusiness.html
FIRST YEAR
CONTENTS
Lesson Page
Title
No No
1. The Nature of International Trade 1
2. Terms of Trade and Gains from International Trade 5
3. Free Trade Vs Protection 17
4. Trade and Commercial Policy: Tariffs and Import Quotas 23
5. International Trade Organisations: International Monetary Fund and IBRD 34
6. International Trade Organisation: General Agreement on Tariffs and Trade 45
(GATT) / WTO
7. International Trade Organisation: United Nations Conference on Trade and 56
Development (UNCTAD)
8. Rate of Exchange and Foreign Exchange Control 62
9. Balance of Trade and balance of Payments Current and Capital Accounts 72
and Adjustments Mechanism
10. Regional Economic Integration: Customs Union 82
11. The European Economic Community 86
12. New International Economic order: North-South Co-operation-SAARC 91
13. Trends in Indian Foreign Trade 102
14. Export Promotion and Import Substitution 113
15. Export Promotion Councils 124
16 Meeting International Standards 134
17 Role of ECGC 145
18. Basics of export 159
19. Packaging and labelling 174
20. Preshipment inspection 199
21. Problems in Maintaining Quality of Exports 209
22. Export Regulatory Documents 217
23. Export Licensing Procedure, CSR & Sustainability-Policy, 224
Process & Procedure
24. Export and import finance and credit 243
LESSON – 1
THE NATURE OF INTERNATIONAL TRADE

1.1 INTRODUCTION
The basic concepts and analytical tools of international Economics are
precisely the same as those used in the principles of Economics. The main
difference between the two lies only in the focus.
1.2 OBJECTIVES
 To understand the basic concepts of international economics same as those
used in principles of Economics.
 As a separate discipline it must explain international exchange of goods and
services and movement of factors such as capital and labour from one
country to another.
1.3 CONTENT
1.3.1 Internal and International Trade
1.3.2 Distinct features of International transactions
1.3.3 Pure and Monetary theory of International trade
1.3.1 INTERNAL AND INTERNATIONAL TRADE
The term "trade" is commonly, understand to mean exchanges of goods, wares
or merchandise among people. It comprehends every species of exchange or dealing
in goods. Trade may be internal or extern al. By internal or domestic trade are
meant transactions taking place within the geographical boundaries of a nation or
region.
It is also known as intraregional or home trade. External or international
trade, on the other hand, is trade among different countries or trade across political
frontiers. International trade thus refers to the exchange of goods and services
between one country or region and another. It is also sometimes known as inter -
regional or foreign trade: Briefly, trade between one nation and another is called
"international" trades; and trade within the territory (political boundary) of a nation
"internal" trade.
Evidently, international economics, which is the subject of the present book, is
that branch of economics, which is concerned with the exchange of goods and
services between one country and another (foreign trade) a distinct from that trade
which is carried on within the territory of a nation (domestic trade).
Is there need for a separate theory of International Trade?
On this question, there are two views:
i) The classical view and
ii) Ohlin's view.
2
The Classical View

Classical economists believed that there was a fundamental difference between
home trade and foreign trade. They pointed out that labour and capital move freely
within a country but not between different countries. Thus, international
immobility of factors was the basic criterion accepted by the classical economists
for the emergence of international trade. Moreover, different national policies,
different political units, different monetary systems, and artificial barriers like
tariffs and exchange controls involved in international trade distinguish it from
domestic trade. Hence, the classicists observed that the conditions, which regulated
the exchange of commodities within one such country, did not apply to economic
relations between different countries. Hence, a separate theory of international
trade was necessary and justified.
Ohlin's View
Bertil Ohlin, the Swedish economics, however, challenged the traditional1y -
accepted notion on international trade by advocating that there is no need for a
separate theory of international trade. In this view, "international trade is but a
special case of inter-regional trade".
In short, from the "space" consideration, there arose the concept of mobility or
immobility of the factors of production as located not in certain places but in
certain "districts".
We may thus say that since there are specialized branches of economics like
theory of value, theory of money, public finance, industrial economics, and labour
economics and so on, there must also be a special study of international trade
separately called "international economics."
1.3.2 Distinct Features of International Transactions
There are several reasons-practical as well as pedagogic-for evolving a separate
theory of international trade and consequent development of a distinctive branch of
economics called "International Economics" dealing with issues and problems of the
international economy. International trade follows di fferent laws of behaviour from
those of domestic trade. Therefore, a separate theory is inevitable. These reasons, in
a way, tend to point out the distinguishing attributes of international transactions.
Following Kindle Berger, we may enlist the important features of international trade
as under.
 Immobility of Factors
 Heterogeneous Markets
 Different National Groups
 Different Political Units
 Different National Policies and Government Intervention
 Different Currencies
 Specific Problems
3
1.3.3 Pure and Monetary Theory of International Trade

International trade theories are usually classified into "pure" and "monetary'
theory. The pure (or equilibrium) theory of international trade deals with
"equilibrium" phenomena of trade. It seeks to analyse and expose the conditions of
equilibrium in real terms. It probes into the economic causes and consequences of
international trade. The monetary theory of foreign trade is confronted with the
monetary mechanism of international economic transactions, including financial
transactions and capital movements. It primarily deals with the determination of
exchange rates and seeks to examine the methods and processes of adjustments in
the balance of payments equilibrium.
The pure theory of international trade answers three sets of questions: First,
why do nations enter into trade? Second, how are gains of trade shared by the
trading nations? Third, how does international trade affect the allocation of
resource in the domestic economy of the trading country?
A distinctive feature of pure theory of international trade is that it is party of
general theory of value. It is, however, static general equilibrium theory (whether it
is the classical theory of "comparative costs" or the modern "factor-proportions
analysis"). At the most, "pure theory" is a rudimentary dynamic analysis. The
monetary theory of international trade, on the other hand, is at least partly a
perfect dynamic theory, which is closely related to the trade cycle theory and
Keynes' General Theory of Income and Employment".
In economic literature so far, however, no successful attempt has been made
to explain fully how these two types of theories are interlocked. Pure theory
generally could not very successfully analyse and describe the process of
adjustment. It could only figure out equilibrium positions. As such, international
monetary theory has always to confront one or the other of the following problems:
either (1) it is trivially simple or (2) it involves specific and sometimes unrealistic
assumptions about the nature of adjustment. The latter fact, however, puts the
generally aspect of the theory in doubt. Consequently, it becomes difficult to
integrate monetary theory into the skeleton of pure economic theory in a rational
and realistic manner.
1.4 REVISION POINTS
1. Internal and International Trade
2. Distinct features of International transactions
3. Pure and Monetary theory of International trade
1.5 INTEXT QUESTIONS
1. which economists believed that there was a fundamental difference between
home trade and foreign trade?
2. Enlist the important features of international trade by Kindle Berger?
1.6 SUMMARY
The international trade theory is usually classified into pure (or) equilibrium
theory and monetary theory.
4
1.7 TERMINAL EXERCISE

1. Define international trade from classical point of view?
2. In who’s view, "international trade is a special case of inter-regional trade".
1.8 SUPPLEMENTARY MATERIALS
1. Charles P.Kindleberger, International Economics, Fifth Edition, 1973.
3. Robert A.Mundell, International Economics, 1968, Macmil lan & co, New York.
4. Jagdish Bhagawathi, International trade & Economics expension. The
American, Economics Review, Dec.1958.
1.9 ASSIGNMENTS
1. Explain the difference between internal trade and international trade.
2. What are the features of international transactions?
1.10 REFERENCE BOOKS
1. Peter B.Kenen, The International Economy, Third Edition, Cambridge
Edition, 1994.
2. Francis Cherunilam, International business, Third Edition 2004.
3. M.C.Vaish & Sudama Singh, International Economics sixth Edition, reprint
1995.
4. Bo sodersten, International Economics II Edition 1980.
1.11 LEARNING ACTIVITIES
1. Take an Asian country and compare it with India on the features of
international trade.
1.12 KEY WORDS
 Trade, exchange of goods, classical view, ohlin’s view, mobility o f factors,
pure theory, monetary theory.

5
LESSON – 2
TERMS OF TRADE AND GAINS FROM INTERNATIONAL TRADE

2.1 INTRODUCTION
Given the production possibility curve and terms of trade, the community
indifference curves determine the autarky or pre - trade & post –trade equilibrium.
The condition of equilibrium under constant cost has been discussed in this lesson.
Different countries engage in trading with one another because they gain from
trade. In short the main reason of trade resides in the gains which cou ntries reap
from trading one another.
2.2 OBJECTIVES
To understood the trade-taking place between two open Economics who’s
measure of purchasing power of exports of a country in terms of its imports, and is
expressed as a relation between export prices and import prices of goods. To
explain the factors that determine size of gains through terms of trade
2.3 CONTENT
2.3.1 Reciprocal Demand Theory
2.3.2 Types of terms of trade
2.3.2.1 Commodity Terms of Trade
2.3.2.2 Gross Barter Terms of Trade
2.3.2.3 Single Factorial and Double Factorial Terms of Trade
2.3.2.4 Income Terms of Trade
2.3.3 Determinants of terms of trade
2.3.4 Terms of Trade and Economic Development
2.3.5 Reason for unfavourable terms of trade
2.3.6 Nature of gains
2.3.7 Sources of gains
2.3.8Factors determining size of gains
MEANING
Terms of international trade means the terms at which two countries trade
with each other. It is a measure of the purchasing power of exports of a country in
terms of its imports, and is expressed as the relation between export prices and
import prices of its goods. International trade involves mostly direct exchange of
commodities between different nations. Countries usually pay for their imports in
the form of exports and the rate at which given vol ume of exports exchange for a
given quantity of imports is called the "terms of trade". The terms of trade can be
explained from the following equations:
Value of Import
Terms of Trade =
Value of Export
6
Pr ice of Import  Volume of Import

Terms of Trade =
Price of Exports  Volume of Exports
The terms of trade may be changing according to the price and volume of
imports and exports. The terms of trade may be favourable to one country and may
be unfavorable to other countries.
2.3.1 Reciprocal Demand Theory
J.S. Mill had worked on simple terms of trade on the basis of two countries
and two commodities. He has defined the terms of trade as the barter terms of
trade, i.e., the ratio of the quantity of imports received for a given amount of
exports. The barter terms of trade depends upon not only on cost conditions, but
also on demand conditions. The actual ratio, at which goods are exchanged,
depends upon the reciprocal demand that means the relative strength and the
elasticity of demand of two commodities for each other's products in exchange of
their own products. The terms of trade may be favourable or unfavourable,
depending upon the relative strength and elasticity of demand.
For example,
Wheat (In units) Cotton(in units)
India 20 Or 40
Russia 20 Or 8
The limits of the terms of trade in India for 20 units of wheat will be between
40 units of cotton in India and 8 units of cotton in Russia. If Russia's demand for
Indian cotton is more intense, the exchange ratio may be determined as 8 units of
cotton = 20 units wheat. India can gain up to the extent of 32 (40 -8) units of cotton.
Russia will be ready to buy up to the point where 8 units of cotton are equal to 20
units of wheat, because below it Russia itself will produce cotton. On the reverse, if
India's demand for Russians cotton is more intense. India may offe r 40 units of
cotton for 20 units of wheat and Russia may gain up to 32 units of cotton (40 -8) in
exchange of 20 units of wheat. Thus during these two limits, the terms of trades are
determined. In brief, thp. country, whose product is mostly in demand, gains in
foreign exchange by pushing terms of trade upward.
The reciprocal theory depends upon the assumptions of full employment,
perfect competition, free foreign trade, free mobility of factors, principle of
comparative costs and model of two countries an d two commodities. The theory
may be useful under the given assumptions, but these assumptions do not hold
good in practice; therefore the theory has lost its practical utility.
2.3.2 Types of Terms of Trade
The terms of trade are of different types; some of them are discussed below:
2.3.2.1 Commodity Terms of Trade
The commodity or net barter terms of trade is the ratio between the prices of a
country's export goods and import goods. Symbolically, it can be expressed as
7
Tc = Px/Pm,
Where,
Tc = commodity terms of trade
Px = Price of exports
Pm = Price of imports
To measure changes in the commodity terms of trade over a period, the ratio of
the change in export prices to the change in import prices is taken. The formula for
the commodity terms of trade is
Px1 / Pm1
Tc =
Px 0 / Pm0
Pxo/Pmo Where the subscripts 0 and 1 indicate the base and end periods.
For example, the price of import have gone up by 25 percent and those of
export by 50 percent. The Net Barter Terms of Trade will be:
150 100
  1.20
125 100
In the above example, the terms of trade of the concept have gone up to 1.20
from 1.0 or (1.20 from 1.0) at the base period. Thus, the country is benefited by 20
percent.
APPRAISAL
The above terms of trade do not indicate the economic position of the country,
unless data on balance of payments is provided. The a bove favourable net barter terms
deos not clarify whether the country exports remain balanced or less exports are
exchanged at the same amount of imports or the same amount of exports is exchanged
for more amount of imports or the surplus of export is invested in foreign countries.
2.3.2.2 Gross Barter Terms of Trade
The gross barter terms of trade refer to the quantities of exports and imports
which have changed in the subsequent period as compared to that of the base
period. The equation can be given below:
Qx1 /Qm1 Y
 x
Qx 0 /Qm0 Ym
Similar to the above equation, Qx and Qm is related with the quantity of
export and quantity of import.
CRITICISMS
The concept of gross barter terms of trade has been criti cized for lumping
together all types of goods and capital" payments and receipts as one category in
the index numbers of exports and imports.
There are no units applying equal to export (or import) of capital and the
payment (or receipt) of a grant. It is not possible to distinguish between the various
types of transactions which are lumped together in the index.
8
2.3.2.3 Single Factoral and Double Factoral Terms of Trade

Jacob Viner propounded the concept of single and double factoral terms of
trade. Single factoral terms of trade indicate the relation between the index number
of export prices and import prices and adjusted by the changes in the productivity
of export industries. It can be expressed as
Px . Fx
Ys = Tc.Fx = (since T c g =Px /Pm
Pm
Where Ts is the single factoral terms of trade, Tc is the commodity terms of
trade, and Fx is the productivity index of export industries. The single factoral
terms of trade removes the short comings of the gross barter term.
Double factoral terms of trade take into account not only the changes in the
productivity of the country's factors but also the efficiency of foreign factors in
producing import goods. The superiority of this term is well -known, because it
takes into account foreign forces, too, which affect the volume of trade and
consequently the terms of trade.
CRITICISMS
The above term is theoretically correct, but it is difficult to analyse statistically
because the factors of production are not statistically ascertainable. The above
terms of trade is not practically observed.
Fx P F
Yd = T c . = x . x (since T c = Px /Pm)
Fm Pm Pm
Where Txd is the double factoral terms of trade, P x/Pm is the commodity terms
of trade, Fx is the export productivity index, and Fm is the import pro ductivity
index.
2.3.2.4 Income Terms of Trade
The income terms of trade are the index of gains from exports or total gains
from trade. It brings into account the volume changes of trade in addition to the
price changes. The term can be explained by the following equations.
Qx .Px
Ty = × 100
Pm
Where Qx Stands for the index of changes in the quantity of export
Px Stands for the index of changes in the price of export
Pm Stands for the index of changes in the price of import
The change in the volume of export adds an extra qualification to the net
Barter terms of trade.
From the above discussion, we can conclude that there are several trypes of
terms of trade, but the net Barter terms of trade are more practical, so this term is
more commonly used.
9
2.3.3 Determinants of Terms of Trade

The terms of trade of a country depend upon various factors, some of which
are discussed below:
Reciprocal Demand Elasticity
The reciprocal demand elasticity refers to the elasticity of demand and supply
of import and export. The reciprocal demand elasticity is caused by the relative
intensity of demand which depends upon the size of population, resourcefulness of
export nature of goods exported and imported, tastes and preferences of buyers,
diversification of products and government policies.
Factors Affecting the Prices of Exports and Imports
The terms of trade are affected those factors which bring changes in the prices
of exports and imports of a country. Countries having production of primary goods
may experience on improvement in the terms of trade. The technological progress
and dominance of the country also affect the terms of trade. The factors, which may
affect the prices of exports and imports, are summarized below:
i. Shift in Demand
The terms of trade are also affected by the shift in demand. If there is an
increase in the demand for a country's exports, the prices of exports relative to
import would increase. Similarly, the increase in the country's' import in relation to
export would demand more import and there would be unfavourable terms of trade.
ii. Tariffs
The terms of trade are greatly affected by tariff-policies. Ordinarily, tariffs are
imposed to improve the terms of trade. The terms of trade will improve only when
the opposite country does not retaliate the composition of tariffs. The relative size of
tariffs, the elasticity of the offer currencies and the nature of other policies affect
the terms of trade.
iii. Devaluation
The devaluation aims at improving the terms of trade by lowering d own the
prices of currency in terms of foreign currencies. But if the import does not decline
and export does not increase due to unavoidable reasons, the devaluation depends
upon the elasticities of demand for country's imports and exports. If the elastic ities
of demand for country's imports and exports are greater than the elasticities of
supply of imports and exports, the effect of.d~valuation will be favourable and vice
versa is also true.
iv. Economic Development
The economic development has mixed effort upon the terms of ~rade. The per
capita income increases and the production possibility also increases due to
economic development of a country. Consequently, the income elasticities of
demand is greater than unity and that of supply is less than unity, terms of trade
will change adversely. On the reverse, if the income elasticity of demand is less than
unity and that of supply is greater than unity. The terms of trade will improve.
10
2.3.4 Terms of Trade and Economic Development

It is held that favourable terms of trade are very significant for the rapid
economic development of the less developed countries. When a country has
favourable terms of trade, it can import a larger quantity of goods for the given
amount of exports. Thus, the availability of resources, in the country. increases so
that rapid growth becomes possible and national income rises. Nurkse thus regards
the advantageous terms of trade as the potential source of capital formation.
Moreover, the favourable effect of the improvement in the te rms of trade may
be offset by certain adverse circumstances, as stated below, and rapid economic
development may not be realized. These adverse circumstances are:
i) When the improvement in the terms of trade is materialized through restricted
exports, resources may remain underutilized in export industries. Thus, the
scope of empoyment, output and income may be limited.
ii) If the improvement in the terms of trade is due to high production as a result
of inflation, the adverse effect of inflation on the developme nt process will
supersede the favourable effect of terms of trade.
iii) Further, when the terms of trade are improved by the price rise in exports due
to a fall in the supply of exports, the adverse effect lies in the reduction of
aggregate exports, so that relative import capacity may actually decline.
As such, the effect of improved terms of trade on development should be examined
cautiously in relation to other pertinent effects like changes in supply, demand,
quantum of exports, and imports, employment and income and prices in the country.
Thus, it may be laid down that, other things being equal, there can be no
theoretical dispute on the role of the favourable terms of trade in economic
development of the primary producing countries. In practice, however, i t has been
observed that the terms of trade in these poor countries are not improving but
actually deteriorating in spite of inflation, scarcity and low productivity in these
economies as against abundance and high productivity and relative price stability
in advanced countries. This deterioration is due to the following reasons:
i) Population in poor countries is large and growing faster than in advanced
countries. Thus, poor countries demand for imports of capital equipments etc.
are rising faster as against the more or less steady demand for primary
exports by the advanced countries.
ii) Concentration and expansion of the export industries in the less developed
countries have lowered the prices of their exports in competitive world market.
iii) Affluence in domestic production in the advanced countries has decreased
their demand for imports from poor countries.
iv) Recent technological advancement and other inventions have caused a further
decline in raw material import needs of developed countries. For instance,
inventions of synthetic substitutes like synthetic rubber, plastics, aluminium
etc. for natural raw materials like jute, cotton, etc. have already affected the
exports of less developed nations.
11
v) The income elasticity of demand of advanced countries for poor co untries

primary products and minerals is very low. On the other hand, the income
elasticity of demand by poor countries for the manufactured goods of
advanced nations is relatively high.
vi) Further, a greater degree of flexibility exists in the diversified economies of the
industrial countries than those of the subsistence sectors of poor countries.
Thus, when world prices of certain commodities are decreasing, industrial
nations can easily shift the production of these goods to the production of
other goods where prices are not falling. Such adaptability is lacking in the
subsistence sectors of the less developed countries; hence their terms of trade
cannot be improved.
vii) Lastly, the poor countries have a weak bargaining power in the world market,
because of the perishable nature of their exportable. Thus they have to depend
much more on developed countries both for their imports and exports and
exports than vice versa. As such, the terms of trade are set always in favour of
the advanced nations, despite GATT and UNCTAD' proposals for bett.er and
improved economic and trade relations.
2.3.5 Reasons for the Unfavourable Terms of Trade of Underdeveloped Countries
In comparison to advanced countries, underdeveloped countries have, usually,
unfavourable terms of trade. The reasons for this tendency are pot far to seek. The
following causes are responsible for such a phenomenon:
i. High cost-ratios
As compared to advanced countries, underdeveloped countries have high cost-
ratios on account of the low productivity of fac tors of production.
ii. Backward technology
Underdeveloped countries are in a backward state of the technology; hence,
their relative productivity is low, so the cost of production and domestic price -
structure is relatively high. This puts the poor country at a disadvantageous
bargaining position, consequently the terms of trade are settled in favour of the
advanced country.
iii. Primary products
Underdeveloped countries are usually agrarian economics. Their exports
consist of primary products and imports c onsist of capita:! goods. Again the these
countries agricultural production is very much prone to the operation of the law of
diminishing returns due to lack of mechanization and agricultural reforms.
iv. High population growth
Most of the underdeveloped countries are over-populated and their growth rate
is also high. Consequently, there is a high internal demand for the goods produced
in general which causes low exportable surplus with these countries.
Again, the relative import demand of these countries i s also high and inelastic.
This cause their terms of trade to deteriorate.
12
v. Greater dependency
Poor countries are greatly dependent for their capital goods requirement and
other needs on the advanced countries. They have no other alternative in view of
the absence of import substitution. While, advanced countries are least dependent
on the poor countries as they are capable of producing import substitutes. Hence,
poor countries have always weak bargaining power. So they have to accept even
terms of trade which are very much against their interest.
vi. Lack of Adaptability
Advanced countries can quickly adapt the production of such goods which are
high in demand and whose prices are rising faster than the goods whose prices
remain steady or declining. Underdeveloped countries lack such adaptability on
account of their primary production, backward state of technology, market
imperfections, immobility of factors of production and the over-all rigidity of their
economy as a whole. As such the terms of trade of underdeveloped countries tend
to deteriorate when inflation starts in manufactured goods at a faster rate, while
the world prices of agrarian output remain more or less steady.
2.3.6 The Nature of Gains
International trade confers a number of gains on the participating countries.
Particularly, international trade, based on the principle of comparative costs, leads
to international specialization or territorial division of labour. International
specialization is advantageous because:
i) The production of different commodities needs different types of resources
(factor of production) in different proportions.
ii) The different regions of the world are differently endowed with
various kinds of economic resources.
iii) The international mobility of factors such as lan d, labour and capital is
extremely limited.
iv) Obviously, therefore, when it is difficult for the resources to move between
nations, the goods which "embody" these resources should move, through
trade, for the optimum allocation of world resources. It goes wi thout saying,
thus, that international trade is beneficial to the trading partners.
v) We may now briefly enlist the gains resulting from international trade:
vi) International specialization and geographical division of labour lead to
optimum allocation of world resources making it possible to have the most
efficient use of them.
vii) Increase in the exchangeable value of possessions, means of enjoyment and
wealth of each trading country.
viii) As Ohlin states, the disadvantage of disproportionate geographical
distribution. of productive resources are mitigated by international trade. In
other words, the loss attributed to the immobility of factors is overcome by the
product movements between the trading countries.
13
5. Foreign trade for a country widens the size of market and thereby helps in
reducing the risks involved in huge investments undertaken for the growth of
home industries. It also enlarges the scope for large -scale production. The
economies of scale so realized would reduce the cost of production.
Consequently goods may cheaply be available to domestic consumers than
otherwise.
6. Under International trade each country will get more of each variety of goods,
more varieties and qualities of goods to consume.
7. International trade causes enlargement of world's total output.
8. International trade thus leads to an increase in the world's prosperity and
welfare of each trading nation. The living standards of trading countries in
turn improve. Hence, the world at large becomes a happy world.
2.3.7 Sources of Gains
According to the classical theory, specialization based on the principle of
comparative costs advantages is the major source of gain from international trade.
An additional source is the possibility of exploiting economies of scale when the size
of the market is extended through the free foreign trade of a country. The principle
of comparative costs shows that it is possible for both countries to gain from trade,
even if one of them is more efficient than the other in all lines of production.
Further, the principle of comparative cost-difference of gains in international
trade should not be looked upon merely as a possibility theorem, but as a positive
hypothesis relating to the real world. The doctrine of comparative costs predicts
that in the real. world, there will be gai ns from trade in terms of increased world
production. As such, each trading country will gain by getting relatively more and
cheaper goods and no one will lose by having less to consume than it would have if
it were self-sufficient. Though the validity of the theory of comparative costs has not
been conclusively proved, its general hypothesis that production and consumption
in the real world and in each country would be higher under international trade
than what it would be without it if all countries were forced to be completely self-
sufficient, cannot, for obvious reasons, be rejected even by any empirical tests.
2.3.8 Factors Determining Size Of Gains
Following are the important factors determining the size of gain and its
proportion.
1. Nature of Terms of Trade
Terms of trade, i.e., the rate at which one country's goods exchange against
those of another, tend to affect the size of gain from trade. Terms of trade .may be
favourable or unfavourable to a country. A favourable term of trade implies a
relatively larger share of gain to a country and an unfavourable term of trade would
mean a relatively smaller share of gain accruing to the country. Between the two
countries, if one has a favourable term of trade, the other must necessarily have an
unfavourable term of trade. According to Ricardian example, if terms of trade are: 1
unit of wine= 1.1. unit of cloth, it if favourable to Portugal but unfavourable to
England.
14
The terms of trade are favourable when they are set closer to the domestic
exchange ratio of the opposite country and unfavourable if they are closer to the
domestic exchange rate of the country under consideration.
2. Difference in Cost Ratios
According to Harrod, the gain from international trade depends on the relation
between the ratio of the costs of production in the two countries concerned. The
gain does not depend on the comparative cheapness of producing commodity X or Y
in the two countries. It depends on the relation between the ratio of the cost of
production of X to that of Y in one country and the ratio of the cost of production of
X to Y in the other country. Gain is possible if the cost ratios are different in
different countries. Briefly, the gain from internationalnal trade arises because of
the difference in cost ratios in the production of two commodities in differrent
countries.
It is quite obvious that the gain to the two cou ntries from international trade
will be greater when the difference between the cost ratio is great before trade
emerged. However, when trade takes place, each country will be producing more of
some goods (having comparative advantage) and less or none of others. This will
probably affect the costs of goods in which the country specialises and of others
which it curtails. Hence, new ratios are still differen t in the two trading countries,
gain can be secured by a further expansion of trade, which again affects the cost
ratios. Thus, a country would expand or curtail the production of different goods
and ratios of cost are the same as those of the other tradin g country, resulting in
exporting surplus or importing the deficiency so generated. To recapitulate, we
must note that the size of the gain from international trade depends upon the
difference in cost ratios before trade has taken place.
3. Productive Efficiency of the Country
The gain from international trade also depends upon the relative productive
efficiency of the country. If the productive efficiency of the home country increases,
it will cc to the advantage of the foreign country (and vice versa), fo r it will lead to
more favourable terms of trade for the later.
If the efficiency in producing a commodity in which a country specialises
increase, its costs and price fall, and it will be advantageous to the other country.
Moreover, it leads to an expansi on in the volume of trade, so that the total gain
from trade also increases.
4. Relative Elasticity of Demand
The gain from international trade also depends upon the relative elasticity of
demand for the commodities in different countries and the relative elasticity of
supply of different commodities in different countries. When exchange takes place
as a result of specialization, the amount of the commodity that will be imported by
a country depends not only on the difference in cost ratios but also on how the
demand for the commodity changes. Thus, as a result of specialization, real
incomes in both the countries rise; hence gain from trade increases, depending
15
upon the elasticity of demand. More elastic the demand for the commodities in both
the countries, the greater would be the volume of trade, output and real income
and larger the total gain.
5. Factor Endowments and Technological Conditions
There exists a positive correlation between the size of foreign trade and the
total gain reaped by the participating nations. However, kinds and quality of factors
available to a country and its technological advancement has unique significance in
this regard. A big, capital-abundant and technically as well as economically
advanced country will have a larger size of foreign trade than a small, labour -
abundant, technically and economically backward country. Moreover, a country
exporting manufacturers will have favourable terms of trade against a country
exporting primary products.
2. 4 REVISION POINTS
 Types of terms of trade
 Determinants of terms of trade
 Reason for unfavourable terms of trade
 Nature of gains
 Sources of gains
 Factors determining size of gains
1. What is an income term of trade?
2. Define Single factoral terms of trade?
3. The production of different commodities needs different types of resources
(factor of production) in different proportions. (true/false)
4. The gain from international trade depends upon the relative productive
efficiency of the country. (true/false)
2.6 SUMMARY
This lesson explains the meaning of terms of trade along wi th the various types
of terms of trade and determinants of terms of trade. It also explains the reason for
unfavourable terms of trade of underdeveloped countries. This chapter explains the
nature of gains, sources of gains and factors determining the size of gains from
terms of trade.
1. Which economist explains the different types of terms of trade?
2. Enlist the gains resulting from international trade?
1995.
3. Bo sodersten, international economics ii nd edition 1980.
2.9 ASSIGNMENTS
16
1. What is mean t by terms of trade?

2. How terms of trade are determined?
3. Distinguish between net and gross barter terms of trade.
4. What are the factors affecting terms of trade?
5. What are the gains from international trade?
1. H. Robert Heller, International Trade, second edition, 1973, chp:8 & 11.
3. Robert A.Mundell, International Economics, 1968, Macmillan & co,
Newyork.
4. Jagdish Bhagawathi, International trade & Economics expension. The
American Economics Review, Dec.1958.
Edition, 1994.
1. compare India’s trade terms with SAARC countries and find reasons for
Favoarable and unfavourable trade of india.
2. Find out the impact of factors affecting terms of trade in india since
liberalisation?
2.12 KEY WORDS
 Value of exports and imports, volume of exports and imports, reciprocal
demand, barter terms of trade, factoral terms of trade. Factors of production,
factor endowments, economics of scale, cost ratios, elasticity of demand
(relative)

17
LESSON – 3
FREE TRADE VS PROTECTION

3.1 INTRODUCTION
International trade is interwoven with advantages and disadvantages. It is a
pertinent factor, whether the international trade should be left unfettered or should
be brought under certain restrictions. Since, long arguments were raised in favour
of and against the free trade.
3.2 OBJECTIVES
To describe the concepts of free trade and protection along with their
advantages and disadvantages.
3.3 CONTENTS
3.3.1 Free trade
3.3.2 Advantages
3.3.3 Disadvantages
3.3.4 Protection
3.3.5 Advantages
3.3.6 Disadvantages
3.3.1 Free Trade
Meaning
Free trade is that trade where no restrictions have been placed on the
movement of goods between countries. Free trade implies complete freedom of
international exchange. There are no barriers to the movement of goods from one
country to another; the exchange takes its perfectly natural course. In other words,
free trade policy refers to a trade policy without any tariffs, quantitative restrictions
and other devices obstructing the movement of goods between countries.
Prof.Jagdish Bhagwati defines free trade policy, "as absence of tariffs, quotas,
exchange restrictions, taxes, subsidies on production, factor use and consumption".
According to Lipsey A Word of FREE TRADE would be one with no tariffs and no
restrictions of any kind on importing or exporting". But it does not mean that all
sorts of duties are removed from the trade. Duties nay be imposed but only for the
purpose of revenue and not for the purpose of protection.
3.3.2 Advantages
Adam Smith and Ricardo were in favour of free international trade. They gave
the following arguments in favour of free trade.
1. Specialisation
Free trade provides sufficient ground for specialization. To gain in the
competition of world market, each country will produce only those goods which are
comparatively cheaper than that of other countries. Thus, the country can provide
cheapest commodities in the world market. This maximizes the output of all the
participating countries, which in turn, increases the real national income of the
world economy.
18
2. Utilisation of Economic Resources

Free trade leads to international specialization and division of labour. As a
result, the existing resources in each trading country are employed more
productively and the resource allocation becomes more efficient. There is more
efficient utilization of factors within a firm or industry. Thus international trade and
division of labour lead to optimum utilization of Economic resources.
3. Larger Production
The free-trade provides sufficient ground for larger production. All the factors
of production can be assembled at a cheaper trade. All the resources of are easily
available causing the higher production. Large -Scale productions and specialised
productions are possible. Mechanical appliances in a large scale can be used fo r
enhancing the production.
4. Equalisation of Prices
The free trade makes it possible to equalize the prices of commodity. If a
commodity is cheaper at a place and is dearer at other place, the commodity will
flow to that place where it can be sold at a higher price. This outflow of the
commodity from the producing country results lesser amount of commodity which
ultimately becomes dearer.
5. Widening of Market
The free trade leads to wide extent of markets for goods. When market is
widened, possibility of greater specialization increases. More complex division of
labour becomes possible. The large-scale production and the large-scale trade are
feasible due to free trade.
6. Improvements In Technique
The competition in world market in feasible due to free trade which results in
production techniques of the trading countries. To beat the competition, every country
attempts to improve their production and trading techniques. In the absence of free
trade competition will not be there and the countries may remai n stagnant.
3.3.3 Disadvantages
The free trade in spite of enjoying all the advantages of international trade
suffers from the following defects.
1. Underdeveloped Countries
Under the free trade, under developed countries suffer from the competition.
They do not get proper opportunities to develop their agriculture, industries etc.
because all the products are available at a cheaper rate. The advanced countries
enjoy the benefits of large-scale production and specialization and therefore, are in
a position to produce goods at a cheaper rate.
2. Political and Economical Interdependence
Free trade makes the country politically and economically interdependent.
Sometimes, the country loses its own identity due to colonisation as occurred
during the British Expire. Every country wants independence; therefore, the policy
of free trade has been abandoned in all the countries of the world.
19
3. Rational Consumption
For the sake of hygienic consumption, trade restrictions are essential,
otherwise, H.c country will have to pay a huge amount of foreign exchange or will
export for the Business goods of harmful consumption.
4. Dumping
No Country can tolerate the dumping by another country. Therefore,
restrictions become essential. The developing countries have to protect the ir infant
industries and the policy of free trade will be injurious for their development.
5. Lopsided Development
Free trade leads towards the specialization which causes lopsided development
of a country For example, England is specialised in industrial production and
agricultural products are imported. It may harm the country at any time and the
country would have to suffer.
3.3.4 Protection
Meaning
Protection does not mean only tariff on imports, it also refers to the policy that
raises the price received by domestic producers of any importable commodity. It is a
policy of encouraging home industries by giving subsidies or by imposing custom duties
on imports. Tariff policy, i.e, import restrictions through custom duties is the most
important method of protection. The tariff barriers restrict the import of foreign goods.
3.3.5 Advantages
The following arguments are given in favour of protection.
1. Development of Infant Industries
Free trade provides proper ground for the development of infant industries.
The development of infant industries requires certain assistances from Government
and protections against foreign competition. Restrictions on trade enables a nation
to face the competition with a strong nation. Import duties provide revenue to
government as well as protection to home industries. It is a method of taxation
which is used for the" support of its industries.
The protection should be granted only to those industries which are able to
grow within a certain period. Protectionists also believe that they should not be
complete restriction, otherwise, the advantage of international specialization or
international division of labour may not be available.
All industries should not be indiscriminately recommended protections.
Industries which are weak and have not reached maturity are permitted
specialization. Thus, the protection to infant industries may speed up
industrialization and new industries can easily grow.
2. Diversification of Industries
Diversification of industries is essential for the balanced growth of a country.
Unbalanced economy may take place due to excessive specialization which leads
the nation towards overdependence. Overdependence is not sound, either
20
economically or politically. In war period, imports from foreign coun tries become
difficult. The economic dislocation may adversely affect the nation. In order to bring
about a harmonious and balanced growth of all industries, it is necessary to bring
about diversification through protection. These days self-sufficient to a certain
extent is essential; however, complete self-sufficiency is not possible to be
possessed by any country. Even developed countries are not self-sufficient.
3. Promotion of Employment
Protection leads to industrial and agricultural development; conse quently, the
employment increases. The belief was widely accepted during the thirtees. The
cyclical unemployment may be reduced. The costlier import discourages purchase
of domestic goods. The demand for domestic goods increases; consequently
industry develops and employment increases. So, the ultimate increase in
employment and income is greater than that initially is generated. The foreign
capital may also be attracted and industry develops in the country. Thus,
protection leads towards the Promotion of e mployment.
4. Balance of Payment
Tariff protection is used to improve balance of payment. The imposition of
import duty causes the import costlier and incentives to export make the export
cheaper. The combined effect of these two improves the unfavourable balance of
payment because the volume of import decreases and the volume of export
increases. Tariff duty moves to more favourable terms of trade for the importing
country.
5. Revenue
Tariff duties serve as a good instrument for enhancing government revenu e.
Besides, serving the purpose of protection, the government exchequer is easened. It
has become a productive source of revenue in most of the countries.
6. Conservation of Natural Resources
The protectionists believe that the tariff protections conserve the natural
resources. Under free trade, the natural resources are exhausted.
7. Defence Purpose
The economic prosperity and welfare can be sacrificed at the alter of the country's
defence. The total and over-independence upon other country's trade makes a country
politically dependent. The country has to forgo its own policies, if there is over -
dependence upon other countries. Protection policy makes the country sound and self-
dependent, because most of the productions are done within the country.
8. Retaliation
Tariff duties are also imposed to complete with the foreign duties, because they
adversely affect export of internal commodities. Liberal trade policy cannot be
observed, if all the other countries are protecting themselves with the weapons of
the tariff instruments. To safeguard the surrounded duties, the country has to
impose tariff duties on its import, because the country cannot pursue other
countries to withdraw their duties.
21
3.3.6 Disadvantages
The protection has also been criticized by se veral authors.
The protection policy should not be adopted to avail the comparative
advantages and relative specialization. No country can be completely self-sufficient
and, therefore, specialization is the best policy to utilize the natural resources for
the maximum satisfaction.
Some authors have argued that protection is essential to safeguard the
country's high standard of living to maintain its high wages against the flow of
unskilled and cheap labour. But protection for the sake of maintaining high
standard of living is baseless, because when capital intensive technique is adopted.
Productivity will increase and the average cost may be reduced. Labour intensive
technique involves high costs of production. High wages are no bar to low cost of
production.
3.4 REVISION POINTS
 Free trade
 Advantages
 Dis advantages
 Protection
 Advantages
 Disadvantages
1. Adam Smith and Ricardo were in favour of free international trade or
protection.
2. what is called retaliation?
3.6 SUMMARY
1. This chapter reveals free trade and its purpose in Economic development.
2. It also expresses the protection and its advantages and disadvantages.
9. Define protection?
1. whether free trade means complete removal of export and import tariff?
2. Robert A.Mundell, International Economics, 1968, Macmillan & Co,
Newyork.
3. Jagdish Bhagawathi, International Trade & Economics Expension. the
American Economics Review, DEC.1958
3.9 ASSIGNMENTS
1. What is Free trade?
2. Explain the advantages and disadvantages of free trade.
3. Elucidate the difference between free trade and protection.
22

Edition, 1994.
1995.
1. Find out the degree of openness in india in different time period after
liberalisation and find out the reasons for variation in openness.
3.12 KEY WORDS
 Absence of tariff and Quota, Specialization, Equalisation of Prices, Lopsided
development, Infant industry, Retaliation

23
LESSON – 4
TRADE AND COMMERCIAL POLICY: TARIFFS AND IMPORT QUOTAS

4.1 INTRODUCTION
Strictly speaking, tariffs are a schedule of custom duties levied upon the
imports. In a broader sense, however, tariffs include all customs duties: import
duties, export duties and transit duties. Amongst these, as a restrictive measure,
import duties are the mo.st common. When the free market forces fail to bring the
desired result in the pattern of foreign trade of a country several kinds of restrictive
measures are practised by the goverment of a country in order to freeze the volume
and direction of trade along the desired channels in order to achieve certain given
objectives.
4.2 OBJECTIVES
To reveal to the students that tariff is an important instrument of commercial
policy, thus by imposing tariff a country is able to change relative prices of goods
and factors of production. To explain the import quotas, types of quotas and their
effects on various economic regulators and purpose of quota system.
4.3 CONTENTS
4.3.1Classification of tariffs
4.3.1.1 Column Classification of tariffs
4.3.2 Effects of tariffs
4.3.3 The Nature and importance of Quotas
4.3.4 Types of Quotas
4.3.5 Effects of Quotas
4.3.6 Quotas Vs Tariffs
4.3.7 Concluding Remarks
4.3.1 Classification of Tariffs
There are different way s of classifying tariffs or customs duties. Using the levy
criterion, tariffs may be classified into: (i) specific duties, (ii) ad valorem duties, (ii:)
combined specific and ad valorem duties, and (iv) sliding scale duties. .
Specific duties are flat levies per physical unit (meter, kilo, ton, etc.,) of the
commodity imported.
Ad valorem duties are, on the other hand, levied as fixed percentage of the
value of the imported commodity.
Combined specific and ad valorem duties, when imposed, specify that one or
the other, usually whichever involves lower charge, is payable at the customs.
Sliding scale duties are those which tend to vary with the price of the
commodity imported. Thus may be either specific or ad valorem. Specific sliding
scale duties are, however, common in practice.
Another important classification of tariffs is based on the purpose they serve.
Using the objective criterion, tariffs are distinguished as: (i) Revenue Duties, and (ii)
Protective Duties.
24
Revenue tariffs are those whose primary purpose is to provide revenue to the
State. These are generally at a lower rate and not intended to exclude imports. They
are usually levied on imports of consumption goods.
Protective tariffs, on the other hand, are designed to curtail imports of certain
goods to protect domestic production.
4.3.1.1 Column Classification of tariffs
In view of the country of origin and application of tariffs as between countries,
tariffs can be classified into: (i) single-column tariff, (ii) multiple-column tariffs and
(iii) traditional tariffs.
1. Single- Column Tariff
Irrespective of the origin of imports of goods, when only one rate of tariff duty
is imposed by law on all the goods, it is referred to as a single column tariff. It is a
very simple system which can be easily designed and administered.
2. Multiple-Column Tariff
In multiple column tariffs, two or more duties are levied by law on each class
of commodity. India, for instance, has adopted the double -column tariff policy since
the acceptance of the Commonwealth Prefe rence Agreement in 1932. Under this
scheme, imports from the commonwealth countries bear lower duties than from
other countries.
3. Traditional Tariffs
Under a traditional or conventional tariff, a basic duty is determined by law for
each class of commodity, with the provision that each such duty may be reduced
reciprocally under international treaties. If under international negotiations tariffs
are widely generalized, the traditional tariffs are reduced to a single column tariff.
4.3.2 Effects of Tariffs
Tariffs can affect import volume, prices, production and consumption. They
also affect the terms of trade, .the balance payments etc., the various effects of
tariffs have been discussed i n the following sections.
1. Price Effect
Assuming that the foreign price of a commodity is unchanged, we find that the
price in the tariff-imposed nation would rise by the full amount of the tariff duty In
this case, the incidence of tariff fails on the domestic consumers.
But this need not happen always. sometimes price may not rise at all or it may
rise by less than the amount of duty. When the price does not rise at all, it means
that the entire burden of tariff is shouldered by the exporters; hence the incidence
falls on burden is shared by both imports and exporters.
The exact price effect thus depends upon the volume and elasticity of supply
and demand in the trading countries. The elasticity of supply, however, depends
upon the costs conditions constant, increasing or decreasing which play an
important role in determining the price effect of the tariff.
2. Protective Effect
25
A tariff is a restrictive measure which seeks to control the quantity of import

so that domestic industry may be protected. A tariff duty is purely protective only if
it is so high as to prohibit total imports of a commodity. In practice, however, in its
restrictive effect upon the quantity of imports, tariff, no matter how high, need not
prove absolutely protective. Obviously, any imports may flow in after the payment
of duties, unless regulated otherwise.
Nevertheless, the protective effect of a tariff can be seen in the expansion of
domestic production of a commodity which becomes possible due to rise in prices in
the domestic market. High prices enable the home producers to cover their hig h
rising marginal costs on a larger output.
The protective effect of a tariff can be exposed in a partial equilibrium
framework (effects of Tariff).
The tariff by raising domestic price to a higher level from enables domestic
producers to increase production. This increased production measures the
protective effect of the tariff in terms of domestic production alone.
However, the protective effect in money terms can also be seen from the
producer's increased receipts. The receipts enable producers to cover their marginal
costs on the larger output.
3. Revenue Effect
Tariffs which are not totally prohibitive certainly bring some revenue to the
state. Usually, the government collects customers' revenue equal to the duty
multiplied by the volume of imports.
if import duty is fixed at which is extremely high and prohibits imports, it has
zero revenue effect.
4. Transfer or Redistribution Effect
After the imposition of a tariff, domestic prices will rise; hence receipts of
producers will increase, while consume r's surplus to that extent declines. This is
called transfer effect. Thus, the increase in receipts which is in excess of marginal
costs is an "economic rent" to the producers, which is derived by subtraction from
consumer's surplus.
In the rise in domestic price and expansion In the sale of domestic output,
producers' additional revenue increases, out of which the is to be deducted to meet
the increase in costs of increased output. Hence, the area is the net excess earnings
remaining with the producers. It may be described as "redistribution effect."
5. Consumption Effect
A tariff generally reduces the total consumption of a commodity because of the
rise in ITS price. In the consumption effect of the tariff, the reduction in total
consumption is a loss in consumer's satisfaction shown by the difference between
the possible total utility of larger quantity at a lower price, and the actual total
quantity bought at a higher price after tariff. It is the real cost of tariff. Out of the
gross loss in consumer's satisfaction, the revenue received by the state and
26
transferred to producer should be deducted to find the society's net loss in

consumer satisfaction as a result of tariff.
6. Terms of Trade Effect
The imposition of a tariff may serve to improve a country's terms of trade (i.e.,
the amount of imports it receives in exchange for a given quantity of exports). This
the tariff can do easily when the foreign demand for the exports of the tariff
imposing country is both large and inelastic. In such a situation, the effect of tariff
is to reduce imports to some extent, thereby making it difficult for foreigners to earn
(through their exports to this country) for their imports from the country. Thus, in
an attempt to expand their exports (to the tariff imposing country) foreigners may
be inclined to reduce their prices, so that to the tariff imposing country the
imported articles are now relatively cheaply available in the foreign market. In this
way, the effect of a tariff is to lower import prices relative to export price, thereby
improving the terms of trade for the tariff imposing country.
It should be noted that the improvement in the terms of trade through tariffs
depends upon the extent of the price rise in the importing country and the extent of
the price fall in the exporting country, which in turn depends upon the elasticities
of reciprocal demand of the trading countries.
Following Kindleberger, we elucidate the terms of trade effect of tariff with the
help of Marshallian offer curves. In technical parlanc e, it must be remembered that
a tariff can improve the terms of trade of a country only if the offer Curve of the
opposite country is less than perfectly elastic.
It should be noted, however, that tariffs can improve the terms of trade under
such circumstances only in absence of retaliation. If both countries retaliate, the
effect is nullified and both will lose. As a result of retaliation, the terms of trade
remain unchanged ultimately, but greatly reduce the volume of trade. Hence both
lose. On the other hand, the reciprocal removal of tariffs will enable both countries
to gain as the volume of trade increases. For the same reason, today Wt find in
international trade relations, programmes and policies like the General Agreements
on Tariffs and Trade.
7. Balance of Payments Effects
Tariff as a means of correcting disequilibrium have been, however, criticized
severely as follows:
 It brings equilibrium through a contraction of foreign trade.
 It thus inhibits the advantages of a large and expanding world trade and
prosperity.
 It adjusts the equilibrium without mitigating the root cause of
disequilibrium.
 Sometimes, the imposition of new or higher tariffs may aggravate disequilibrium
in case of a country already experiencing a surplus in its balance of payments.
In such a case, new or higher tariffs will tend to intensify the existing
maladjustment in the balance of payments.
27
 Since the imposition of tariff duties does not necessarily imply a reduction in
the value of imports, the effect of a tariff on the balance of payments cannot
be very certain.
8. Income and Employment Effect
It was firmly believed in the thirties that imposition of tariff would lead to
expansion of employment and incomes
By reducing imports, tariffs stimulate employment and output in the import
competing industries. A new flow of income will be generated with its 'multiplier
effect'. In an expanding economy, more capital goods investment will also be made
which produces 'acceleration effect'. Thus under conditions of less than full
employment, the interaction of multiplier-accelerator will lead to a cumulative
expansion of investment, employment, output and income in the country.
Another possible impact of tariffs is that the imposition of tariff duties may
attract foreign capital in the country concerned, when they find that they may lose
market for their products in the country due to contraction of import demand and
expansion of home industries under the protective effect of tariffs.
Doubts have been expressed, however, against this income-employment effect
argument for tariff as:
Under conditions of full employment, income through inflation, leaving real
allocation of resources.
 Even when there are idle resources, it is highly questionable to say that
tariffs would lead to the expansion of income and employment very
effectively. When a country curtails its imports through tariffs, the exports of
other participating countries will be reduced to that extent. Thus, the
exporting country's employment; output and income in the expor sector
would contract, and a decline in employment is set in motion abroad. As
employment and incomes fall abroad, foreigners would curtail their imports.
Hence, tariff imposing country's exports may decline. This will offset the
import curtailment effect in improving income and employment position of
the country. Further, other countries may also retaliate by imposing tariffs
so that benefit goes to none, and the result is overall contraction of trade,
income and employment in the world as a whole. As Ellsworth puts a
country attempting to increase income and employment at home by means
of tariffs is in effect exporting its unemployment. This sort of beggar-my-
neighbour policy will definitely provoke resentment and retaliation.
 To generate employment through tariffs means a permanent
allocation of resources which gives only a temporary gain. Hence
the remedy proves to be costly.
Thus, instead of resorting to tariffs for solving the problem of unemployment
and poverty in the country, appropriate monetary and fiscal policies should be
resorted to a tariff would raise only money income reduction by the altered
28
In conclusion, thus we may follow Kindleberger in saying that tariffs can

stimulate production, raise revenue, redistribute income and re -allocate resources
within and between countries, expand employment and bring about a favourable
balance of payments position. But the same can be achieved in a better way with
weapons of economic policy other than tariffs. Moreover, the other devices have no
such undesirable effects of tariffs like distorting the allocation of resources and
limiting consumption. For instance, direct taxes and transfer are better means of
redistributing income than tariffs, as these least disturb production and
consumption. Similarly, internation al transfers are superior to tariffs for improving
the terms of trade. To solve the problems of unemployment and balance of
payments, deficits, appropriate monetary and fiscal policies are much better than
tariffs.
Nevertheless, tariffs continue to prevail strongly. This is because of emotions
are self-interest. In fact, as Kindleberger puts it, producer interests in particular are
politically more powerful than producer and consumer interests in general.
4.3.3 The Nature and Purpose of Quotas
Like tariffs, import quotas are another protectionist device and an old form of
trade restriction that came into existence since the Mercantilist era.
An important quota implies a fixed quantity or value of a commodity that has
been allowed to be imported in the country during a given period of time. In
practice, quotas may be fixed either in terms of the physical volume or monetary
value of imports or a combination of the two.
An import quota system has generally the following broad objectives:
1. To regulate imports in an effective manner.
2. To check imports in order to correct an adverse balance of payments.
3. To protect domestic industries from severe foreign competition.
4. To maintain and stabilize domestic price level by restricting import inflows.
5. To retaliate against countries resorting to restrictive devices like import quotas
and to strengthen a country's bargaining power by limiting import demands.
6. To check speculative imports in anticipation of tariff legislation through
allocation of quotas.
Quotas, in fact, are recognized as an emergency device and to be very effective
should be promptly enforceable. A quota system is, therefore, usually administered
by the executive body rather than by parliamentary law.
4.3.4 Types of Quotas
The system of import quotas may be cl assified into five major groups: (I) The
tariff or custom quota, (2) The unilateral quota, (3) the bilateral quota, (4) The
mixing quota, and (5) import licensing.
(i) The Tariff Quota
The tariff or customs quota is a widely acclaimed measure. Under the system,
imports of a commodity upon a specified quantity are allowed to be imported duty -
29
free or a special low rate of duty. But imports in excess of this fixed limit are
charged a higher rate of duty. The tariff quota thus combines the features of a tariff
with those of a quota. Flexibility is another advantage of this system.
(ii) The Unilateral Quota
Under this system, a country places an absolute limit on the importation of a
commodity during a given period. It is imposed without prior negotiation with,
foreign governments.
The quota so fixed may be either global or allocate. Under a global quota, the
commodity can be imported from any country upon the full amount of the quota.
Under an allocated quota system, however, the total of the quota is distributed
among specified supplying countries.
(iii) The Bilateral Quota
Under this system, quotas are set through negotiation between the importing
country and the exporting country (or foreign export groups).
(iv) The Mixing Quota
It is a type of regulation which requires producers to utilize a certain
proportion of domestic raw materials along with imported parts to produce finished
goods domestically. It thus sets limits on the proportion of foreign made raw
materials to be (imported and ) used in domestic production.
(v) Import Licensing
The mechanism of import licensing has been evolved as a system devised to
administer quota regulations. Under this, prospective importers are required to
obtain a license from the proper authorities for importing any quantity w ithin the
specified quotas. Licenses are generally distributed among established importers
keeping in view their share in the country's import trade.
4.3.5 Effects of Quotas
The following are important economic effects of quotas:
(i) The Price Effect
Import quotas, by limiting physical quantities, tend to raise the prices of
commodities to which they apply. While this is generally true also of a tariff, there
is one important difference in the impact of quotas. Mostly, the rise in price caused
by a tariff is limited to the amount of the duty imposed, less any decrease in price
abroad. Thus, the range of the price change due to tariff can well be circumscribed.
In contrast, a quota can raise price to any extent, since it places an absolute limit
upon the volume of imports and leaves price determination in the domestic market
to the interaction of supply and demand force. The price effect of quotas is thus
related to : (i) the restrictiveness of the quota, i.e., the degree to which the supply of
imported commodity is restricted; and (ii) the degree of elasticity of domestic and
foreign supply of the commodity; and (iii) the nature of the demand, Le., the
intensity or elasticity of demand for the commodity in the importing country.
Hence, the price change due to quotas is far less predictable.
30
If the importing country imports a fixed quota to the amount, then the relevant
import supply schedule assumes the form. Thus, the segment of the import supply
curve implies that supply in excess of the quota limit is perfec tly inelastic.' The new
equilibrium price is set. Thus, it is obvious that the extent of the price rise will be
different under different conditions of demand and supply.
(ii) The Terms of Trade Effect
As a result of the fixing of import quotas, the terms of trade of a country
change. The new terms of trade may be either more or Less favourable to the
country importing the quota. The terms of trade are generally improved by a quota,
to the extent that the foreign offer curve is elastic. If the foreign exporters of the
commodity are well-organised and the offer curve is elastic, the terms of trade may
move against the country imposing quota. But, if the foreign offer curve is more
elastic, the terms of trade may move favourably to the country imposing the quota.
(iii) The Balance of Payments Effect
It has been argued that import quotas can also serve as a useful means for
safeguarding the balance of trade. By restricting imports, quotas seek to eliminate
deficit and influence the balance of payments situation favorably. Further, it is
usually assumed that administrative reduction of imports, through import quotas,
would be a less harmful measure for correcting disequilibrium in the balance of
payments than such micro economic measures like deflation or devaluation.
Moreover, there is a greater expansive income effect of quotas, considered
important for underdeveloped countries which usually suffer from balance of
payment difficulties resulting from domestic inflation. Due to import quotas, the
marginal propensity to import becomes zero after the quota limit is reached, which
thus reduces leakage and increase the value of income multipliers in the country.
(iv) Other Miscellaneous Effects
Another important effect of quotas is that they have a protective effect. By
limiting to a fixed amount, irrespective of supply and demand conditions or prices
in the domestic or foreign markets, import quotas may tend to be absolutely
protective. They stimulate home production.
Further, import quotas raise domestic prices, causing reduction in overall
consumption. This is the consumption effect of quotas. They tend to discourage
consumption of imported goods as also domestic consumption of goods involving
foreign raw materials, since the prices of these goods rise due to the artificial
scarcity created by import restriction.
Another effect of quota is found to the redistribution effect. When prices rise,
there is redistribution of income from consumers to producers. The domesti c
producers' receipts increase when prices of goods rise and the consumers' surplus
in these goods decreases. Hence, there is a redistribution effect. .
4.3.6 Quotas vs. Tariffs
Import quotas have peculiar properties and problems distinguishing them from
tariffs.
31
1. Usually, quotas fix a rigid quantitative limit on imports. Thus, they are harsh
and inflexible in their operation. In case of tariffs, on the other hand, no such
rigidity lies. A tariff is rather mild and flexible in its restrictive influence.
2. In their impact, generally import quotas are absolutely protective. A tariff,
however, need not prove absolutely protective. Under tariffs, the commodity
can freely enter on payment of duties. Thus, the superiority of a quota over a
tariff lies in the certainty of its restriction of imports.
3. In its protective effect, however, the quota system provides protection to old
inefficient firms as it generally favours established importers in giving
licences. Tariffs shelter the domestic market from foreign competition .
4. Under a tariff, it’s probable effect upon price would be reasonably clear, but
its impact on the quantity of imports will be uncertain. In the case of an
import quota, its effect on the quantitative restriction would be explicit, but
its impact on the prices will not be very certain.
5. Tariffs permit the market forces of supply and demand to operate freely.
Quotas, however, by fixing a maximum limit on supply, inhibit the free play
of market forces. As against tariffs, however, quotas introduce a wholly
arbitrary new dimension in foreign trade of a imposing country. Thus, quotas
involve greater consciousness in the value judgments than tariffs.
6. Under quotas, domestic price would more than under tariffs, because when
the quantity imported is fixed under the quota, any changes in demand and
supply in the domestic market or world market have to be adjusted, not
through changing import quantities but rather than through altered prices.
7. When tariffs are imposed, the rise in price is absorbed partly or fully by the
State as revenue. Thus, the revenue effect of tariffs is favourable to the state.
Most quotas, however, fail to bring any revenue to the government.
Further, importers under a quota system are placed in a monopoly -like
position and as a result of rising prices are able to reap high profits, called
8. quota profits.
From a general point of view tariffs seem to be superior to quantitative (quota)
restrictions. But from a rational point of view, especially in underdeveloped
countries, quantitative restrictions are better than tariffs on the following counts:
 Tariffs are not very effective in poor countries as their problems are distinct
from those of advanced countries. Particularly, infant industries of poor
countries need to be protected through quotas rather than look protection
bounded with free competitive elements at a higher price of tariffs.
 Marginal propensity of poor countries to import is generally very high while
their import demand is less elastic. Therefore, to correct the disequilibrium
in the balance of payments, curbs on imports, through quantitative
restriction, are absolutely essential for these countries.
 Quotas are more effective than tariffs in various respects. They succeed
where tariffs might fail. Protected home producers feel more secure under
32
quotas than under tariffs. Quota system surely strengthens the bargaining
power of the country.
 For a planned economy, quota system is better than tariffs, as its effect on
quantitative restriction is certain.
 Quota system is generally administered by the executive authorities and so
it is more flexible and adaptable whereas tariffs prove to be a rigid and
conservative system requiring the approval of the legislature.
 Further, tariffs undoubtedly raise the domestic price of a commodity, but
quotas do not rise it under price control and rationing.
 Among other things, if tariffs are higher in prohibitory effect than quotas,
then quotas would be preferred and vice versa.
4. 4 REVISION POINTS
 Classification of tariffs
 Effects of tariffs
 Nature and importance of Quotas
 Types of Quotas
 Effects of Quotas
 Quotas vs Tariffs
 Concluding Remarks
1. Define Specific duty?
2. What is meant by Advalorem duty?
3. What is meant by quotas?
4. Quotas can restrict or limit either value or quantity of commodity to be
imported and exported True/False.
4.6 SUMMARY
This lesson reveals the purpose of tariff along with its classifications and the
effects of tariff on various sectors of economic activities such as price, revenue,
redistribution, consumption, BOP and employment. The use of Quotas as a
restrictive device was almost forced with foreign exchange. Import and export
Quotas are one of several restrictive trade practices which limit either value or
quantity of commodity to be imported.
1. Irrespective of the origin of imports of goods, when only one rate of tariff duty is
imposed by law on all the goods, it is referred to as a _______________tariff.
2. What are the objectives of quota?
3. Whether import licensing is a kind of quota or a kind of tariff?
1. Peter b.kenen, the international economy, third edition, cambridge edition, 1994.
2. Francis cherunilam, international business, third edition 2004.
3. C.Edwards, control of cartels and monopolies: an international comparison, 1966
4.9 ASSIGNMENTS
33
1. Explain the offers of tariff on terms of trade and domestic price ratio.
2. What are the different classifications of tariffs?
3. What is Quota?
4. Explain and show with the help of a diagram the various effects of import
Quota.
1. Charles P. Kindleberger, International Economics, Fifth Edition, 1973.
2. Robert A. Mundell, International Economics, 1968, Macmillan & co,
Newyork.
3. Jagdish Bhagawathi, International trade & Econ omics expension. The
American
4. Economics Review, Dec.1958.
5. M.C. Vaish & Sudama Singh, International Economics sixth Edition, reprint
1995.
6. Bo Sodersten, International Economics II nd Edition 1980.
1. Identify some of the countries and commodities where India is having
different types of quota at present
2. Try to study the effect of any one tariff on the export of a commodity in the
Indian economy.
4.12 KEYWORDS
1. Specific duties, Advalorem duty, unilateral quota, bilateral quota, import
licensing Sliding scale duty, Effects of tariff.

34
LESSON – 5
INTERNATIONAL TRADE ORGANISATIONS: INTERNATIONAL

MONETARY FUND AND IBRD
5.1 INTRODUCTION
IMF was established for promoting international Economic stability by
promoting the balanced growth of free trade and the multi -convertibility of national
currencies.
The International Bank for Reconstruction and Development (IBRD), better
known as the world Bank, was established at the same time as the international
Monetary Fund to tackle the problem of international investment. Since the IMF
was designed to provide temporary assistance in correcting balance of payments
difficulties, an institution was also needed to assist long-term investment purposes.
Thus, IBRD was established for promoting long-term investment loans on
reasonable terms.
The world Bank (IBRD) is an inter-governmental institution, corporate in form,
the capital stock of which is entirely owned by its member-governments. Initially,
only nations that were members of the IMF could be members of the World Bank;
this restriction of membership was subsequently relaxed.
5.2 OBJECTIVES
 To explain the nature, structure, objective, functions and operations of
international monetary fund.
 IMF and the role of India is also explained in this chapter.
 To outline the principal purpose and functions of world bank as a
international corporate institution.
5.3 CONTENTS
5.3.1The Nature, Objectives, Functions of IMF
5.3.2 Organisation and Structure
5.3.3 Quotas
5.3.4 Operations
5.3.5 IMF – Gold Standards
5.3.6 The IMF and India
5.3.7 Functions
5.3.8 Capital Resources
5.3.9 Lending Operations
5.3.10 Criticisms
5.3.11 Conclusion
5.3.1 The Nature, objectives, Functions of IMF
1. The Nature of IMF
A landmark in the history of world economic cooperation is the creation of the
international Monetary fund, briefly called IMF.
35
The genesis of the Fund lies in the breakdown of Gold Standard, which created
a vacuum in the field of international trade. With the abandonment of gold
standard in the 'thirties all countries realised the need for international cooperation
in economic affairs, as veritable chaos had resulted in the system of foreign
exchange rates and international trade after the end of the gold standard system.
As a result, each country tried to secure its own interest at the cost of others. Each
deliberately undervalued its currency to secure an advantage for its exports. They
started following' beggar-my-neighbour' policies in currency matters as well as in
matters of international trade. Competitive exchange depreciations, exchang~
controls, import and export regulations and bilateral trade pacts were the order of
the day, and world trade as a whole dec lined to a great exte nd . International
investments also suffered very much as a result of the uncertainty created by the
frequently changing exchange rates. In short, international trade and investments
passed through the worst period in the 'thirties.
It was then recognised that the monetary disorder of the world could be
corrected only by mutual agreement between nations having international economic
relations. International monetary cooperation became the dire need of the day. As a
result in 1943, the United States treasury published a proposal for the
establishment of an International Stabilisation Fund of the United and Associated
Nations. In the same period Great Britain also proposed the establishment of an
International Clearing Union. The American proposal is known as 'white Plan', and
the British proposal is known a 'Keynes Plan', after their principal authors Mr.
white and Lord Keynes respectively. In 1944, a joint plant pIa in the shape of a
"Joint Statement by Experts on the Establishment of Inte rnational Monetary Fund
of the United and Associated Nations" emerged, which became the basis for the
United Nations Monetary and financial conference at Bretton Woods, New
Hampshire, from July 1 to July 22, 1944.
The purpose of the Bretton woods Conference was to devise means for assuring a
system of international trade and payments consistent with the dual objectives of high
world productivity and trade and domestic employment and income with economic
stability. At this meeting, it was decided that an 'In ternational Monetary Fund' (IMF) be
organised embodying a working mechanism for the smooth settlement of international
payments in order to achieve the objectives.
However, the IMF itself was orgnised in 1946, and commenced operations in
March 1947.
2. Objectives
The objectives of the Fund are stated in Article 1 of the Fund Agreements as follows:
1. To promote international monetary cooperation through a permanent
institution which provides machinery for consultation and collaboration on
international monetary problems.
2. To facilitate the expansion of balanced growth of international trade, and to
contribute thereby to the promotion and maintenance of high levels of
36
employment and real income and to the development of the productive

resources of all members as the primary objectives of economic policy.
3. To promote exchange stability, to maintain orderly exchange arrangements
among members, and to avoid competitive exchange depreciation.
4. To assist in the establishment of a multilateral system of payments in
respect of current transactions between members and in the elimination of
foreign exchange restrictions which hamper the growth of world trade.
5. To' lend confidence to members by making the Fund's resources available to
them under adequate safeguards, thus providing them with opportunity to
correct maladjustments in their balance of payments without resorting to
measures destructive of-national or international prosperity.
6. In accordance with the above, to shorten the duration and lessen the degree
of disequilibrium in the international balances of payments of members.
3. Functions
From the objectives outlined above, it is easy to see that:
i) The fund functions as a short-term credit institution.
ii) It provides a machinery for the orderly adjustment of exchange rates.
iii) It is a reservoir of the currencies of all the member countries, for which a
borrower nation can borrow the currency of other nations.
iv) It is a sort of lending institution in foreign exchange. However, it grants
loans for financing current transactions onl y and not capital transaction.
v) It also provides a machinery for altering sometimes the par value of the
currency of a member country. Thereby it tries to provide for an ordeal
adjustment of exchange rates, which will improve the long -term balance of
payments position of member countries.
vi) It also provides a machinery for international consultations
In fine, the Fund contributes to the promotion and maintenance of high levels
of employment and real income and to the development of the productive resources
of all member nations.
5.3.2 Organisation and Structure
The Fund is an autonomous organisation affiliated to the U.N.O. Its main
office is in Washington. At present the Fund has 116 members (nations).
The ruling body of the Fund is a Board of governors, consisting of one
representative and one alternate representative appointed by each member nation.
Normally, the Board meets once a year and exercises its power in such important
matters as admission of new members, revision of quotas, election of directors, etc. But
it has delegated working authority to the Board of Executive Directors. Thus the Board
consists of 20 executive directors of whom 5 are nominated, one each by the five
largest quota-holding countries, U.S.A., U.K., West Germany, France and Indi a.
Of the remaining 15, three are elected by Africa, 3 by Latin America, 5 by the Far
East and Pacific area and 4 by Continental Europe. The Chairman of the Board of East
and Pacific area and 4 by Continental Europe. The Chairman o(the Board of Executive
37
directors is the Managing Director-who is the head of the Fund. The executive board
meets two or three times each week to consider problems brought before the Fund.
5.3.3 Quotas
IMF's constitution represents a departure in the formation of international
organisations. It is financed by the participating countries, with each country's
contribution fixed in terms of quota. Quotas were fixed on the following basis:
i) 2 per cent of national income;
ii) 5 per cent of gold and dollar reserves;
iii) 10 per cent of average annual imports;
iv) 10 per cent of maximum variation in annual exports;
v) The sum of (i), (ii), (iii), and (iv) increased by the percentage ratios of average
annual exports of national income.
The quotas are reviewed every five years and adjusted from time to time by the
Fund. In fact, the enlargement of quotas from time to time reflects the Fund's
appraisement of the increase in need for international liquidity.
5.3.4 Operations
Following points may be enlisted for discussing the operations of the IMF:
1. The lending operations of the Fund technically take the form of sale of
currency. Any member nation running short of foreign currency may buy the
required currency from the fun, paying for it with its own currency. Since
each member contributed gold to the extent of 25 per cent of its quota, the
Fund freely permits a member to draw up to the amount of its gold
contribution. Additional drawings are permitted only after certain careful
and strict scrutinies.
2. The Fund has also laid down provisions relating to exchange stability. under
the IMF arrangements, gold retains its role in determining the relative values
and currencies of different nations. And once the par values of different
currencies are fixed, it is quite easy to determine the exchange rate between
any tWo member nations.
3. With a view to eliminate or minimize exchange control operations, the Fund
laid down that in ordinary trade and other current transactions, there
should be no restrictions. Exchange controls are expressly permitted in the
case of currencies which may be declared 'scarce' by the Fund. It is also
permitted during the 'transition period'. Thus, the elements of exchange
control have been incorporated in the provisions of the Fund.
4. In fine, the IMF may be described as a bank of central banks of different
countries, because it collects the resources of the various central banks in
the same way in which a country's central bank collects cash reserves of all
its commercial banks and assists them in times of emergency.
5.3.5 IMF-A Better Scheme than Gold Standard
According to Keynes, the IMF scheme is quite the opposite of the gold standard
system in several respects.
38
The value of the currencies is not rigidly fixed in terms of gold and once for all:
Alterations in the exchange rates or par values are al lowed by the Fund within
certain limits.
The basic principles underlying the working of th~ international gold standard
was that the countries following it should adjust their internal price levels and
income levels in order to maintain the rigidly fixed e xchange rates. On the other
hand the Fund emphasises that orderly adjustment of exchange rates should be
undertaken in order to bring the exchange rates in parity with the structure of
internal prices and incomes. Thus IMF holds that de facto exchange depreciation
must be made de jure by devaluation. .
Unlike the gold standard system under the Fund's arrangements a deficit
country is under no compulsion to induce deflation in its economy. It can easily
counter-balance any deflationary influence, so arisen on account of international
payments, through the action of the central bank. Thus, deflation is not a logical
outcome of the IMF arrangements.
Under the game of gold standard, exchange control is not permitted, whereas
the IMF allows the use of exchange re strictions together with exchange rate
adjustments in certain circumstances.
Rules of gold standard emphasised external stability, even at the cost of
internal stability, whereas the IMF arrangements give greater importance to the
achievement and maintenance of internal stability.
International gold standard required a compulsory coordination if domestic
economic policies of the participating countries in accordance with the rules of the
gold standard game. Under IMF arrangements, member countries can follo w their
independent economic policies.
Under the gold standard system there was no international currency reserve
which could help the deficit countries to meet their temporary disequalibrium in
the balance of payments. The Fund, however, keeps a pool of such reserves, assists
in meeting a temporary shortfall in the balance of payments and tries to minimise
the ugly consequences (depression and unemployment) of the gold standard.
Undoubtedly the IMF has made a remarkable success in achieving most of its
principal objectives:
The primary goal of the IMF was to promote stability in exchange rates. The
measure of exchange stability that the world has witnessed in the IMF era is
remarkably superior to what was seen during the inter-war period or gold standard
regime. Under IMF arrangements, stable exchange rates do not imply rigid
exchange rates. IMF's object is to combine the merits of stability with flexibility in
exchange management. It is aimed at avoiding competitive exchange depreciations
by requiring members to declare the par values of their currencies fixed in terms of
gold er the U.S dollar. However, it permitted an orderly adjustment of exchange
rates when this was needed for correcting fundamental disequilibrium in a
39
country's balance of payments. The recent devaluation of the Indian rupee (in 1966)
and that of pound sterling were justified by the IMF.
The IMF also served as an exp.ert institution for consultation and guidance in
international monetary matters. It serves as an excellent forum for discussions,
practically on a day-to-day basis, of the economic, fiscal and financial policies of
member nations, with purticular reference to their balance of payments impact. The
fund has created a feeling among the member nations that their economic proble ms
are not their exclusive concern but of the whole international society.
The fund has contributed in certain ways to the expansion of world trade. By
providing credit facilities to member countries, the IMF has reduced the need for
their imposing import quotas and resorting to exchange controls. It assists the
deficit countries in meeting their temporary disequilibrium in the balance of
payments. It also works for facilitating multi -lateral payments and trade, promoting
thereby international trade as a whole.
In recent years the Fund has achieved some success in bringing about a
simplifIcation of the multiple exchange system at least in countries that have
sought fInancial assistance from the Fund.
The fund has been instrumental in ensuring steady progress in the
establishment of a multilateral system of payments in respect of current
transactions. However, little success has been achieved in this direction due to
agencies and organisations out of the Fund's purview.
In the beginning, the Fund pursued a con servative credit policy, refusing loans
for any purpose other than correcting a fundamental disequilibrium in the balance
of payments. Moreover, the IMF credit was of short-term duration only. Lately,
however, the Fund has changed its attitude by accepting a more liberal credit
policy. Today the Fund grants development loans, too. Hence, the quantum of
borrowings from the Fund has shown a marked increase in recent years.
In a nutshell, the fund has thus been able to secure all the advantages of
paper standard by maximising employment and accelerating the pace of economic
development and of the gold standard by maintaining comparative economic
stability, while carefully avoiding the disadvantages of either.
Moreover, the fund has been particularly interested in the newly developing
countries of the world and has been liberally assisting them to maintain a healthy
balance of payments and monetary stability at home. In recent years, however,
underdeveloped countries have started looking to the Fund to assist them in their
economic development programme also. Furthermore, most of the new member
countries who have acquired independence recently are facing difficult problems in
organising their monetary, fiscal and exchange systems. These countries, thus,
base for their economic growth. The fund has been already providing technical
assistance to its members in this respect, but now its activity is substantially
widened to meet this challenge. In Many of these countries, the Fund's experts have
40
assisted in the formulation of appropriate monetary, fiscal and exchange policies or

in the implementation for stabilisation programmes, Besides, the Fund has
organised, since 1964, a Fiscal Affairs Department whose officers advise member
countries on matters relating to tax policy, tax systems, taX administration,
budgeting etc. the fund has also organised the Central banking Advisory Sevice to
provide technical advice to newly developing countries to establish or improve their
central banks. An IMF Institute is also started by the fund in 1964 to train the
officials of member nations.
Above all, to solve the current international liquidity problem, the IMF has
succeeded in establishing the SDR scheme.
Mr. P.P. Schweitzer rightly expressed his strong conviction that the Fund is
ideally and flexibly constructed to perform the new tasks and to provide the new
facilities that may be needed in the course of the continuing evolution of the
international monetary system.
5.3.6 The IMF and India
India's economic policies led to a control-permit raj in the Nehruvian era and
thereafter. Following the Soviet model planning, with due Indianisation, however,
the country had tended to become a closed economy. This was never appreciated by
the IMF and World Bank authorities. Hence, these intern ational institutions have
always tried to press their views at every opportune moment. Whenever India
experienced a foreign exchange crisis, these international authorities tried their
level best to dilute Indian industrial and trade policies. In 1966, for instance, when
India had a severed problem of BOP deficit, the World Bank insisted on a degree of
import liberalisation as a quid pro quo for its financial support for BOP
adjustments. In the seventies and onwards, India had to change her economic
policies quite often. Most of .such changes were towards the process of
liberalisation, attributed to the IMF pressure. The imposition of emergency rule in
June 1975 is also attributed to crush the political opposition against the IMF
programme and strategy. In fact, Smt. Indira Gandhi was heavily pressured to
abandon her quasi-socialist policies and accept the market ideology of the West. A
very patent, calculated and long-term campaign was launched by the IMF and the
World Bank to see it that India opens up its door to Western private investment,
western technology and western exports on a growing scale in due course of time.
To quote Prof. S.L.N Sinha in this context, "In the last 23 years the IMF and the
World Bank have laid a great deal of emphasis on measure s of economic
liberalisation, much less on controls and artificial props and much more free play of
the market forces. A lot of stress has also been laid on going very slow on the
setting up of public sector enterprises, including financial intermediaries. This
attitude reflects partly the ideological preference for free enterprise and a market
oriented economy but primarily dissatisfaction with the general performance of
economies which ,were based on planning, regulation and public enterprises in a
big way, in the light of experience of over three decades.
41
These international authorities went on giving financial help to the country on

such conditions. In 1981, India received 5 million on SDR loan under the pretext of
development assistance. In 1991, when India was confronted by a severe foreign
exchange and financial crisis, the IMF and World Bank came to her rescue not with
sympathy but to fulfill their long-cherished objective. India was forced to accept all
conditions of the IMF for such assistance. She was asked to globalise her economy
very rapidly with an open door policy of free trade. The country had to change
theplanning strategy and to redesign it on market-friendly approach. The New
Economic Policy with all its dimensions towards liberalisations was chalked out under
the IMF's direction. In effect, trade and exchange liberalisation are imposed upon the
Indian economy at a very faster rate which probably the country had never expected.
Under the zeal of globalisation of the Indian economy, less attention was paid to its
age-old problems of property, inequality and chronic unemployment. Developing
countries including India must realise that some policy changes in the right direction
are inevitable for their own benefit. There should be no scope left for the politicians to
raise wrong issues or false ideas of prestige or outworn ideologies. Nonetheless, no
country should consider itself to be weak enough to mortgage its sovereignty in right
decision-making, When countries like India need to borrow from the international
sources, they must be alert to discourage overt and covert attempts on the part of
officials of the IMF or World Bank from doing propaganda for only those' proposals and
reforms which they think as the only best for the country's improvement, expecially
when they are unduly dogmatic, biased and unreasonable. India's main problem until
now has been the government’s incapacity to act rightly, firmly and effectively in time,
on account of being more emotional to set ideologies and compromising attitude to
safeguard the party's interest more than the national interest.
5.3.7 Functions
The principal functions of the IBRD are set forth in Article I of the Agreement
as follows:
1. To assist in the reconstruction and development of the territories o f its
members by facilitating the investment of capital for productive purposes.
2. To promote private foreign investment by means of guarantee of
participation in loans and other investments made by private investors and
when private capital is not available on reasonable terms, to make loans for
productive purposes out of its own resources or from funds borrowed by it.
3. To promote the long-term balanced growth of international trade and the
maintenance of equilibrium in balances of payments by encouraging international
investment for the development of the productive resources of members.
4. To arrange loans made or guaranteed by it in relation to international loans
through other channels so that more useful and urgent projects, large and
small alike, will be dealt with first. It appears that the World Bank was
created to promote and not to replace private foreign investment. The Bank
considers its role to be a marginal one, to supplement and assist private
foreign investment in the member countries.
42
4.3.8 Capital Resources

The World Bank, like any other corporation, has an authorized capital of $ 21
billion divided into 2, 10,000 shares, each having a par value of $ 100,000. Initially,
however, its authorized capital was $ 10 billion. Of the present authoritie s
authorized capital, $ 20.48 billion are subscribed by issue of 204, 848 shares.
However, only 10 per cent of the par value, viz., $ 2.04 billion has been called in as
paid-up capital. The capital stock of the Bank can be increased if a 3/4th majority
of the total voting power is cast in favour. Of the paid-up capital 2% has to be
subscribed in gold or V.S dollars, the remaining 98% has to be paid in the currency
of the member.
4.3.9 Lending Operations
Loans are granted to member countries only after the Bank is fully satisfied
about the economic position of the borrowing country as well as the soundness of
the specified projects for which assistance is sought. In granting loans, the Bank is
prepared to take reasonable risks but insists that funds obtained from it should be
used for purposes which are constructive and practical. The Bank has powers of
supervision and control to ensure that funds are used for the purposes for which
the loan is granted. Normally the Bank makes medium or long -term loans, the term
being related to the estimated useful life of the equipment or plant being financed.
The total outstanding amount of the loans made or guaranteed by the Bank is
not to exceed 100% of its total unimpaired subscribed capital resources and
surplus. The interest rate charged by the Bank on its loans is the estimated cost of
the Bank of borrowing money for a comparable term in the market and is uniform
without distinction among borrowers. In addition to the rate of interest, the Bank
charges on all loans a commission of 1 % for the purpose of creating a special
reserve against losses and 1/2 per cent for administrative expenses.
In recent years, the Bank has made loans mainly for specific development
projects in the field of agriculture, power, transport an d industry. Most of the loans
have been made to the underdeveloped countries. India is the Bank's largest
individual borrowers.
4.3.10 Criticisms
The modus operandi of the Bank has been criticised on various counts from
different quarters:
It is alleged that the Bank charges a very high rate of interest on loans. For
example, some of the loans which India has received in recent years bear an
interest of 53/4 per cent including the commission at 1 % which is created to the
Bank's special reserve.
The Bank's insistence, prior to the actual grant of loan, on the country having
the capacity to transfer or repay, is open to criticism. The Bank should not apply
orthodox standards to judge the transfer capacity of any borrowing country.
Transfer capacity follows rather than precede the loan.
43
The financial help given by the Bank does not amount to more than a drop in
the big ocean of financial requirements so essential for various development
projects.
5.3.11 Conclusion
It may be said that the World Bank has not come upto the expectations of
many nations. Nevertheless, it has been instrumental to a very large extent in
initiating and accelerating the work of economic reconstruction and development in
different countries. No doubt, India has derived immense benefit from the world
Bank. The Bank may have failed to finance most of the development projects, but it
should be remembered that it has financed quite a large number of them which
have proved a notable success. The Bank has also played a significant role outside
financial matters by serving as a mediator between different countries on major
economic and political issues. For instance, its help in the solution of the Indus
Waters dispute between India and Pakistan and the Suez Canal dispute between
the U.K. and U.A.R. has been invaluable.
5.4 REVISION POINTS
 Organisation and Structure
 Quotas
 Operations
 IMF – Gold Standards
 The IMF and India
 Functions
 Capital Resources
 Lending Operations
 Criticisms
1. What are the functions of imf? name few vital operations of IMF define
capital resourses of ibrd?
2. What are the advantages of lending operation for the member countries of
IBRD
5.6 SUMMARY
This lesson outlines the functions of IMF, Objectives, Operations and Quotas
of International participating countries. This lesson explains that IBRD is an inter-
governmental institution, corporate in form and capital stock of which is entirely
own by its member-government.
1. IMF Fund are stated in ___________of the Fund Agreements
2. Developing countries including India must realise that some policy changes
in the right direction are inevitable for their own benefit . True/False
3. What is the other name of IBRD?
4. What is the expansion for IBRD or
5. IBRD stands for ___________?
44

1. IMF annual reports and staff papers.
3. Robert A. Mundell, International Economics, 1968, Macmillan & Co, Newyork .
4. IMF and World Bank, Finance and Development, Vol 1-25
5.9 ASSIGNMENTS
1. How fa r Has IMF been successful in achieving the purposes? Discuss.
2. Critically apprise the Assistance Provided by IMF to India.
3. Explain the role , World Bank has played in Economic Development of less
developed countries.
4. State the functions of IBRD.
1. Jagdish Bhagawathi, International Trade & Economics Expansion. the
American Economics Review, dec.1958.
2. Peter B.Kenen, the International Economy, third edition, Cambridge Edition,
1994. Francis Cherunilam, International Business, Third Edition 2004.
3. M.C.Vaish & Sudama Singh, International Economics Sixth Edition, Reprint
1995. BO Sodersten, International Economics II Edition 1980.
1. Distinguish between authorised capital and subscribed capital
resourcesStudy the role and the impact of imf on indian economy since
liberalisation
5.12 KEY WORDS
 White plan, Keynes plan, gold standard, Multilateral system, Quotas, Special
Drawing Rights. Authorised capital, Subscribed capital resources, Loans,
Modus operandi.

45
LESSON – 6
INTERNATIONAL TRADE ORGANISATION: GENERAL AGREEMENT

ON TARIFFS AND TRADE (GATT) / WTO
6.1 INTRODUCTION
GATT is a curious hybrid that represents the first successful effort in the
history of countries cooperating in international l evel to reduce trade barriers and
to establish a code of conduct and the set of rules in the sphere of international
trade.
A remarkable feature of the Uruguay Round was that it paved the way for
further liberalisation of international trade with the fundamental shift from the
negotiation approach to the institutional framework envisaged through transition
from GATT to WTO Agreement.
The GATT 1947 and the WTO co-existed for the transitional period of one year
in 1994. In January 1995, however, the WTO compl etely replaced the GATT. The
membership of the WTO increased from 77 in 1995 to 127 by the end of 1996.
6.2 OBJECTIVES
 To outline the purpose of GATT is international trade organisation. The main
objective of various rounds of talks.
 India’s role and stand in GATT is also explained in this area.
 To understand the co-existence of WTO and the legal entity of GATT and
replacement of GATT into WTO in 1995.
 To outline features, objectives and functions of WTO.
6.3 CONTENTS
6.3.1 Origin of GATT
6.3.2 Objectives of GATT
6.3.3 Uruguay Round of GATT
6.3.4 India’s role and stand
6.3.5 Features of WTO
6.3.6 Objectives and functions of WTO
6.3.7 WTO in action
6.3.8 Concluding remarks
6.3.1 ORIGIN OF GATT
Inspired by the success of agreement for international monetary co-operation
as reflected in the formation of the IMF, similar cooperation in international trade
also was desired by any trading nations for expansion of world trade. It was
thought that for healthy world trade, attempt must be made to relax the existing
trade restrictions, such as tariff. As such, at the International Conference on Trade
and Employment held in 1946 at Havana, a proposal for establishing an agency
called the International Trade Organisation (ITa) was made with the miscellaneous
and general objective of augmenting and maintaining world trade and employment
Though the Havana Charter for ITa was designed as a sort of international trade
46
constitution, it was not translated into practice due to various difficulties and lack
of common agreement.
However, some of the countries took up one of the important issues of the
Havana Charter regarding relaxation of trade restrictions by incorporating it into a
General Agreement on Tariffs and Trade (GATT). This was signed in 1947 by some
twenty-three major trading nations, including India. GATT membership has now
gone up to more than 64.
6.3.2 Main Objectives of Gatt
By reducing tariff barriers and eliminating discrimination in international
trade, the GATT aims at:
1. Expansion of international trade
 Increase of world production by ensuring full employment in the
participating nations;
 Development and full utilisation of world resources; and Raising standard of
living of the world community as a whole.
 However, the articles of the GATT do not provi de directives for attaining
these objectives. These are to be indirectly achieved by the GATT through
the promotion of free (unrestricted) and multilateral international trade.
 As such, the rules adopted by GATT are based on the following fundamental
principles:
 Trade should be conducted in a non -discriminatory way; The use of
quantitative restrictions should be condemned; and Disagreements should
be resolved through consultations.
 In short, members of GATT agree to reduce trade barriers and to eliminate
discrimination in international trade so that multilateral and free trade may
be promoted, leading to wider dimensions of world trade and prosperity.
6.3.3 Uruguay Round of The GATT The Uruguay Round
The Eighth round of Multilateral Trade Negotiations (MTN) of the GATT
participants-commonly referred to as the Uruguay Round-was launched at Punta Del
Este in Uruguay Latin America, in September 1986 in a special session and after eight
weary years, has been concluded on the 15 the December, 1993, at Geneva.
The Treaty of the Uruguay round will become effective in April 1995.
Global Trade and Negotiations Rounds (Conferences) of the GATT
Round Year Venue Outcome
First 1947 Geneva First GATT Agreement was signed. 20 tariff schedules
(Switzerland) were formed. 45,000 tariff concessions were exchanged.
Second 1949 Annecy Tariffs on specific products reduced but no significant
(France) cuts. Some 5, 000 tariff concessions exchanged
Third 1950-51 Torquay Tariffs on specific products redp.ced, Around 8,700
(England) tariff concessions exchanged
Fourth 1956 Geneva Tariffs on specific products reduced, but not significantly
(Switzerland) only 82.5 billion worth of tariff reductions,
47
Round Year Venue Outcome

Fifth 1960-61 Geneva Cut in tariffs averaged by 20 per cent. EC negotiated
(Dillon Round) (Switzerland) for the first time as a unit 4, 400 tariff concessions
exchanged, covering $ 4.9 billion worth of trade.
Sixth 1964-67 Geneva Achieved 35 per cent reduction in tariffs on
(Kennedy Round) (Switzerland) manufactured goods, covering $ 40 billion of trade.
Seventh Tokyo (Japan) Signed 11 agreements covering non-tariff barriers,
1973-79 subsidised exports, and tropical products. Tariff reduction
and binding covered about $ 300 billion of trade.
Eighth 1986-93 Punta Del Este Agriculture included in agenda for the first time. Now
(Uruguay Round) (UrguayjGeneva) terms of trade in services, protection of intellectual
property rights and deregulation of controls over
foreign investments. Tariffs on industrial goods
reduced. Reduction in farm export subsidies. Removal
of import barriers. TRIPs, TRIMs and MFA.
1. Major Issues of Negotiations
With the adoption of a 'package approach,' the Uruguay Round is the most
complex, complicated and ambitious of any post-war multilateral negotiations on a
plethora of issues. Initially, the Uruguay round of Ministerial Declaration signed In
September 1988 contained a mandate for negotiations on a plethora of issues.
Initially, the Uruguay round fo Ministerial Declaration signed in September, 1988
contained a mandate for negotiations in 15 major areas; of which 14 areas relating
to trade in goods, included in track.! meant for the group of negotiations on goods,
and the 15th area pertaining to the liberalisation of services, included in track I
meant for the group of negotiations on services, included on services. The groups
and issues in the Uruguay Round are briefly narrated in Table 26.2
Groups and Issues in the Uruguay Round
Negotiating Groups M ain Issues
Track I: Group of Negotiations on Goods
1. Tariffs (i) Reduction/ elimination of existing tariffs
(ii) Tariff escalation
(iii) Formula approach vs. Product-by- product approach
2. Non-Tariff Measures (i) Elimination/reduction of any non-tariff measures,
including quantitative restrictions
(ii) How to establish "equivalence" for bilateral
negotiations
(iii) Whether to treat unjustified quantitative restrictions
(QRs) as negotiable, or whether to insist on rolling
back these QRs
3. Natural Resource Based (i) Tariff escalation
Products (ii) Use of quantitative restrictions
(iii) Access to supplies
(iv) Products coverage in the group's work
4. Textiles and Clothing (i) What procedures could be used to integrate trade in
textiles and clothing into the workings of the GATT; in
effect, how to dismantle the MFA
48
Negotiating Groups M ain Issues

5. Agriculture (i) Improved market access through education of import
barriers.
(ii) Increased discipline over measures not conforming
with the GATT, including direct and indirect
subsidies,
quotas, also reduction of subsidies which do not
conform with the GATT
6 Tropical Products (i) Increased liberalisation of processed and semi
processed tropical products
(ii) Tariff and non-tariff liberalisation
(iii) How much reciprocity should be required of
developing countries
(iv) Coverage by product
7. GAIT Articles (i) Articles on tariff bindings, customs unions, balance of
payments, state trading, waivers etc. are to be
reviewed
8. MTN Agreements and (i) Improvement, classification on expansion of codes
Arrangements
9. Safeguards (i) Selectivity transparency, digressively, structural
adjustment, etc.
10. Subsidies and Coun (i) Review of the MTN Agreement on subsidies and
tervailing Measures countervailing measures
(ii) Definition of subsidy
(iii) Discipline on export subsidies
11.Trade - Related Aspects of (i) Clarify GAIT provisions
Intellectual Property (ii) Ensure measures and procedures to enforce IPR
(TRIPs),Trade Counterfeit
goods
12. Trade -Related Rights . (i) To elaborate of further provisions
Including Investment
Measures (TRIMs)
13. Dispute Settlement (i) Effective enforcement of panel's conclusions
(ii) Improvement of the efficiency and transparency
14. Functioning of the GAIT (i) Enhanced surveillance in the GAIT to enable
System monitoring of trade policies and practices of
contracting parties
(ii) Improved functioning of the GAIT as decision making
institution
Track II: Group of Negotiations on Services
15. Services (i) Definition and statistical issues
(ii) Broad concepts on principles and rules for trade in
services
(iii) Coverage of multilateral discipline
(iv) Foreign investment
(v) International labour mobility
(vi) Right of establishment, etc.
49
2. Dunkel Draft: The Cornerstone of Negotiations

To expedite the resumed negotiations in 1991, Sir Arthur dunkel, Director
General of GAIT and the official Chairman of the TNC, tabled a scheme of proposals
(commonly referred to as the dunkel Draft of dunkel Text) for the consideration of
the participating countries. The Dunkel Text, being a legal and technical document,
covered seven areas for negotiations, namely: (i) Market Access; (ii) Agriculture; (ii)
Textiles and Clothing; (iv) GAIT Rules; (v) Trade Related Intellectual Property Rights
(TRIPs); (vi) Trade in Services; and (vii) Institutional matters.
3. Implications of the Uruguay Round Treaty
The Uruguay Round Treaty (URT) is a march ahead to a free trade in the global
economy, Trade barriers and the quota system of all the 117 participating nations will
be reduced in the years to come and will be completely abolished of the year 2004.
The Agreement on Trade Related Intellectual Property Rights (TRIPs) is
comprehensive in giving cover to all areas of technology -property, patents,
trademarks, copyrights, and so on. TRIPs encroach upon the member country's
sovereign right to frame its own legislation on intellectual property matters. Multi -
¬Fiber Arrangement (MFA) regulated trade in textile and clothing since the last four
decades. Under this special arrangement, importing countries such as the US,
Canada, Austria, Norway, Finland and European Union (EU) could impose quota
restrictions on exports from the developing countries on a selective basis. Hitherto,
unrestricted trade was permitted among the developed countries. But the new
treaty phases out MFA over a period of 10 years from 1995. In the case of the US,
the integration phase is to be 3 per cent in the initial three years, 10 per cent in the
next four years 32 per cent in the next three years and 55 per cent in the end of the
tenth year. Under the new Treaty, thus the process of liberalisation of NFA is stage -
wise and slow which seems to be disadvantageous to the exporting nations. But the
fact is that the US actually wanted the phase -out period to be stretched up to 15
years. The Treaty, however, succeeded to have its commitment to dismantle the
quota regime over the ten years time, which of course, is a positive gain for the
textile¬exporting developing countries, including India. It is equally true that the.
provision of 10 year phase-out period to open up textile quotas in full extent is
rather a defensive gain for the US and other OECD economies. It gives them
sufficient time for adjustment while the developing countries dodge the onslaught of
OECD exports.
6.3.4 India's Role and Stand
Of course, it is out of question for India to have remained outside the
mainstream of the GATT. By virtue of its membership in the GATT, India is
automatically entitled to enjoy the benefit of the Most Favoured Nation (MFN)
treatment from all the other participating members. Secondly, keeping aloof herself
from the GATT, India would have had to undergo bilateral agreements with several
countries for improving her trade relations and yet could not have assured the
same what could have been yielded through the GATT: Today, even a country like
China has been keen on joining the GATT.
50
At this juncture, it is not easy to say with full confidence about India's position
as a net gainer or a loser from the new Treaty as there are both plus and minus
points on several issues. A real picture of the URT's implications will be revealed
only through a close scrutiny of the provisions made in the 500 -page document
when it is signed and sealed in April 1994. Meanwhile, the present study, in brief,
makes only a broad perception of the likely outcomes of the new treaty.
Agriculture has been a major subject of the URT. Under the new treaty, member
countries are required to reduce their agro-export subsidies over the six years if these
exceed 10 per cent of the value of agricultural production. In the case of India, there is
no need to fear about this clause, since our product and non-products specified agro-
subsidies are already below 10 per cent of the total agro-output value. Member
countries have agreed to reduce import duties on agricultural products by 36 per cent.
Further, developed countries will have to import at least three per cent of their agro-
output. These provisions will give a boost to India's agro-exports when European farm
exports will tend to be more expensive in the world market.
From India's viewpoint, "Textiles" appears to be a green area of the GATT
agreement. It is presumed that India's textile exports should be boosted by the
phase-out of the multi fiber arrangement (MFA) under the new treaty. India's textile
exports have already doubled from Rs.9,558 crores in 1990-91 to Rs.18,643 crores
in 1992-93. Of the total textile exports of India, 52 per cent of the total cotton
textile exports and 77 per cent of readymade garments exports are to the quota
countries. With the dismantling of the quota system, apparently, India will have a
better access to the quota-countries markets for her textile export"5 especially
cotton piece goods, knitted fabrics and ready-made garments.
A provision for intellectual property rights (TRIPs) is a crucial area of the URT
with far-reaching implications for developing countries including India. Up till now
only the process patent was protected. Under the new agreement, inventor's fights
widely cover patents copyright, industrial design, trade marks as well as performing
art. The phasing-out period is specified as 10 years for drugs and agro-chemicals
and 5 years for the rest. In the years to come software packages will tend to become
more expensive for our country. India's software industry may become stagnant,
unless the government modifies the present duty structure on software and Indian
companies are encouraged to develop specialised software packages.
The TRIPs are likely to create some adverse effect on pharmaceutical industry
in India, when the new discoveries would become available at very heavy costs of
royalties. According to the new agreement, when the product patents will be
brought into force in the year 2005 in the developing countries including India,
drug prices will zoom. The indigenous pharmaceutical industry following the
process patent will be in an adverse position.
Under the GATT agreement then India can hope to increase her exports of
generic, tropical and ayurvedic drugs to many countries. This obviously calls for a
rational and pragmatic drug policy on the part of the government.
51
Under the TRIPs, seeds will be patented. Indian farmers' inputs costs will be
enhanced due to royalties on seeds to be paid. Simil arly, agro-chemicals of patented
manufacture will be more expensive. As a result, food grain prices will go up and
the average Indian consumer will be adversely affected. Effective and subsidised
public distribution system (PDS) can only
Regarding services, the new treaty provides for fair trade and non -
discrimination, easing entry restrictions on specialised and skilled labour. This will
help India to some extent as her consultancy exports will get a boost.
Further, on account of the anti-dumping strategy and rules adopted in the
URT, India's local chemical industry can be protected. Similarly, using the same
clause the US Government can also prevent India's textile exports when its quota
region is over.
India has to be the least worried about her financial sector, since the TRIMs
provisions exclude banking and insurance, and the country has the right to
formulate its own investment policy.
India's share in global exports, at present, is just around 0.5 per cent as
against that of 1.9 per cent in 1950. The positive side of the URT and the export
optimism prevailing in the country should be exploited for improving India's export
scenario on world's front. All efforts must be made to see that our exports expand
by at least 15 per cent per annum in US dollar te rms. Internal restrictions on
exports need to be removed. To sustain the' export - led growth strategy of the
country steps should the taken to provide an aggressive export push. An important
feature of India's exported growth strategy is the degree to whi ch the country can
supply exportables that prove acceptable to customers in the world markets. Good
design and better quality at competitive prices are highly significant factors. In this
respect, foreign collaborations with multinational corporations may prove important
for the Indian economy provided there is a clear understanding on this issue. The
country has yet to build a reputation for the Indian as symbol of quality trade mark
in the global markets.
6.3.5 Features of the WTO
The distinctive features of the WTO are:
 Unlike the GATT, it is a legal entity.
 Unlike the International Monetary Fund (IMF) and the World Bank
 (WB) it is not an agent of the United Nations.
 Unlike the IMF and the world Bank, there is no weighted voting, but all the
WTO members have equal rights.
 Unlike the GATT, the agreements under the WTO are permanent and
binding to the member countries.
 Unlike the GATT, the WTO dispute settlement system is based not on
dilatory but automatic mechanism, It is also quicker and binding on the
members. As such, the WTO is a powerful body.
52
 Unlike the GATT, the WTO's approach is rule-based and time-bound.

 Unlike the GATT, the WTO's has a wider coverage, It covers trade in goods as
well as services.
 Unlike the GATT the WTO's has a focus on trade -related aspects of
intellectual property rights and several other issues of agreements.
 Above all, the WTO is huge organizational body with a large secretariat.
6.3.6 Objectives and Functions of the WTO
The purposes and objectives of the WTO are spelled out in the preamble to the
Marrakesh Agreement. In a nutshell, these are;
i) To ensure the reduction of tariffs and other barriers to trade.
ii) To eliminate discriminatory treatment in international trade relations.
iii) To facilitate higher standards of living, full employment, a growing volume of
real income and effective demand, and an increase in production and trade
in goods and services of the member nations.
iv) To make positive effect, which ensures developing countries, especially the
least developed secure a level of share in the growth of international trade
that reflects the needs of their economic development.
v) To facilitate the optimal use of the world's resources for sustainable
development.
vi) To promote an integrated, more viable and durable trading system
incorporating all the resolutions of the Uruguay Round's multilateral trade
negotiations.
vii) Above all to ensure that linkages trade policies, environmental policies with
sustainable growth and development are taken care of by the member
countries in evolving a new economic order.
6.3.7 FUNCTIONS OF THE WTO
The WTO consisting institutional substantive and WTO are as follows: a multi
faced normative framework: comprising implementation aspects. The major
functions of the
1. To lay down a substantive code of conduct ai ming at reducing trade barriers
including tariffs and eliminating discrimination in international trade
relations.
2. To provide the institutional framework for the administration of the
substantive code which el1.COmpasses a spectrum of norms governing the
conduct of member countries in the area of global trade.
3. To provide an integrated structure of the administration, thus, to facilitate
the implementation, administration and fulfillment of the objectives of the
WTO agreement and other multilateral Trade Agreements.
4. To ensure the implementation of the substantive code.
5. To act as a forum for the negotiation of further trade liberalisation.
6. To cooperate with the IMF and WB and its associated for establishing a
coherence in trade policy-making.
53
7. To settle the trade-related disputes.

8. The WTO code lies in the international instruments, such as the GAIT 1994,
the Multilateral Trade Agreements (MTA) and the multilateral Agreements.
The clash conflict between MTA and GAIT 1994 is to be resolved by
accepting the provisions of MTA.
In essence, the WTO Agreements is based on the results of the Uruguay Round
of negotiations.
The WTO Agreement, thus, covers the following:
 Multilateral Agreements on Trade in goods
 General Agreement on Trade in services
 Agreement on TRIPs
 Rules and procedures regarding dispute settlement
 Multilateral Trade Agreements (PTA)
 Trade Policy Review Mechanism (TPRM)
Among these, agreement on agriculture deserves attention of the developing
agrarian nations. The Agreement seeks to deal with non -tariff measures affecting
global competition. It specifically aims at reducing domestic and export subsidies
on agricultural goods.
It is further laid down that the member countries should reduce the value of
direct export subsidies to a level of 36 per cent below the 1986-90 base period level
during the implementation span of 6 years. Moreover, the volume of subsidized
exports should be reduced by 21 per cent.
The members have to allow minimum market access by reducing their import
tariffs by 36 per cent and permit at least 3 per cent of their domestic consumption
for foreign agricultural consumption initially and then after 6 years period it should
be raised to 5 per cent.
Green box policies-relating to domestic support measures causing a minimum
impact on free trade-are not subject to such reduction commitments.
The WTO Agreement on textiles and clothing aims at securing the integration
of this sector into the GATT 1994 in four phases. By January 1,2005, (I) On
January 1, 1995, 16% of total volume of imports of textiles and clothing sector in
1990; (II) January 1,1998, not less than 17% of 1990 imports; (III) January 1, 2002,
not less than 18% of imports; (IV) January 1, 2005, all remaining products to be
integrated.
The Dispute Settlement Body to be set-up by the WTO is to govern the dispute
settlement system as per rules and procedures laid down.
Plurilaterial trade Agreements (PTA) consist: (I) Agreement on Trade in Civil
Aircraft; (II) Agreement on Government Procurement;
TPRM is meant to review the trade policies and practices under MTA and PTA.
The task to be carried out by the trade Policy Review Body.
54
The WTO In Action

In December 1996, Singapore hosted the first biennial Ministerial Meeting of
the WTO. The' participants reasserted their faith in commitment for the multilateral
trading system and free trade as envisaged by the WTO.
Twenty-eight member countries, however, signed an agreement on Information
Technology (IT) for completely scrapping the tariffs on related items, such as,
computers, software, semiconductors, photocopiers, capacitors and fiber-optic
cables.
Critics, however, observed that the negotiations were mostly in favour of the
rich and not the poor countries. Domination of the developed countries was clearly
revealed in this meeting.
A notable feature of the WTO is active functioning of the dispute Settlement
Body with several cases of disputes to be solved in hand. It acted boldly and gave a
ruling against a United States gasoline tax and the country has to agree for the
suggested legal amendment.
Further in November 1996, it gave its ruling in favour of Costa Rica against
the United States regarding' the sale of cotton shirts
Similarly, in December 1996, it gave a ruling against the United States
regarding the sale of Indian woolen garme nts.
The just approach of the DSB has thus strengthened the confidence of the
developing countries in the WTO.
Possible emergence of economic imperialism with the growing dominance of
foreign MNCs as well as emerging 'Rober Capitalism' under speculative pursuit in
stock market and forex market developing countries are exposed to a new danger
under the impact of globalisation and liberalisation forced by the WTO. If it goes
beyond limit, globalised market economies may derail with dire consequences at all
levels-economic, social and political. The WTO needs a rethinking on the issue to
build-up adjust and 'Robust Global Capitalism' rather than paving the way for
'Rober Capitalism in the new world economic order.
6.4 REVISION POINTS
 Origin of GATT , Objectives of GATT , Uruguay Round of GATT , India’s role and
stand, Features of WTO, Objectives and functions of WTO, WTO in action,
Concluding remarks
1. What is the role of india in GATT
2. The objectives of the wto are spel led out in the preamble to the
______________ Agreement.
3. Explain the purpose of WTO in a nutshell.
55
6.6 SUMMARY
This lesson explains the origin , purpose and various rounds of treating
Dunkel draft and Uruguay round treaty. The role of Indian state in the trade
negotiations and agreements on MFA and textile played crucial role in India’s point
of view. This lesson consists of major functions of WTO based on the results of
Uruguay round of negotiations.
1. Which organisations reduce tariff barriers and eliminate discrimination in
international trade?
2. What is the implication of dunkel draft?
3. What is meant by MTA?
4. What is the role of PTA?
1. GATT, Trends in international Trade (THE HABERLER REPORT) Reymond
Vernon, American’s Foregn Trade policy and GATT.
6.9 ASSIGNMENTS
1. Explain the origin, objectives and working of GATT.
2. Explain the objectives of WTO.
3. What are the functions of WTO?
1. Robert A.Mundell, International Economics, 1968, Macmillan & co, Newyork.
2. Jagdish Bhagawathi, International trade & Economics expansion.
The American Economics Review, Dec.1958.
3. Peter B.Kenen, The International Economy, Thi rd Edition, Cambridge
Edition, 1994.
1995.
1. Give an account of multilateral trade agreement by india in WTO
2. Write a report on the role of gatt in the global economy.
6.12 KEY WORDS
 Uruguay round treaty, Dunkel draft, Most favoured nations, Multi fibre
agreements, TRIPS. Multilateral agreements, TRIPS, PTA & MTA, TPRM

56
LESSON – 7
INTERNATIONAL TRADE ORGANISATION: UNITED NATIONS

CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD)
7.1 INTRODUCTION
The developing countries were greatly dissatisfied with the working of the GATT.
The principles and procedures underlying it were regarded as the fundamental cause
of the weak bargaining position (in tariff reduction negotiations) of the less developed
countries. Thus, though GATT had made a very significant contribution to the
liberalisation of international trade in the post-war era, it was condemned since most
of its benefits accrued to the advanced nations. Hence, it was desired to have some
new institutional arrangements of international economic co-operation to deal with
problems of world trade and development, especially, those which may reduce the
'trade gap' of developing countries. Consequently, the UNCTAD was created.
The first United Nations Conference on Trade and Development (UNCTAD) met
in March 1964 in Geneva. It was an ad hoc gathering of representatives of about
120 states which were members of the United Nations. It however, marked a
turning point in international economic relations and ushered a new era in the
evolution of world trade and development, since it represented the first major
endeavour to examine all the problems of international economic relations, with
special reference to the needs of developing countries.
7.2 OBJECTIVES
 To understand the main purpose of creating UNCTAD, its principal functions
in promoting international trade are problems related to international trade.
7.3 CONTENTS
7.3.1 Organisation of UNCTAD
7.3.2 Main functions of UNCTAD
7.3.3 UNCTAD and GATT
7.3.4 Recommendations of UNCTAD
7.3.1 Function of the UNCTAD
The UNCTAD is established as a permanent organ of General Assembly of the
United Nations. However, it has its own subsidiary bodies and also a full -time
secretariat to service it. It has a permanent organ c alled Trade and Development
Board as the main executive body. The Board functions between the plenary
sessions of the conference. It meets twice annually. It is composed of 55 members,
elected by the conference from among its members on the basis of equitable
geographical distribution The Trade and Development Board has four subsidiary
organs to assist it in its functions. these are: (1) The Committee on Commodities;
(2) The committee on Manufactures; (3) The Committee on shipping; and (4) The
Committee on Invisible Items and Financing related to Trade.
Generally, these committees meet annually. However, they may be called in
special session to consider urgent matters.
57
7.3.2 Main Functions of UNCTAD

The main intention of the conference was to assist the deve loping countries
achieve accelerated economic development by helping them to control economic
forces instead of being dominated by them
The principal functions of the conference are:
1. To promote international trade allover the world-between developed and
developing countries with. Different socio-economic systems, and thus to
accelerate economic development.
2. To formulated principles and policies on international trade and related
problems of economic development.
3. To make proposals for putting the said principles and policies into effect.
4. Generally, to review and facilitate the co-ordination of activities of the other
institutions within the U.N. system in the field of international trade .
5. To be available as a centre for harmonious trade and related documents in
development policies of governments.
7.3.3 UNCTAD and GATT
The UNCTAD may be distinguished from the GATT as follows:
a) The UNCTAD is a formal, reflecting, deliberating, constructing and
conciliating body while the GATT is a negotiating, committing,
andcontrolling organisation.
b) The UNCTAD in essence is a dynamic, initiating body dedicated to economic
growth and equity while the GATT poses a somewhat static view of
commercial policy relations.
7.3.4 Appraisal of Recommendations of UNCTAD-I
UNCTAD's action programme and priorities have been laid down in the various
recommendations adopted by the first Conference in 1964. It was realised that the
prime responsibility for the economic advan ce of developing countries lay on their
shoulders only. Nevertheless, foreign trade and international economic relations of
these countries were to be considered as crucial factors determining the pace of
their economic growth. For this the conference laid down a host of principles,
policies and recommendations to bring about basic changes in the set up and
working of trade relations between advanced and poor nations.
The main purpose of the recommendations made by the Conference was to
adopt, a new international division of labour and make the external sector
conducive to the developing countries.
The conference further realised that the developing nations must progressively
diversify their economies (from primary producing to industrial) and develop new
lines of manufactured exports.
The Conference also recommended that each developed nation should transfer
annually at least one per cent of its income to developing countries by way of foreign aid.
The Conference also put forward a number of recommendations to improve the
invisible trade of developing countries through development of shipping tourism etc.
58
Out of these laudable recommendations of UNCTAD, nothing was, however,

substantially translated into practice. Though there has been some progress in the
matter of international trade arrangements and a notion is credited among the rich
nations for giving tariff preference to the poor countries in the western markets, no
action for the same has been taken so far.
Likewise, regarding foreign aid programme, onl y a few advanced nations have
implemented the one per cent target (as laid down by UNCTAD) for development
assistance. In 1966, for instance, only 0.62 per cent of the GNP of developed
countries was transferred (in the form of aid) to poor nations. Moreove r, aid is given
on hard terms and conditions so that poor countries are burdened with high debt-
servicing charges.
In short, the first UNCTAD Conference programmes made very slow progress
in concrete action.
1. UNCTAD-II
UNCTAD was formed as a plenary body of U.N. members, which was to meet
normally at intervals of not more than three years. However, the second meeting of
UNCTAD took place four years after the first conference in Geneva. UNCTAD-II was
held in New Delhi from February 1 to March 28, 1968. Thi s session had an
ambitious agenda to confront the problems of the less developed countries and
other major issues relating to world trade and development. The broad objectives of
this conference were as follows.
 To reappraise the economic situation and its implications in implementing
the recommendations of the UNCTAD-I
 To achieve specific results by initiating appropriate negotiations which
ensure real progress in international cooperation for development; and To
explore and investigate matters requiring through study before fruitful
agreements can be envisaged.
With these objectives in view, the various items on the agenda of the
conference were grouped into the following major categories:
2. Trends and problems in world trade and development.
i) Commodity problems and policies of different nations.
ii) Problems of growth, development finances and aid to developing nations.
Synchronization of national and international policies in this regard.
iii) Specific problems of developing nation regarding
(a) Expansion and diversification of exports of finished (manufactured)
and semi-finished goods.
(b) Invisibles, including shipping
iv) Problems and measures of economic integration and trade development
among developing nations.
v) Special measures for economic and social up lift of the less developed
among the developing nations.
vi) General review of the work and functions of UNCTAD.
59
The final resolution of the conference, therefore, stressed that a mutually

acceptable system of generalised, non -reciprocal and non-discriminatory
preferences beneficial to the developing countries should be immediately
established. It is popularly known as the Generalised scheme of preferences
(G.D.P). The objective of such a system of preferences has been:
3. To increase export earnings of the less developed nations.
 To promote their industrialisation, and to accelerate their rates of economic
growth.
 To meet this end, the conference established a special committee on
preferences as a subsidiary organ of the trade and Development Board,
which was to pay special attention to this matter.
The less developed nations urged at the conference that the advanced
countries should remove all trade barriers in their markets to the entry of poor
nations' commodities in primary, processed or semi -processed forms. But no due
attention was paid to this plea.
The conference did not deal with the possibilities of agreed solution to the
problem of prices, trade liberalisation and increased access to the markets of advanced
countries for the primary products exported by the less developed nations.
It may, however, be said that the New Delhi session of UNCTAD could not
make any significant achievements and concluded with disillusionment writ large
all over. Most of the problems fa2ing the conference remained unsolved, as there
~as no consensus on them.
4. UNCTAD-III
The beginning of 1970s witnessed far-reaching changes in international trade
and economy. With Britain's entry into the European common Market, GATT's new
drive to enlarge markets, G.S.P. of UNCTAD, S.D.R.s constituting a new shape of
world monetary system, a new era in trade and international relations of developed
and countries has started. UNCTAD-III amongst these sought to pen a novel
chapter on various problems of trade and economic relations between developed
and developing nations.
UNCTAD-III meeting was held at Santiago in Chile from 13th April to 17th
May, 1972. 120 member nations participated in this meeting, of which 96 were
developing countries, forming the so-called "Group of 77." At this meeting, these
underdeveloped nations vehemently attacked the developed world for their
unsympathetic attitude towards helping the poorer nations through trade.
A major issue which was raised at the Santiago conference was that of the
problem of changes in shipping freights. It was estimated that 1/3 of total deficit in
the balance of payments of L.D.C.s was due to high shipping freights. Further, at
present, the rich nations own 92 per cent of the world's merchant marine, when
nearly 2/3 of weight originates from the developing countries. This definitely
imposes a drain on their (L.D.C.s) foreign exchange resources and puts up the cost
of their imports and exports. There has been a positive gain on the subject of
shipping at the Santiago session as the greatest triumph has been over the
agreement reached on an international code of conduct. In particular, the UNCTAD
60
Director of the committee on invisible sounded a warning that if such a code was
not formulated and honored, there would be pressure for national re gulations.
A notable achievement of UNCTAD-III has been that the governments of the
developed nations agreed unanimously, in principle, on the necessity of shipping
conferences providing the relevant financial data while making a demand for
revision in freight rates. There was also a consensus on the necessity in freight
rates. There was also a consensus on the necessity of arbitration in cases of
disputes between shippers and shipping lines, but compulsory arbitration was,
however, ruled out by the developed nations.
Failure of UNCTAD-III should not discourage developing countries; it should
rather bring them more closely together to solve their intricate trade problems. The
zeal of collective bargaining will brighten its colour one day. UNCTAD has failed but
UNCTAD must succeed.
5. UNCTAD-IV
In February 1976 a meeting of the Group of 77 developing nations was held at
manila, and passed a resolution that the developing countries ought to design a
programme of action against advanced nations to protect their trade interests. The
resolution also contained that during the forthcoming UNCTAD-IV, the participants
should be induced to restructure the commodity trade of the developing countries with a
view to create a common fund to maintain buffer stocks of 10 primary commodities and
to ease the terms of obtaining foreign aids from the advanced nations.
The representatives of the developing countries did agree to give debt relief and
debt-scheduling in favour of the poor countries. However, with respect of the
integrated commodity programme the participants of the conference failed to come
to any settlement, so the matter was kept pending on the future conference.
6. UNCTAD-V
On May 7, 1979 a meeting of UNCTAD-V was held in Manila for nearly a month.
150 member countries participated in this conference. But, on the core issues no
concrete resolution were passed. However, some agreements were unanimously made on
the issues like transfer of resources to developing countries, protectionism, etc. some
ideas about monetary reforms have been placed for future consideration. It also
recommended all the members to refrain from exploiting resources until the adoption of
an international regime by the U.N. conference on the law of the Sea.
7. UNCTAD-VI
In July 1983, the sixth session of the UNCTAD was held at Belgrade. Its focus
was on the attainment of a new international economic order. It reiterated its full
support to earlier programmes approved in previous UNCTAD sessions. Monetary
issues such as SDR allocation, adequacy of fund resources, conditionality etc. were
discussed. Question of improvement in the quality of aid was examined.
Improvements in institutional arrangements were suggested.
8. UNCTAD VII AND VIII
UNCTAD VII took place in geneva during 1987. The develope d countries
expressed their desire to provide debt relief to the poor countries. The members,
61
however, felt that the institution is becoming progressively marginalised and

economic issues are becoming more and more complex.
UNCTAD VIII took place in Cartegena de Indias, Colombia, during February
1992. Creation of new standing committee on poverty alleviation, economic
cooperation among developing countries and services.
9. UNCTAD IX
UNCTAD IX met at Midrand in south Africa in 1996. It discussed issues
pertaining to WTO, sustainable development and debt relief to developing nations.
7.4 REVISION POINTS
 Organisation of UNCTAD
 Main functions of UNCTAD
 UNCTAD and GATT
 Recommendations of UNCTAD
1. What are the main intentions of the UNCTAD?
2. UNTAD conference was to assist the developing countries achieve accelerated
economic development?
7.6 SUMMARY
This lesson tries to explain origin of UNCTAD and its functions,
recommendations of eight rounds of UNCTAD.
1. First United Nations Conference on Trade and Development (UNCTAD) met
in which year and place.
2. UNCTAD stands for ___________________________________________.
1. UNCTAD, Annual Reports.
Newyork.
7.9 ASSIGNMENTS
1. What are the main objectives UNCTAD?
2. Discuss the role of UNCTAD in less developed countries.
1. Jagdish Bhagawathi, International trade & Economics expension. The American
2. Economics Review, Dec.1958.
3. Peter B.Kenen, The International Economy, Third Edition, CAMBRIDGE
EDITION, 1994.
5. M.C.Vaish & Sudama Singh, International Economics sixth Edition, reprint 1995.
1. Distingush the functions between UNCTAD and GATT
7.12 KEY WORDS
 Committee on Commodity-Manufactures-Shipping, Invisible and financing
related trade, Group of 77, New International Economics order.

62
LESSON – 8
RATE OF EXCHANGE AND FOREIGN EXCHANGE CONTROL

8.1 INTRODUCTION
Foreign exchange is a collective term that embraces all kinds of negotiable claims
expressed in foreign money as seen by the domestic buyer or seller. In simple words
and rather in a restricted sense, by foreign exchange we mean foreign currencies.
However, in a broad sense, the term refers to the system of external or international
payments. It covers methods of payment, rules and regulations of payment and the
institutions facilitating such payments. Foreign exchange controls have been instituted
for various purposes. The important reason accounting for the presence of exchange
controls is the presence of centrally controlled Economics and exchange control is
nearly on extension of central control to the international sector of the Economy
8.2 OBJECTIVES
 To express the details of transactions in the exchange mark et under
inconvertible paper money standard.
 To explain various types of exchange rates and their advantages and
disadvantages in international money market.
 To explain the governmental intervention in the matter of foreign exchange
and the exchange rates.
8.3 CONTENTS
3.1 Types of exchange rates
3.2 Case for and case against fixed exchange rate
3.3 Flexible exchange rate, Merits and Demerits
3.4 Floating Exchange rate
3.5 Objectives of Exchange Control
3.6 Methods of Exchange Control
3.6.1 Direct Method
3.6.2 Indirect Method
Meaning
The transactions in the exchange market are carried out at what are termed
exchange rates. It is the price of foreign money. Thu s exchange rate may be defined
as the price paid in the home currency for a unit of foreign currency. Or more
simply rate of exchange is the price of one national currency in terms of another. It
can be quoted in two ways. One unit of foreign money to so many units of the
domestic currency; or A certain number of units of foreign currency to one unit of
domestic money.
For instance 1. u.s. dollar = Rs.30 or Re.1 = U.S.3.33 cents.
It is obvious that the reversibility in the mode of quoting exchange rate does
not alter the basic value of one currency in terms of another.
8.3.1 Types of Exchange Rates
63
1. Fixed, Flexible and Floating Exchange Rates

Under inconvertible paper money standard, there can be two types of exchange
rates-fixed and flexible. Under the present monetary system of the International
monetary Fund (IMF), fixed /stable exchange rates are known as pegged exchange
rates or per values. In fact, IMF was established with the object of stabilizing the
rates of exchange, with proper safeguards for adjustments whenever necessary. On
the other hand, free or flexible exchange rates are left uninterrupted by the
monetary authorities to be determined by the conditions of demand for and supply
of foreign exchange and are perfectly free to fluctuate according to the changes in
the demand or supply forces, if there are no restriction on buying an d selling in the
foreign exchange market. The free are floating rate is allowed to seek its own level,
as no par of exchange is fixed. Sometimes when a currency is floated, a former fixed
par no longer applies, and the government also does not come to enforce it.
2. Fixed or P egged Exchange Rates
Under fixed or pegged exchange rates all exchange transactions take place at
an exchange rate ie. Determined by the monetary authorities.. The authorities may
fix., the exchange rate by legislation or intervention in currency markets. They may
buy or sell currencies according to the needs of the country or may take policy
decision to appreciate or depreciate the national currency. The following arguments
are usually advanced for and against the system of fixed exchange rates.
8.3.2 Case for and Case against Fixed Exchange Rates
1. Case for Fixed Exchange Rates
The following advantages are claimed for the system of stable or fixed
exchange rates as against the flexible exchange rates:
i. Stable exchange rates ensure certainty and confidence and thereby promote
international trade. Foreigners can easily know how much they will have to
pay and how much they will receive in terms of the home currency.
Instability in exchange rates constitutes an additional risk in internati onal
trade which hampers its growth.
ii. A system of stable exchange rates will facilitate long -term international
investments. With an unstable exchange rate, lenders and investors will not
be prepared to lend for long-term investments. Thus, a system of stable
exchange rates is essential for the orderly growth of international investment
markets.
iii. A fixed rate of exchange is more suited to a world of currency areas, such as
the sterling area.
iv. Fixed exchange rates will remove the dangerous possibilities of spec ulation.
In a system of stable exchange rate there will be no panic flight of capital
from one country to another.
v. A stable exchange rate will also assist in internal economic stabilization. On
the other hand, freely fluctuating exchange rates encourage abnormally high
liquidity preference which leads to hoarding, to higher rates of interest, to
shrinking of investment and to unemployment.
vi. For small countries like Denmark and Great Britain in whose economy
foreign trade plays a crucial role, stabilization of the exchange rate is the
64
only right policy. For it the country does not stablize her exchange rate,
fluctuations in the rate of exchange will disturb her foreign trade and within
the propensity and growth of country.
2. Case against Fixed Exchange Rates
All these conditions are absent today. Hence, the smooth operation of a system
of fixed exchange rates is not possible. Due to the interest defects in the IMF
system, the pegging of exchange rates has not been a very successful phenomenon.
The major shortcomings of the IMF are as follows:
2. Since the system of pegged rates followed by the IMF permits occasional
changes in exchange rates, it turns out to be a system of managed flexibility.
It involves various difficulties such as: (i) deciding as to when to change the
external value of a currency; (ii) establishing acceptable criteria for
devaluation; (iii) measuring the extent of devaluation needed to re -establish
equilibrium in the balance of payments of the devaluating country. Further,
due to more frequent exchange rate changes and the national monetary
policies followed today, the need for reserves is becoming greater and greater
which tends to aggravate the problem of international liquidity
 The system of pegged rates may cause a large -scale destabilizing speculation
in the foreign exchange markets.
 Pegged rates are not permanently fixed. As such, it deters long-
term foreign investment assumed to be available under genuinely
fixed rates system.
 The present system of pegged rates thus provides neither the
expectation of permanently stable rates not the continuous and
sensitive 'adjustment of a freely fluctuating rate.
 The monetary policies followed by' the countries individually are
rarely coordinated today. The objectives of achieving a high and
stable level of employment and income at home and maintenance
of external stability of the value of money are distinctively
inconsistent.
8.3.3 Flexible Exchange Rates
Flexible, floating exchange rates are determined by market forces. The
monetory authorities do not intervene for the purpose of influencing the exchange
rate. Under a regime of freely fluctuating exchange rates, if there is an excess
supply of a currency, the value of that currency in foreign exchange markets will
fall. It will lead to depreciation of the exchange rate. Consequently equilibrium will
be restored in the exchange market on the other hand shortage of a currency will
lead' to appreciation of exchange rates thereby leading to r :storation of equilibrium
in the exchange market. These market forces operate autOI"1atically without any
action on the part of monetary authorities. We study below the case for and
advantages of flexible exchange rates.
1. Merits of Flexible Exchange Rates
65
The system of flexible exchange rates is a simple one. The exchange rate moves
in a free market to equate supply and demand, so that the market is cleared off and
the problem of scarcity or surplus of anyone currency is automatically solved.
Hence, under the flexible exchange rate system, the countries do not have to make
extra efforts in inducing changes in prices and incomes in order to maintain or re -
establish equilibrium in the balance of payments.
Being very sensitive, the system of flexible rates facilities continuous adjustments,
so that the adverse effect of prolonged period of disequilibrium is avoided.
It is the only system which permits the continued existence of free trade and
convertible currencies. This system does not require the use of exchange controls,
which is generally associated with the system of pegged rates.
The flexible exchange rates system also confers more independence on the
countries in their domestic policies.
So men argues that flexible rates system tends to reinforce the effectiveness of
monetary policy.
The system of flexible exchange rates eliminates the need for official foreign
exchange reserves.
2. Demerits of Flexible Exchange Rates
Under a system of flexible rates, as the friend of the rate of exchange can
usually be assessed through the forward market, the risk will be minimized an d
trade will grow.
It flexible exchange rates can do more than fixed rates to adjust external
balances and prevent recurrent balance of payments crises, then their effect on
international lending is likely to be more beneficial.
Typical economic, political and social forces have induced various countries to
constitute the sterling bloc and these forces would not be enfeebled if the sterling is
allowed to have flexible exchange rates.
The system of stable exchange rates has many inherent weaknesses. Even
under severe exchange control it, press up currency speculation and endangers the
stability in the external value of home currency, ultimately leading to devaluation.
When countries follow different economic policies, cost-price relations alter
frequency and the economic stability will be hampered.
8.3.4 Floating Exchange Rates
The system of floating exchange rates is not one of free flexible exchange rates
but of "managed floating". It has rarely operated without government intervention.
Periodic intervention by governments has led the system to be called a "managed"
or "dirty" floating system.' In 1977 when the intervention was very heavy, it was
characterized as a "filthy" float. When governments do not intervene, it is a "clean"
float. But the possibilities of a clean float are very remote. Thus a system of
managed floating exchange rates is evolving where the central banks are trying to
66
control fluctuations of exchange rates around some "normal" rates even though the
second Amendment of the fund makes no me ntion of normal rates.
8.3.5 Meaning and Objectives of Exchange Control
Exchange control implies governmental intervention in the matter of foreign
exchange and the exchange rates. According to Haberler, exchange control is "state
regulation excluding the free play of economic forces from the foreign exchange
market." Thus, when the exchange control is full -fledged the foreign exchange
market is ruled by the government's ~ decision. It forbids free transactions in
foreign exchange.
The main objects of foreign exchange control may be stated as follows.
1. Conservation of Foreign Exchange
Exchange control may be introduced by the monetary authority to converse
the gold, bullion, foreign exchange currencies etc., i.e., foreign exchange resources,
of the country.
2. Check on Flight of Capital
Under the free exchange system there is the danger of huge outflow of capital
which may weaken the country economy. Especially erratic shifting of capital tend
to accentuate the disequilibrium in the balance of paymen ts and it also adversely
affects future growth of the country. Exchange control, .however, offers a prompt
and effective means to prevent such capital outflows.
3. Correcting Disequilibrium in Balance of Payments
To correct the deficit in the balance of payments, the country needs to put a
curb on imports. For this purpose, the use of Foreign exchange earnings by
exporters for import of goods must be checked through appropriate exchange
control. Again, the exchange control is essential to implement an import policy very
effectively. In short, exchange control may be introduced may be introduced to
protect the country's balance of payments.
4. Stabilization of Exchange Rates
In a free exchange market exchange rate is a fluctuating phenomenon. Thus,
exchange control may be adopted to maintain exchange rates at an arbitrarily
chosen fIxed point.
5. Protecting the Interest of Home Producers
Exchange control may be used for giving protection to domestic producers by
restricting the competition from foreign traders through import control.
6. Redemption of External Debt
The Government may use the exchange control device to obtain foreign
exchange needed for repaying or servicing of its foreign loans.
7. Effective Economic Planning
For successful economic planning, foreign trade has to be coordinated with
planned programmes and the outflow of capital should be restricted in order to
make it available to domestic industries. Thus, for mitigating the economic
67
repercussions of foreign trade endangering economic plans, e xchange control

becomes inevitable.
8. Maintaining Over-value of Home Currency
Sometimes exchange control is used in order to maintain the extemal value of
the country's currency at an overvalued level. For this purposes, the available
foreign exchange resources are rationed for use of specific and important purposes
only and the government thereby seeks to adjust total demand with total supply of
foreign currencies.
9. Generating Public Revenue
Under exchange control by adoption multiple exchange rates system the
Government can yield revenue income through difference of average buying and
selling rates1 less costs of administration.
10. To Prevent Spread of Depression
Depression in a big country may spread from country to country via international
economic relations. Exchange control may work as a preventive against such spread of
depression by controlling the main doors-imports and exports.
8.3.6 Methods of Exchange Control
The various methods of exchange control may broadly be classified into two types,
direct and indirect. Direct methods of exchange control include those devices which are
adopted by govemments to have an effective control over the exchange rate, whil e
indirect methods are designed to regulate international movements of goods.
There are many way to introduce exchange control in an economy. These are
usually classified into two groups:
(i) Direct Exchange Control and
(ii) Indirect Exchange Control.
8.6.1 Direct Exchange Control
In direct exchange control, certain measures are adopted which effectuate
immediate direct restriction on foreign exchange from all sides-its quantum, use
and allocation.
In general, direct exchange control includes measures like:
(i) Intervention
(ii) Exchange restrictions;
(iii) Exchange clearing agreements;
(iv) Payment agreements; and
(v) Gold policy.
(i) Intervention
It refers to the government's intervention or interference in the free working of
the exchange market with a view to overvalue or undervalue the country's currency
in terms of foreign money.
68
(ii) Pegging operation

Government intervention in the foreign exchange market takes the form of
'pegging up' or 'pegging down' of the currency of the country to a chosen rate of
exchange. since undervaluation or overvaluation is not the equilibrium rate, it has
to be pegged. Thus pegging means keeping fixed exchange value of a currency;
however, intervention may be practiced by a government without resorting to
pegging as such.
(iii) Exchange Restrictions
Exchange restrictions refer to the policy or measures adopted by a government
which restrict or compulsory reduce the flow of home currency in the foreign
exchange market.
(iv) Blocked Accounts
Under the condition of severe financial crisis, a debtor country may adopt the
scheme of blocking the accounts of its creditors. .
Blocked accounts refer to bank deposits, securities and other assets held by
foreigners in a country which denies them conversion of these into their home
currency. Blocked accounts thus Gannot be converted into the creditor country's
currency. Under the blocked accounts scheme, all those who have to make
payments to any foreign country will have to make them not to the foreign creditor
directly but to the central bank of the country which will keep the amount in the
name of the foreign creditor. This amount will not be available to the foreigners in
their own currency, but can be used by them for purc hase in the controlling
country.
Blocked accounts system has two drawbacks: (i) It reduces international trade
to a minimum, and (ii) it leads to black-marketing in foreign exchange.
(v) Multiple Exchange Rates
Under this system, different exchange rates are set for different classes and
categories of exports and imports. Generally a low rate, i.e., low prices of foreign
money in terms of domestic currency, is confined to imports of necessary items
having an inelastic demand, while a high penalty rate is fi xed for the imports of
luxury item. In short, the multiple exchange rates system implies official price
discriminatory policy in foreign exchange transactions.
(iv) Exchange Clearing Agreements
It-was a system for the direct bilateral bartering of goods on a national scale.
Under this device, two countries engaged in trade pay to their respective central banks
the amounts payable to their respective foreign creditors. These central banks then use
the money in offsetting the corresponding claims after fixing the value of the currencies
by mutual agreement. And, importers have to deposit their payment with the central
bank can use such money to pay the domestic exporters. This economises exchange
needs for trade. therefore, exchange clearing device is helrrul to a country which has
little or no foreign exchange reserves and which is more interested in selling than
buying. However, this system is essentially one of offsetting each other's payments,
69
and the basic assumption is that countries entering into such an agreement should try
to equalise their imports and exports so that there will be no necessity for either
making or receiving payments from the other countries.
(vii) Payment Agreements
Under this scheme a creditor is paid as soon as informants. Under this
scheme a creditor is paid as soon as information is received by the central bank of
the debtor country from the creditor country's central bank that its debtor has
discharged his obligation and vice versa. By designing the arrangement for mutual
credit facilities, thus, possibilities of delay are ruled out. Payment Agreements have
the advantage that direct relation between exporters and importers are maintained.
(viii) Gold Policy
Through a suitable gold policy, the country can bring the desired exchange
control. for this the country may resort to the manipulation of the buying and
selling prices of gold which affect the exchange rate of the country's currency.
8.6.2 Indirect Exchange Control
Apart from the direct methods, there are several indirect methods also
regulating the rates of exchange. Important ones are briefly discussed below.
(i) Changes in Interest Rates
Changes in interest rate tend to influence indirectly the foreign exchange rate. A
rise in the interest rate of a country attracts liquid capital and banking funds of
foreigners. It will tend to keep their funds in their own country. All this tends to
increase the demand for local currency and consequently the exchange rate move its
favour. It goes without saying that a lowering of the rate of interest will have the
opposite effect.
(ii) Tariffs Duties and Import Quotas
The most important indirect method is the use of tariffs and import quotas and
other such quantitative restrictions on the volume of foreign trade. Import duty
reduces imports and with it rise the value of home currency relative to foreign
currency. Similarly, export duty restricts exports; as a result, the value of home
currency falls relative to foreign currencies. In short, when import duties and quotas
are imposed, the rate of exchange tends to go up in favour of the controlling country.
(iii) Export Bounties
Export bounties of subsidies increase exports. As such the external value of
the currency of the subsidy-giving country rises. It should be noted that import
duties and export bounties are treated as indirect instruments of exchange control
only if they are imposed with the object of conserving the foreign exchange.
Otherwise, the fundamental aims of import duty is merely check imports and that
of export bounty is to encourage exports.
(iv) Concluding Remarks
There are various forms in which the exchange control system may be devised.
Each form has its own merits and demerits and each one serves a specific purpose.
70
Therefore, the whole economic situation of foreign trade of a cuuntry must be

carefully viewed while resorting to exchange control and mo re than one methods
must be combined together.
In so far as the correction of disequilibrium is concerned, it should be noted
that exchange control does not basically solve the problem, it only prevents the
situation from becoming worse.
Moreover, exchange control is always an inhibiting factor to an expanding
world trade. With its adoption the gains from international trade are reduced and
channels of trade are distorted. It also checks the flow of international investments
which are very essential for the planned development of world's economic
resources. In normal peace times, therefore, it has hardly anything to commend.
That is why? International Monetary Fund also has mentioned the removal of
exchange controls as one of its major objectives.
8.4 REVISION POINTS
 Types of exchange rates
 Case for and case against fixed exchange rate
 Flexible exchange rate, Merits and Demerits
 Floating Exchange rate
 Objectives of Exchange Control
 Methods of Exchange Control
(i) Direct Method
(ii) Indirect Method
1. What are the methods used to quote Rate of exchange of one national
currency in terms of another?
2. What are the different types of exchange rates?
3. What is meant by export bounties?
4. Whether pegging operation is direct method or indirect method?
8.6 SUMMARY
This lesson explains the methods of payments, rules and regulations of
payments and the institutions facilitating such payments. This lesson is explaining
the corrections of disequilibrium and it is also to be noted that exchange control
does not basically solve the problem.
1. Rate of exchange is the price of one national currency in terms of another.
True/False
2. It can be quoted in two ways. True/False
3. What are the objectives of exchange control?
4. What is direct method of exchange control?
1. Jacob Viner, “Studies In The Theory of International Trade,” 1937 Pp 3 77 -81
71
3. Robert A.Mundell, international economics, 1968, Macmillan & co, Newyork

8.9 ASSIGNMENTS
1. What is fixed exchange rate? Explain its advantages and disadvantages.
2. What is flexible exchange rate?
3. What is meant by Exchange Control?
4. What are the various methods of exchange control?
Newyork.
2. Jagdish Bhagawathi, International trade & Economics expansion. The
Edition, 1994.
5. M.C.Vaish & Sudama Singh, International Economics sixth Edition, reprint 1995.
1. Find out the reasons for exchange rate fluctuation in india in the post
liberalisation period.
2. International monetary fund has mentioned the removal of exchange
controls as one of its major objectives. Why?
8.12 KEY WORDS
 Fixed exchange rate, Flexible exchange rate, Plugged exchange rate, Floating
and Managed floating, Dirty floating. Conservation of foreign exchange,
Protecting interest of home producers, BOP, Redemption of external debt,
Pegging operation, Gold policy, export boundaries.

72
LESSON – 9
BALANCE OF TRADE AND BALANCE OF PAYMENTS CURRENT

AND CAPITAL ACCOUNTS AND ADJUSTMENTS MECHANISM
9.1 INTRODUCTION
Originally by the Balance of Payments was meat an excess of payment over the
receipts. Under the gold standard, excess meant an outflow of gold from the
country. Any disequilibrium (deficit or surplus) in the balance of payments when it
persists continuously is certainly undesirable because of its disastrous effects on
the country's economy and orderly world trade. Thus, one of the basic problems of
international economic policy is restoring 'even balance' to a country whose balance
of payments is seriously and persistently in surplus or in deficit, since both are bad
for normal internal economic operations and international economic relations.
The various measures that may be used for correcting an adverse balance of
payments are of two kinds:
a. Monetary measures and
b. Non-monetary measures.
Monetary measures include (1) Deflation, (2) Exchange Depreciation,
(3) Devaluation and (4) Exchange control.
Non-Monetary measures include (1) Tariffs-import duties, (2) Import quotas
and (3) export promotion policies and programs.
9.2 OBJECTIVES
 To state that the international BOP of a country is a statistical record in the
form of a balance sheet comprising all its transactions with rest of the world
or with another country during given period of time.
 To explain a nation’s BOP equilibrium situation either through monetary
authority or by non-monetary measures.
9.3 CONTENTS
9.3.1 BOP accounts
9.3.2 Importance of BOP
9.3.3 Structure of BOP
9.3.4 Balance of trade and BOP
9.3.5 Balancing the BOP
9.3.6Monetary Measures
9.3.7 Non-monetary Measures
9.3.8 Conclusion
9.3.1 The Balance of Payments (BOP) Accounts
The principal tool for the analysis of the monetary aspects of international
trade is the balance of international payment statements. The balance of
international payments, or simply the balance of payments, of a country is a
systematic record of all international economic transactions of that country during
a given period, usually a year.
73
Balance of payments accounting of any county uses a double entry system of

recording accounts with the rest of the world. Thus, the balance of payments
account is divided into transactions giving rise to payments (or debit) and receipts
(or credit). All international transaction that result in payments in India (receipts to
India), for instance, increase India's stock of, or claims on foreign currencies, and
may be recorded as credit (or plus) entries in India's balance of payment.
Conversely, all payments by India (receipts to foreigners) deplete. India's stock of or
claims on, foreign currencies, and may be recorded as debit (or minus)entries in the
balance of payments account.
However, the balance 0 payments account should not be confused with the
conventional accounting balance sheet of "Profit and Loss" statement of a firm. A
balance sheet shows assets and liabilities at a particular time, whereas a balance of
payments account groups transactions during a year. However, a country's real
economic gain or loss from international trade or transactions cannot be expressed
mathematically like an income state ment; the real gain to a country from
international transactions is social or utility gain.
The balance of payments thus forms part of the national or social accounts of
a country, because, in social accounting, the economy is classified into: (I) Firms
(Production sector), (ii) Households (Consumption sector), (Hi) Government sector,
(iv) Capital sector and (v) Rest of the world sector. The transactions in the "rest of
the world sector" are known from the balance of payments of the country. It shows
what is sent to the foreign countries by the nation and what is received from them
in return.
9.3.2 Importance of Balance of Payments (BOP)
Basically, a balance of payments account is complied to measure gross deficits or
surpluses with the rest of world. Howeve r, the balance of payments statement has
become increasingly important in recent years, as it has been devised to describe in a
concise fashion the state of international economic relationship of the country, as a
guide to its monetary, fiscal, exchange and other policies. It offers a major control tool for
both analysing and directing a country's international economic position.
Thus, the fundamental aim of the balance of payments statement is to inform
governmental authorities about the international econ omic position of the country,
assist them in reaching decisions on monetary and fiscal policies and foreign trade
and foreign exchange phenomena.
The balance of payments analysis shows whether a country is paying its way
internationally, whether it is payi ng for its imports and other current payment
transactions by exporting goods, drawing down its foreign assets, accumulating
foreign liabilities, or receiving donations. Thus, whether a country is borrowing or
lending money, whether its currency and foreign exchange resources are becoming
weaker or stronger, and how effective are the monetary and exchange control
policies it pursues, can be studied from the balance of payments statement of the
country, Balance of payments accounting also permits an appraisal of the effects of
74
currency devaluation, i.e., whether exports have increased to a considerable extent

through devaluation or not can be easily seen from the current account section of
the balance of payments statement.
Above all, more recently, with the development of national income accounting
the balance of payments account has been used to measure the influence of foreign
trade and transactions on the national income of the country.
9.3.3 The Structure of Balance of Payments (BOP)
A balance of payments statement summarises of nation's total economic
transactions undertaken on international trade account. It is usually composed of
two sections:
1. The current account, and
2. The capital account
1. Current Account
Current account mainly consists of two sub-groups
Merchandise or the trade account, and Invisible account
In the trade or merchandise account, only the transactions relating to goods are
entered, i.e., all goods exported and imported are recorded in the trade account.
The invisible account usually consists of services account and the gifts or
charities account (usually referred to as "transfer payments").
It is interesting to note here that the International Monetary Fund includes the
following items as invisible transactions:
i) International transportation of goods, including warehousing while in
transit and other transit expenses,
ii) Travel for reasons of business, education, health, international
conventions or pleasure,
iii) Insurance premiums and payment of claims,
iv) Investment income, including interest, rents, dividends, profits,
v) Miscellaneous service items such as advertising, commissions, film
rental, pensions, patent fees, royalties, subscriptions to periodicals and
memberships fees,
vi) Donations, migrant remittances, legacies,
vii) Contractual amortization and depreciation of direct investment.
viii) Further, the current account also comprises items of "unilateral" or
"unrequited transfer" in the transfer payment account.
On the credit side, we have thus, "unrequited receipts", Le., receipts which the
residents or a country receive "for free", without having to make any present or
future payments in return. Such items are gifts, indemnities etc. received from
foreigners. Similarly, on the debit side, there are "unrequited payment" when gifts,
indemnities etc. are made to foreigners. Such unrequited or unil~teral transfers
lack specific return as a quid pro quo.
75
2. Capital Account
Capital account deals with payments of debts and claims. It consists of all such
items as may be employed in financing both imports and e xports, namely, private
balanced, assistance by the international institutional agencies and specie flow, and
balances held on government account. Accordingly, we shall have private capital
account, international institutional capital account, specie accou nt, and government
capital account. Balances in these accounts may rise or fall from year to year depending
upon the account movements or fluctuations in other items on capital account.
Under private capital account, all the private balances held by corporate bodies or
commercial banks are recorded. Private capital account usually consists of short and long
period adjustments. Obviously, the short period capital movements are caused by changes
in short-term liabilities. The long-term capital movement is affected by capital investment,
direct or indirect. Direct investment reals investment in industries. Indirect or portfolio
investment is financial investment in holding of existing assets.
International institutional capital account consists of assistance from the short
and long-term capital supplying agencies like MF, BIS (Bank of International
Settlements), World Bank, International Finance Corporation, International
Development association etc.
Specie account records the movements (inflow and outflow) of gold bullion. The
balances on government capital account consist of all governmental capital
transactions in the form of grants or loans, short-term as well as long-term.
9.3.4 Balance of Trade and Balance of Payments (BOP)
There is a marked distinction between the two concepts, balance of trade and
balance of payments. Balance of payments is a wider concept than balance of trade,
In fact, balance of payments includes in its structure the notion of balance of trade.
As we know, a country may export and import many items some of which are
visible and some are invisible. Balance of trade refers only to the value of imports
and exports of goods, Le., visible items only. Import or export of goods is a visible
item because it is an open trade between the countries and can be easily certified
by the customs officials. On the other hand, balance of payments is more
comprehensive in scope and covers the total debits and credits of all items, visible
as well as invisible. Thus, balance of trade is only a segment of the balance of
payments. It simply refc:;rs to the difference between the value of visible exports
and visible imports.
9.3.5 Balancing the Balance of Payments (BOP)
Since the balance of payments statement is drawn up in terms of debits and
credits based on a system of double-entry book-keeping, if all the entries are made
correctly, total debits must equal total credits. This is because two aspects (debits
and credits) of each transaction recorded are equal in amount but appear on the
opposite sides of the balance of payments account. In this accounting sense,
balance of payments of a country must always balance.
76
To illustrate the point, a simple hypothetical account of a country's balance of

payments is represented in Table 1.
In Table 1 rows 1 and 8 show the country's visible exports and imports. Rows
2 and 9 refer to items of invisible trade. Rows 3 and 10 pertain to investment
incomes. Rows 4 and 11 denote unilateral transfers like donations and gifts (private
as well as official). Rows 5,6, 12 and 13 show capital movement. Rows 7 and 14
reveal gold outflow and gold inflow. Further items 1 to 7 enumerate receipts and
items 8 to 14 show payments. Item 15 refers to the act of errors and omissions as a
balancing factor. Thus, total value of both credit and debit sides is the same (Rs.
1000 in our example).
Moreover; all the items 1,2,3,4,8,9,10, and 11 in current account have flow
dimension pertaining to the current year for which the balance of payments
statement is made. Items 5,6,7,12,13 and 14 belong to capital account. As
Professor Bo Sodersten puts, these items are of a distinct nature, because they do
not represent flow magnitudes per period of time but are instead changes in stock
magnitude during the period under consideration.
Table 1
Country's Balance of Payments Account
Credit (Receipts) I. Current Transactions Debit (Payments)
Rs. In Rs. in
Item Item
Crores Crores
Merchandise Trade (goods exported) 200 Merchandise Trade (goods imported) 300
Services exported 100 Services imported 200
Income from foreign Investments 200 Foreign income from investment at home 200
Unliateral receipts 200 Unilateral payments 100
Sub-Total 600 Sub-Total 800
II. Capital Transactions
Loan-term borrowings 200 Long-term lending 80
Short-term borrowings 100 short-term lending 60
Sale of gold / assets 100 Purchase of gold/ assets
Sub – total 400 Sub-total 190
Errors and Omission 10
Grand Total 1000 1000
For analytical purpose again, following Bo Sodersten, we may break the

balance of payments account vertically and reconstitute it as shown in Table 2
77
Table 2
EXTERNAL BALANCE (Prepared From Table 1)
Credit – Debit = Surplus/ Deficit
Balance of Trade (1 & 8) 200 – 300 = -100
Balance of Services (2 &9) 100 – 200 = -100
Balance of Investment income (3 & 10) 100 – 200 = -100
Balance of unilateral transfers (4 & 11) (Rows I + II + III + IV) 200 – 100 = + 100
Balance of Current Account 600 – 800 = -200
Balance of loan transactions (5,6, 12 & 13) 300 – 140 = + 160
Balance of monetary gold Flows(7 & 14) 100-50 = + 50
Balance of Capital Account (Rows V &VII) 400-180 = +220
Errors and Omission –10
Net + 200
Balance of Payments 1000-1000 = 0
Roman figures in the bracket indicate rows in Table 1

It should be noted that the two accounts - current and capital- in the balance of
payments should necessarily balance. The surplus on the trade or current account must
be equal to the deficit on the capital account or the deficit on the current account must
be equal to the surplus on the capital account. Thus, the balance of current account
need not be equal but can show a surplus or a deficit. In our example, the balance of
current account shows a deficit (-) of Rs. 200 crores. There is however, a corresponding
surplus of Rs. 200 crores in the balance of capital account. As a result, the credit and
debit sides of the balance of payments are exactly balanced.
If in the actual balance of payments account the credits and debits do not balance,
the balance is usually achieved. by adding an item called errors and omissions. As a
matter of fact, the net total of errors and omissions is a balancing item that compensates
for any excess of recorded credits over recorded debits or vice versa. (In our example, it is
10 crores). This total can be large, when balance of payments data are collected from
diverse sources, Its analytical significance lies in 'suggesting a capital outflow (not
otherwise recorded) or a wrong valuation of merchandise.
It must be noted that the inevitable equality of debits and credits in the
balance of payments follows from interlocking definitions and systems of
accounting and does not necessarily imply equilibrium in the real economic sense.
9.3.6 Monetary Measures
The following monetary measures are usually employed for boosting up exports and
checking or curtailing imports. So as to correct the adverse balance of payments.
1. Deflation
A traditionally suggested method of correcting disequilibrium IS to deflate the
home currency. Deflation means contraction of the home currency through dear
many and credit policy and fall in the cost and prices of domestic goods. Naturally,
domestic goods and so the exporting items of the country in the foreign market
become relatively cheaper and demand for them will rise so that exports will
increase. Moreover, deflation attempts to restrict home consumption and through
reduction of incomes; demand for goods at home will be reduced and more surplus
78
may become available for export purposes. So that exports may be increase wi th a
fall in domestic income of the people, their propensity to import will also decline
and imports will be decline curtailed. Thus, when exports increase and imports
decline as an impact of deflationary monetary policy a deficit in the balance of
payments gets automatically corrected.
However deflation is fruitfully employed when countries are on a gold standard
or on fixed exchange rates, because its workability assumes that exchange rates are
unchanged during its course.
2. Exchange depreciation
Another important method of correcting an adverse balance of payments is to
depreciate the external (exchange) value of the home currency. This device
obviously assumes that the country has adopted flexible exchange rate policy.
Thus, exchange depreciation is feasible. By exchange depreciation is meant a
decline in the rate of exchange of one country in terms of another's. Suppose the
Indian rupee exchanges for 3 cents of the American currency. If India experiences
an adverse balance of payments with regard to America, the Indian demand for
American currency. i.e. dollar will rise. Consequently, the price of dollars in terms
of the rupee will appreciate in its external value, while the rupee will depreciate in
its external value. Thus, the rate of exchange of Indian rupee in terms of American
dollar may change from Rs. 1=3 cents to Rs.1=2 cents. Such a depreciation in the
value of rupee is what is called exchange depreciation.
Exchange depreciation of a country will tend to cheaper its'domestic goods for the
foreigners so that its exports will be boosted up, while its imports will be costlier so
that they will tend to decline. Thus imports will be checked and exports will be
stimulated by a fall in exchange rate or the external value of the currency of a country.
The country may thus achieve a favourable balance to payoff an earlier deficit.
3. Devaluation
A most commonly adopted method consists in devaluation of the currency of a
country faced with an adverse balance of payments. Devaluation simply means the
lowering of the external value of the country's currency by an official edict. This
may be either is relation to the currencies of all the countries or in terms of gold or
it might be done in relation to the currencies of only a few selected countries. For
instance, the Indian rupee' on June 6, 1966 was devalued 36% in terms of gold,
and by 57.5% in terms of the American dollar and English pound-sterling. Thus, in
relation to the U.S. currency, the official exchange rate of rupee which was Rs.1=22
cents, has been fixed at Rs.1=13.3 cents after devaluation. It should be noted that
the difference between devaluation and depreciation of exchange is that while
devaluation is reduction of the external value of a currency as arbitrarily decided
upon the Government, depreciation stands for automatic reduction in the external
value of a country's currency by market forces. Some times the act of devaluing a
currency might simply mean giving official recognition to what might be termed the
defector depreciation of the currency in the foreign exchange market. In substance,
however, both imply the same thing, Le. lower value of the local currency in terms
of foreign currencies. Similarly, both devaluation and depreciation produce similar
79
effects increase exports. Curtail imports and ultimately correct an adverse balance
of payments and move it a favourable one.
The success of devaluation depends upon the following conditions.
a. A Fairly Elastic Demand
A fairly elastic demand for imports and exports will ease the way of the
successful functioning of devaluation to achieve its desire goal.
b. Structure of Imports and Exports
If the devaluing country's export consists of non -traditional items, and has a
large demand from the rest of the world, it can gain by improving terms of trade
due to increase in world's demand for its product induced by devaluation. But, if its
exports are largely of primary products and ~mports are of manufactured goods.
raw materials etc., it will have always unfavourable terms of trade, so it will lose
more under devaluations.
c. Domestic Price Stability
Maintenance of internal purchasing power of a devaluing country is very
essential to realize fruitful effects of devaluation. Success of devaluation requires
that when the external value of a currency is deliberately reduced, the internal
value of the currency should not change, otherwise the whole purpose will be
defeated. In other words, the cost-price structure of devaluing country should not
alter thus should be no inflation.
d. International Cooperation
Devaluation will serve its purpose only if other countries do not retaliate by
resorting to simultaneous devaluation. The rest of the world must be prepared to
cooperate fully with the country devaluing its currently by not raising import duties
or giving export bounties or devaluing their own currency which also may tend to
nullify the beneficial efforts of devaluation to the country under consideration.
e. Co-Ordination of Other Measures
If the act of devaluation is co-ordinated with a hike in import duties, Lowering of
export duties, liberalization of export licenses, fixing of import quotas, export
promotion program etc, devaluation will prove to be more efficacious. If however, other
measures are contrarily adopted the desirable effects of devaluation will be hampered.
f. Exchange Control
Under this method all the exporters are directed by the exchange control
authority, usually the central bank, to surrender their foreign exchange earnings to
it, and the foreign exchange is rationed out among the li censed .importers. Thus,
under exchange control none but the license-holders are allowed to import goods. A
quota for different items of imports is also fixed from time to time by the authority.
The balance of payments is thus rectified by keeping imports well within the limits
of export earnings and the foreign exchange balances.
9.3.7 Non-Monetary Measures
Among non-monetary measures import duties and quotas are generally used
for correcting an adverse balance of payments.
a) Tariff Duties
80
As a restrictive measure import duties are commonly imposed when such

duties are levied on selected imported items their prices would rise so that
contraction in import demand would occur. If exports quantum remaining the same
are being increasing and when the volume of imports declines the adversity in the
balance of payments is reduced or eliminated.
b) Import Quotas
Fixing of import quotas is another and perhaps a better device used for correcting
an adverse balance of payments. Under the quota system, the Government may fix and
permit the maximum quantity or value of a commodity to be imported during a given
period. By restricting imports through quota system, deficit is reduced or eliminated
and thereby the balance of payments position is improved.
As direct method of correcting disequilibrium in the balance of payments,
import quotas are assumed to be better than import duties. Quotas have immediate
action of restriction of restricting imports as the marginal propensity to import
becomes zero once the quota limit is reached. Thus the effect of quotas on
quantitative restriction of import is explicit. But the balance of payments effects of
imports duties are not so certain.
c) Export Promotion Policies and Programs
Along with these measures the government of a deficit c ountry has to formulate
and implement export promotion policies and programs. Export duties may be reduced,
export bounties may be provided and subsidies to exporting industries may be given as
incentives for exports. Import substitution producing industri es may be induced and
encouraged by the state to be more self-sufficient and less reliant on imports.
All these non monetary measures are, however, considered more effective,
significant and are normally applicable than monetary measures in correcting the
adverse balance of payments. Fixing of import quotas and tariffs to check imports
and launching upon export promotion programs is perhaps the best solution of
correcting the disequilibrium in the balance of payments. Devaluation of currency
may be resorted to only under abnormal conditions.
9.3.8 Conclusions
Above all what is basically needed for correcting the long -term deficits in the
balance of payments of under-developed countries is large-scale direct export
promotion measures, properly planned and exe cuted and ever-increasing efforts to
mould the structure of their exports, with the diversification of supply of
exportables as per the changing pattern of world's demand.
9.4 REVISION POINTS
 BOP accounts
 Importance of BOP
 Structure of BOP
 Balance of trade and BOP
 Balancing the BOP
 Monetary Measures
 Non-monetary Measures
81
1. What is current account?

2. What are the components of capital account?
3. What are the monetary measures used to control exchange?
4. What is meant by exchange depreciation?
9.6 SUMMARY
This lesson reveals the structure of balance of payment and illustrates country’s
BOP. This lesson explains adjustments mechanism in BOP through Monetary
measures and non-monetary measures.
1. Name the components of current account?
2. Specie account records the movements (inflow and outflow) of gold bullion.
3. Whether tariff duties are coming under monetary measure or non -monetary
measure?
4. Name any two non-monetary measures used to control exchange?
2. Robert A. Mundell, International Economics, 1968, Macmillan & Co, Newyork.
9.9 ASSIGNMENTS
1. Distinguish between current account and capital account in BOP of a country.
2. What do you understood by fundamental disequilibrium in BOP?
3. What is mean by Adjustment Mechanism?
4. Explain the monetary measures to boost exports and imports of a country.
2. Peter B. Kenen, The International Economy, Third Edition, Cambridge Edition, 1994.
4. M.C. Vaish & Sudama Singh, International Economics sixth Edition, reprint 1995.
5. Bo Sodersten, International Economics, II Edition 1980.
1. Compare the bop of India with other Asian Countries.
2. Explain any one exchange control methods adopted by India in the
Pre-Liberalisation period.
9.12KEY WORDS
 Debit & Credit, Current & Capital account, Merchandise accounts, Invisible
accounts. Deflation, Depreciation, Devaluation, price Elastic demand, Tariff
duties, Import Quotas.

82
LESSON – 10
REGIONAL ECONOMIC INTEGRATION: CUSTOMS UNION

10.1 INTRODUCTION
Discriminatory trade policy has become a common feature with almost all
countries of the world today. Economic integration may be defined both as a
process and as a state of affairs.
10.2 OBJECTIVES
 To explain the chapter of the describe structure of inter-regional economy
through formation of a customs union or free trade within the region.
10.3 CONTENTS
10.3.1 Concept of Regional Economic Integration
10.3.2 Types of Economic Integration
10.3.3 Advantages of Regional grouping
10.3.4 Custom Union
10.3.5 Economic integration
10.3.1 Concept of Regional Economic Integration
Regional economic integration implies the creation of the most desirable
structure of inter-regional economy through the formation of a customs union or of
a free, trade within the region and deliberately introducing all desirable elements of
coordination and unification. Generally, such an economic integration would have
to pass through three distinct but inter-dependent stages of cooperation, co-
ordination and finally, of full integration. In fact, economic integration may be
identified with liberalisation of trade as well as factor movements. The
harmonisation or coordination of economic policies as a whole would follow once a
common market has been set up.
10.3.2 Types of Economic Integration
Economic cooperation or integration may take anyone or a combination of any
of the following from:
(i) Economic Union, (ii) Customs Union, (iii) Free Trade Area, (iv) Sectoral or
Partial Integration, (v) Preferential Trading, (vi) Long-term Trade Agreements.
10.3.3 Advantages of a Regional Grouping
The healthy effects of such a regional economic integration are presumed to be
as follows:
 Since a regional common market obviously provides a much larger market than
that offered by the domestic market of a single country, economies of scale, both
internal and external, become possible with the widened size of the market.
 Secondly, the large market so created would permit a high degree of
sophistication and specialisation of products conducive to furthereance of
modern industrial development. Moreover, the possibility of specialisation
for regional trade would encourage the flow of investment in to industries
83
which have a comparative cost advantage, so that gains from international

trade would rise.
 Apart from an increase in the volume of total trade as a result of such
integration, a favourable change in the cost and price structure may also be
effected along with the desirable change in the structure and composition of
foreign trade.
 Furthermore, this may facilitate the realisation of the optimum allocation of
resources, and thus, lead to an increase in efficiency in production.
 Above all, the increased possibilities of competition in a regional common
market would ensure that all benefits accruing to the producers from the
existence of a large market would be passed on to the consumer.
 In fine, thus there can be an increase in the general welfare due to better
production and enhanced consumption, and a rise in real income generated
by the overall growth an development. In short, thus, it has been conceived
that, as a factor in the development of the less developed countries, a
regional common market is economically far superior to the relatively small
national market sheltered behind a protectionist tariff wall.
10.3.4 Custom Union
Establishment of a customs union of the six member countries is the crucial
provision under the ECM. This customs union signified the composition of a sing le
customs territory of the participating nations as against the customs territory of
each individual nation. In such a customs union there is complete freedom for the
movement of goods and services between the outside world and the partner
countries. In a customs union, the members adopt a uniform tariff policy applicable
to ~he outside world, and all tariffs between members are to be abolished.
10.3.5 Economic Integration
The purpose of the Common Market is not limited to the creation of a customs
union. It aims at a much broader economic union. The avowed objective of the
Treaty of Rome includes free moodily of labour and capital within the Economic
Community and harmonisation of national economic policies of the member States,
to promote throughout the Community a harmonious development of economic
activities and closer relations between its member nations.
To accomplish all these, the member States are committed under the Treaty of
Rome to:
a) The removal of customs duties and import-export quotas between each
other;
b) The establishment of a common tariff and commercial policy for the outside
nations;
c) The abolition within the Community of obstacles to the free movement of
labour and capital;
d) The inauguration of common agricultural and transport policies;
e) The establishment of a system ensuring competition in the Common Market;
84
f) The adoption of procedures for coordination of the economic policies of

member nations and for remedying their balance of payments
disequilibrium. Basic goals in the coordination process include external
balance full employment and price stability;
g) The coordination of legislation of member states for the smooth functioning
of the Common Market;
h) The establishment of a European social Fund for easing the readjustment
problem of workers experiencing unemployment as a consequence of trade
liberalisation;
i) The creation of a European Investment Fund which will give financial aid to
the industrialists to improve workers conditions in the underdeveloped
regions of the component states. Another purpose of such a Fund is to help
in financing projects of European importance;
j) The association of dependent overseas territories within the Economic
Community. Hence, an Overseas Development Fund was also established in
1958, empowered to provide loans for projects in the affiliated overseas
territories.
Above all, under the Treaty of Rome, provision was made to admit new
membership, full or associate. As such, for instance, in 1961, England and
Denmark negotiated for full membership which, however, did not materialise.
Under the provision for associated membership, however, Greece was accepted as
an associated member of ECM in 1961.
10.4 REVISION POINTS
 Concept of Regional Economic Integration
 Types of Economic Integration
 Advantages of Regional grouping
 Custom Union
 Economic integration
1. What are the advantages of regional grouping?
2. What are the different types of economic integration?
10.6 SUMMARY
This lesson explains Economic integration would have to pass through distinct
inter-department States of Co-operation, co-ordination and full integration.
1. What is ECM?
2. Discriminatory trade policy has become a common feature with all countries
of the world today. True / False
1. Peter B. Kenen, The International Economy, Third Edition, Cambridge
Edition, 1994.
85
10.9 ASSIGNMENTS
1. What is mean by Regional Economic integration?
2. What is customs union?
1. Robert A. Mundell, International Economics, 1968, Macmillan & co, Newyork.
2. Jagdish Bhagawathi, International Trade & Economics expansion. The American
Economics Review, Dec.1958.
4. M.C. Vaish & Sudama Singh, International Economics Sixth Edition, Reprint
1995.
5. Bo Sodersten, International Economics II Edition 1980.
1. List out the Asian Countries coming under different economic integrations.
10.12 KEY WORDS
 Custom Union, Economic integration, European investment fund, Treaty of
Rome.

86
LESSON – 11
THE EUROPEAN ECONOMIC COMMUNITY

11.1 INTRODUCTION
The ultimate form is full economic integration by the completion of removal of
all barriers to intra- bloc movement of goods and factors, unification of social and
Economic policies.
11.2 OBJECTIVES
 To understand the most comprehensive economic integration of European
community and the gains from this union of European countries by forming
a common integrated market.
11.3 CONTENTS
11.3.1 The Nature of EEC
11.3.2 Objective
11.3.3 Functions
11.3.1 The Nature of EEC
Europe's most comprehensive attempt at economic integration was marked by
the formation of the European Economic Community (EEC). In a treaty signed in
Rome on March 24, 1957, six nations of Western Europe, viz., France, Germany,
Italy, Belgium, Netherlands and Luxemburg agreed to merge their separate
economies into one single economic unit by establishing a common market area
also known as the "Inner Six" arrangement. This six-country arrangement for the
creation of a "common market' area is popularly known as the European Common
Market (ECM) which came into being on January 1, 1958.
11.3.2 OBJECTIVE
The board mission of the Common Market as defi.n.ed in the Treaty of Rome is
to form a customs union of the six signatories in order to have a large market
areas, leading gradually, by the end of the transition period (roughly 1970), to an
economic union, and ultimately to a complete political integration - a Federation of
Europe. However, the immediate objective of the EEC was to achieve the
advantages of increased specialisation and division of labour by making the unified
area of ""nner Six" a more powerful unit which ensures the harmonious
development of economic activities, continuous and balanced growth, increased
stability, a more rapid improvement in the standard of living and closer relations
between its component states.
 The European Economic" Community is a kind of super-government in
economic affairs and relations of the Community. Like any government,
there it has specific agencies to execute, to legislate and to settle disputes.
 Its principal administrative body is the European Economic Council. It is sort of
economic cabinet of the six component states. It has one member from each of
these six states. It functions as an executive agen t of the Community. It has to
make day-to-day decision formulate rules of conduct, make new legislation and
good members to carry out the provisions of the Treaty
87
 To assist the Council, a nine-man European Commission is set up. The

Commission has to look to the application of the Treaty, study special
problems and make recommendations to the Council.
 A Monetary committee is also formed as an advisory body to watch over
balance of payments and such other matters of the Community.
In addition, the European Economic and Social Committee is created as an
advisory body, which consists of representatives of industry, workers, farmers, etc.
 The Assembly of 106 members is created for the legislative purposes of the
Community.
 A Court of Justice is also set up to adjudicate disputes.
 The major impact of EEC has been the achievement of larger markets and
markets and economies of scale. Within the community, the gains from
trade creation in manufactured goods are substantial on account of their
high elasticities.
 Further, the most significant result of the Common Market has been the
breaking up of monopolies in countries like France. Hence, the gains in
productive efficiency could be secured due to promotion of competition
 Moreover, special attention could be given to the improvement of
underdeveloped areas within the Community by pooling financial and other
resources.
 Mobility of labour and capital could be increased within the Community
which makes it possible to have reallocation of some industries to make
advantage of ready access to markets or raw materials and so to reduce
transport costs.
 The United Kingdom did not join the ECM. Hence, in 1959 due to the fear of
adverse effect on her trade by the Common Market, the U.K. formed a rival
group known as European Free Trade Association (EFTA). EFTA comprised
of seven members: the U.K., Austria; Denmark, Norway, Portugal, Sweden
and Switzerland, popularly designated as the "Outer Seven." Its main goal
was to reduce tariffs among The member countries. Thus, initially in 196 0
mutual tariffs were reduced by 20 per cent. However, under EFTA each
nation retained its won external tariffs. It also did not provide for the free
movement of labour or capital.
 As a result of EFTA's leadership, however, the U.K. instituted powerful
negotiations in' 1961 for membership in the Common Market. She, however,
demanded special terms and concessions in regard to future dealings with
members of the Imperial Preference System with the other EFTA nations and
such other matters like her domestic agricultural programmes. EEC
members did not want to bow down just for the sake of expansion of
members!1ip. Hence, the result was deadlock in negotiations.
 The European Community (EC) is a glaring example of an economic iteration
through. The membership of the customs union. EEC raised from original 6
nations in 1957 to 12 nations by 1987.
88
 A customs union was achieve by the EEC by 1970 yet it did not succeed in
creating a common market until 1985. In 1985, a detailed programme was
charted to achieve real economic integration through common market.
In recent years the 1992 plan envisaged great unification of the European
community by introducing the followIng reforms:
a. Simplification of Border growing by relaxing internal border controls. Since
1993, the EC dominated its customs check at borders.
i) Removal of technical barrier to trade.
ii) Removal of government procurement obstacles with the EG commission
taking more control of this problem. This makes public procurement
more competitive among the member.
iii) Removal of hindrances to capital movement with the opening up of the
financial services such as banking and insurance.
iv) Permitting the professionals such as lawyers, accounts, etc. to practice
anywhere within the EC.
v) Removing the differences in tex systems by adopti ng standardised
system of a value-added tax in the community.
b. Foreign multinational corporations actually find an advantage in 1992 EC
reforms in their favour in competing with may EC firms as they have already
been treating the EC as unified market since long.
c. In short, with 1992 reforms for further unification the EC furnishes a living
example of programme towards economic integration in the pocket of global
economy and trade.
d. The Cecchini Report 1988, claimed that the member countries of the EC
would benefit by the 1992 plan, with a one-time boot to GDP spread over a
number of ears of 4.5 per cent to 6 per cent, a gain of 2 million new jobs,
and price-reduction by about 6 per cent. To some critics like Baldwin Flam
this is an overestimation. In their opi nion, gain is to be 2 per cent rise in
GDP and a million job creation.
The potential welfare gain of forming a common marked by the EEC are
measured by Cecchini Report (1988) (as in Table1).
Gains to the EEC from the process of forming an Integrated Common Market
Effect in Rise in
Rise in
Process (Consumer) Employment
GDP (%)
Price(%) (1,000)
1. Removal of Customs Formalities 0.4 -1.0 200
2. Opening of Public Procurement 0.5 -1.4 350
3. Liberalisation of Financial Services 1.5 -1.4 400
4. Supply-side Effects:
(Reduction in Production Costs) 2.1 -2.3 850
Source: Paolo Cecchini: The European Challenge: 1992 C Brook Field vs. Gower, 1988, p.98
89
The 1992 programme, however, created some suspicions among the European
Economic Community (also called European Unions) major trading partners the Japan
and the United States. It was referred to as a protedonist step towards creation of
Fortress.' The basic fear was that with the minimisation of its internal barriers the
European Union might tend to raise its external barriers. Several misgivings held by
the trading partners of the EU were confirmed by the evidences, such as:
i) The EU insisted that foreign producers have to monitor their exports in
certain sensitive industries (such as Japanese cars, American Television
after 1992, programme, etc) for an undefined period of time.
ii) The anti-dumping measures ofthe EU.
iii) Insistence on guaranteering the use of total input components upto 60 -80
per cent by the foreign companies establishing their production plan ts in the
European Union.
iv) The EU's reluctance to liberalise agricultural and cinematic products.
v) The EU's new industry policy focussed electronic, aircraft and computer
sectors of self-sufficiency.
Against, the pessimistic protectionist interpretation, there was also an
optimistic view held by some. It is argued that in the long run, the economic growth
of the EU envisaged under the 1992 programme would be equally shared by the
foreign companies. Besides, it is not in the interest of the EU to pursue
protectionists policy as the union is not against globalisation. Moreover, its exports
and inward investment are of a very high order. The EU contributes one -fourth of
the total world exports, which accounts for about 15 per cent of its gross domestic
product. Almost 40 per cent of foreign direct investment (FDI) of the developed
countries goes to the European Union.
 The Nature of EEC
 Objective
 Functions
1. State few objectives of EU.
2. What are the functions of EEC?
11.6 SUMMARY
The major impact of EEC has been the achievement of larger markets and
economics of scales.The most significant result of common market has been
breaking up of monopolies in Europe. Hence, going in productive efficiency could be
due to promotion of competition.
1. Whether EU is useful for its member countries?
2. What is EFTA stands for?
90

Newyork.
11.9 ASSIGNMENTS
1. What is European Economic Community?
2. What are the objectives of EEC?
1. Jagdish Bhagawathi, International Trade & Economics expansion. The
2. Peter B. Kenen, ‘The International Economy’, Third Edition, Cambridge
Edition, 1994.
3. Francis Cherunilam, International Business, Third Edition 2004.
1995.
5. Bo Sodersten, International Economics II nd Edition 1980.
1. List out the member countries of eu and take one country and study eu’s
role in development of that country.
11.12 KEYWORDS
 EEC (EC), ECM, EFTA, Inner Six, FDI.

91
LESSON – 12
NEW INTERNATIONAL ECONOMIC ORDER: NORTH-SOUTH

CO-OPERATION-SAARC
12.1 INTRODUCTION
The fundamental god of SAARC is to accelerate Economics and social
development through optimum utilisation of their human and material resources.
Increasing inter regional trade is a major means of promoting regional economic co-
operation.
What is PESTLE Analysis? PESTLE analysis, which is sometimes referred as
PEST analysis, is a concept in marketing principles. Moreover, this concept is used
as a tool by companies to track the environment they’re operating in or are
planning to launch a new project/product/service etc.
12.2 OBJECTIVES
 To outline the objectives, functions and gains from NIEO and North-South
cooperatives.
 To passage structure, function and objectives of SAARC with special
reference to India.
 To outline the objectives, functions and gains from cooperatives.
 It gives a bird’s eye view of the whole environment from many different
angles that one wants to check and keep a track of while contemplating on a
certain idea/plan.
12.3 CONTENTS
11.3.1 NIEO
11.3.2 The North-South Dialogue
11.3.3 Objectives of NIEO
11.3.4 Programme of action for NIEO
11.3.5 SAARC
11.3.6 PESTLE analysis
11.3.6.1 Political factor
11.3.6.2 Economic factor
11.3.6.3 Social factor
11.3.6.4 Technological factor
11.3.6.5 Environmental factor
11.3.6.6 Legal factor
12.3.1 New International Economic Order (NIEO)
At the Sixth Special Session of the United Nations General Assembly in 1975,
a declaration was made for the establishment of a New International Economic
Order (NIEO). It is regarded as "a turning-point in the evolution of the international
community." NIEO is to be based on "equity, sovereign equality, common interest
.and cooperation among all States, irrespective of their social an d economic
systems, which shall correct inequalities and redress existing injustices, make it
92
possible to eliminate the widening gap between the developed and the developing
countries and ensure steadily accelerating economic and social development and
peace and justice for present and future generation."
Though the declaration on the NIEO by the General Assembly (GA) is of recent
origin, the idea is not altogether a new one. In fact, similar resolution was ado~ted
by the G.A. itself long back in 1952. Agai n, similar demands were raised time to
time by the UNCTAD since its inception in 1964. A.K. Das Gupta, however, says
that what is spectacular about the NIEO Declaration is its timing.
The NIEO aims at a development of the global economy as a whole, with the
set up of inter-related policies and performance targets of the international
community at large.
12.3.2 The North-South Dialogue
IN 1977, there was a negotiation between the North and South at the Paris
talks. The: developed countries agreed to provide of an additional U.S.! billion
towards the Aid fund for the development of the poor nations.
In December 1977 the Willy Brandt Commission was set up with view to
review the issues of international economic development. The WB Commission's
Report (1980) stresses the need for North-South co-operation. Besides
establishment of a common development fund, its recommendations include
strengthening the structure of development lending a code of conduct for the
multinational corporations as well as the need for inter-governmental cooperation
in minatory and fiscal areas along with the trade policies. It also proposed for the
increasing participation of developing nations in the decision -making processes at
international level.
12.3.3 OBJECTIVES OF NIEO
In essence, the NIEO aims at social justice among the trading countries of the
world. It seeks restructuring of existing institutions and forming new organisations
to regulated the flow of trade, technology, capital funds in the common interest of
the world's global economy and due benefits in favour of the LDCs. It has the spirit
of a "world without borders."
 It suggests more equitable allocation of world's resources through increased
flow of aid from the rich nations to the poor countries.
 It seeks to overcome world mass misery and alarming disparities between
the living conditions of the rich and poor in the world at large.
 Its aim is to provide poor nations increased participation and have their say
in the decision-making processes in international affairs.
 Among the other objectives, the NIEO envisages the establishment of a new
international currency, the implementation of SDR aid linkage, the increased
stabilisation of international floating exchange system and the use of IMF
funds a sincerest subsidy on loans to the poorest developing countries.
 The crucial aim of the NIEO is to promote economic development among the
poor countries through self-help and South-south cooperation.
93
 The NIEO intends to deal with the major problems of the South, such as
balance of payments disequilibrium, debt crisis, exchange scarcity etc.
12.3.4 Programme of Action for the NIEO
Its action programme narrates the need for a more rapid economic
development of the poor countries and their increasing share in the world's trade at
favourable terms of trade.
The era of 1990s is characterised by liberalisation and globalisation . WTO is
giving a new mode to form a newer global economic order. New challenges and new
problems have been emerging. With market-orientation, growing speculation is
taking its toll. With unchecked speculations currency trading, a kind of Rober
Capitalism has also cropped up. It is posing a new danger to developing countries.
A heavier speculation can ruin the economy in a .global set up despite its good
economic fundamentals-as has been the case with Malaysia recently. The UNCTAD
has to play a positive role in safeguarding the basic interest of the developing
countries at all levels. Negotiating with UN, WTO and IMF the developing countries
trade and finance have to be inserted from speculators' attack from outside. Check
through transparency and other devices have to be asked for.
12.3.5 South Asian Association for Regional Co-Operation (SAARC)
In recent years the global economy is witnessing certain dynamic and
unprecedented change. Regional economic integration is becoming its prominent
feature. In the South Asian Association for global economic system, south Asian
Association for Regional Co-operation (SAARC) is the youngest regional grouping
among the seven Asian countries, namely, India, Pakistan, Maldives, Sri Lanka,
Bangladesh Bhutan and Nepal, came into existence in the first summit at Dhaka in
1985. This group comprises over one -sixth of the world's population. Nearly 50 per
cent of the world's poor dwelve in this region.
The following are the main objectives of SAARC:
 To promote the socio-economic welfare and cultural development of the
 people in the region.
 To achieve the goal of collective self-reliance.
 To encourage active collaboration in the economic social , technical and
 scientific fields among the grouping nations.
 To strengthen over-all co-operation and harmonious economic and political
relations among the countries of the SAARC.
 To facilitate optimum utilisation of human and material resources.
 To develop free regional trade.
 To stimulate investment flows and accelerate pace of economic development.
Empirical evidences show that there is an ample scope for extending trade and
economic relations among the countries constituting SARRC region. These
countries are competing for trade with other countries. For instance, India and
Bangladesh compete for their share in the world markets for jute goods. India, Sri
94
Lanka and Pakistan compete for readymade garments] similarly India and Sri
Lanka. Compete for tea. Through SAARC this kind oi internal competition can be
eliminated and the countries can improve their terms of trade by evolving - unified
marketing policies and practices. There is also a good potential to expend intra -
regional trade among these countries on bi-lateral terms.
The SAARC countries should assume foreign trade as a priority sector under
the rapid globalisation of their economies. They must have co-ordination of their
technical knowhow and scientific research with mutual help for their industrial
growth and development. They have to redesign their tariff and non -tariff structure
under a liberalised trade policy. They must built up a system for a common
information pool to take advantage in global markets. The member countries of the
SAARC would benefit themselves through co-operation in supply of inputs for
production and a market for the outputs. The countries should ignore their political
differences for the sake of regional co-operation and common welfare.
The progress of SAARC, in general has remained very slow due to lack of
adequate consensus among the countries. For the success of SAARC co -operation
the countries should undergo preferential trading arrangements, open data bank
start joint R & D programme and develop a common support service programme.
12.3.6 Pestle Analysis
Pestle
Pestle is a mnemonic which in its expanded form denotes P for Political, E for
Economic, S for Social, T for Technological, L for Legal and E for Environmental. It
gives a bird’s eye view of the whole environment from many different angles that
one wants to check and keep a track of while contemplating on a certain idea/plan.
The framework has undergone certain alterations, as gurus of Marketing have
added certain things like an E for Ethics to instill the element of demographics
while utilizing the framework while researching the market.
 There are certain questions that one needs to ask while conducting this analysis,
which give them an idea of what things to keep in mind. They are: What is the
political situation of the country and how can it affect the industry?
 What are the prevalent economic factors?
 How much importance does culture has in the market and what are its
determinants?
 What technological innovations are likely to pop up and affect the market
structure?
 Are there any current legislations that regulate the industry or can there be
any change in the legislations for the industry?
 What are the environmental concerns for the industry?
All the aspects of this technique are crucial for any industry a business might
be in. More than just understanding the market, this framework represents one of
the vertebras of the backbone of strategic management that not only defines what a
company should do, but also accounts for an organization’s goals and the strategies
stringed to them.
95
It may be so, that the importance of each of the factors may be different to
different kinds of industries, but it is imperative to any strategy a company wants
to develop that they conduct the PESTLE analysis as it forms a much more
comprehensive version of the SW OT analysis.
It is very critical for one to understand the complete depth of each of the
letters of the PESTLE. It is as below:
1. Political: These factors determine the extent to which a government may
influence the economy or a certain industry. [For example] a government may
impose a new tax or duty due to which entire revenue generating structures of
organizations might change. Political factors include tax policies, Fiscal policy,
trade tariffs etc. that a government may levy around the fiscal year and it may
affect the business environment (economic environment) to a great extent.
2. Economic: These factors are determinants of an economy’s performance that
directly impacts a company and have resonating long term effects. [For
example] a rise in the inflation rate of any economy would affect the way
companies’ price their products and services. Adding to that, it would affect
the purchasing power of a consumer and change demand/supply models for
that economy. Economic factors include inflation rate, interest rates, foreign
exchange rates, economic growth patterns etc. It also accounts for the FDI
(foreign direct investment) depending on certain specific industries who’re
undergoing this analysis.
3. Social: These factors scrutinize the social environment of the market, and
gauge determinants like cultural trends, demographics, population analytics
etc. An example for this can be buying trends for Western countries like the
US where there is high demand during the Holiday season.
4. Technological: These factors pertain to innovations in technology that may
affect the operations of the industry and the market favourably or
unfavourably. This refers to automation, research and development and the
amount of technological awareness that a market possesses.
5. Legal: These factors have both external and internal sides. There are certain laws
that affect the business environment in a certain country while there are certain
policies that companies maintain for themselves. Legal analysis takes into
account both of these angles and then charts out the strategies in light of these
legislations. For example, consumer laws, safety standards, labour laws etc.
6. Environmental: These factors include all those that influence or are
determined by the surrounding environment. This aspect of the PESTLE is
crucial for certain industries particularly for example tourism, farming,
agriculture etc. Factors of a business environmental analysis include but are
not limited to climate, weather, geographical location, global changes in
climate, environmental offsets etc.
There are many templates available for companies to conduct PESTLE
analysis. Many organizations have provided information regarding their PESTLE
analysis as case studies available on the Internet
96
A PESTEL analysis is a tool or framework for marketers. You can use it if you
are seeking to analyze and screen the external marketing environment of you
company. The strategic management tool gauges the macro environmental factors.
The results make decision taking much easier.
The different macro-environmental factors can affect business strategies. So, it
is vital to follow the PESTEL framework. The aim is to assess how exactly the
factors influence business performance.
one can judge 6 types of environmental influences in the PESTEL framework.
They are political, economic, social, technological, environmental and legal. You
should not see these factors as i ndependent factors. They are all interdependent.
For example, technological advances can affect the economy in different markets.
The 6 factors mentioned above make up the acronym PESTEL. Each letter
represents one factor. It is often called PESTLE. You may these factors using other
tests too. PEST, STEEP, and STEEPLE are similar analyses. Some other variations
are STEPJE, STEP, and LEPEST. Managers can choose any based on the nature of
the firm and the factors they wish to study.
I have discussed some characteristics of these environmental factors below.
The article will help you find which factors are more important to your company’s
strategy. This might serve as a preliminary inspiration. You will have to dig deeper
into the details to take accurate decisions.
12.3.6.1 POLITICAL FACTORS
 Politics plays an important role in business. This is because there is a balance
between systems of control and free markets. As global economics supersedes
domestic economies, companies must consider numerous opportunities and
threats before expanding into new regions. It also applies to firms identifying
optimal areas for production or sales. Political factors may even help determine
the location of corporate headquarters.
Some of the political factors you need to watch are:
 Tax policies
 Stability of government
 Entry mode regulations
 Social policies (e.g. social welfare etc.)
 Trade regulations (e.g. the EU & NAFTA)
 The political risk in Singapore is quite low. In fact, the Political and Economic
Risk Consultancy (PERC) states that the country enjoys the lowest political
risk in the continent. It is a democratic country. The people elect
representatives to lead the nation. Since its independence, they cherished
relative political stability. Today, the stability has translated to peace and a
better standard of living. Moreover, It has transformed into improved business
opportunities for Singapore.
 However, there have been reports about restriction of free speech for opposition
parties in Singapore. It is said that the value of free speech for the parties is
97
limited. The defamation laws require opposition parties to be careful that political
comments do not lead to costly defamation suits or imprisonment.
 The fear of legal suits limits the potential of free speech for opposition parties
in Singapore. Another factor is limited dissemination of CONTENTS. These
discourage the opposition parties. As a result, the contribution to free speech
activities and inter-party debates is low.
12.3.6.2 Economic Factors
 Economic factors are metrics that measure the health of any economic region. The
economic state will change a lot of times during the firm’s lifetime. You have to
compare the current levels of inflation, unemployment, economic growth, and
international trade. This way, you can carry out your strategic plan better.
Some examples of economic factors you can judge are:
 Disposable income of buyers
 Credit accessibility
 Unemployment rates
 Interest rates
 Inflation
 The economy of Singapore is a vibrant free-market economy. It is developing at
a very fast pace. The country’s per-capita income is the highest in ASEAN. A
corruption-free environment supports the business sector. It is among the
most competitive countries. The educated and motivated worke rs strengthen
it. The legal and financial business framework helps as well.
 Recently, the government has invested in diversifying the economy. As a
result, the tourism, pharmaceutical, and many other industries have
flourished. One of the main reasons behi nd the success is its strategic
geographic location. The government is an imperative and active player. It
owns substantial productive assets. Cheaper labor cost from neighboring
countries helps Singapore save a lot of costs.
Some constraints on Singapore’s economic performance are the following:
 Labor shortages
 Rising labor costs
 Declines in productivity
123.6.3 Social Factors
 Social factors assess the mentality of the individuals or consumers in a given
market. These are also known as demographic factors. Social indicators like
exchange rates, GDP and inflation are critical to management. They can tell
when it is a good time to borrow. These factors help find out how an economy
might react to certain changes.
The following are some social factors to focus on:
 Population demographics: (e.g. aging population)
 Distribution of Wealth
 Changes in lifestyles and trends
 Educational levels
98
 Socially, Singapore is like any other Eastern country. It still follows traditional family
values. It is true that the younger generation has the tendency to follow western
culture and values. The residents work hard and fulfill the materialism desire. This
urge to do well has increased nation productivity. The business sectors can,
therefore, expect higher purchasing power from customers. Reports suggest that
most Singaporeans dislike blue collar jobs like construction.
 Literacy rate in the country is very high. Primary schooling is compulsory in
Singapore. Parents must ensure children’s regular attendance. Good command
of English and Chinese languages gives Singaporeans an advantage. It helps to
attract international trade and foreign investment.
12.3.6.4 Technological Factors
 This step entails recognizing the potential technologies that are available.
Technological advancements can optimize internal efficiency and help a
product or service from becoming technologically obsolete. Role of technology in
business is increasing each year. This trend will continue because R&D drives
new innovations.
 Recognizing evolving technologies to optimize internal efficiency is a great asset in
management. But, there are few threats. Disruptive innovations such as Netflix
affect business for CD-players. The best strategy is to adapt according to the
changes. Your strategies should sidestep threats and embrace opportunities.
This is a large challenge for management. Below is a list of common technological factors:
 New discoveries and innovations
 Rate of technological advances and innovations
 Rate of technological obsolescence
 New technological platforms (e.g. VHS and DVD)
 I can assure that one of the main reasons behind the change in lifestyle and
quality of life is the technological advancement.
 As you might have guessed, the internet plays a role in Singapore’s
advancement. It eased communication and increases connectivity. The cost
and time of conducting business lowered. It also boosted the social
networking. The residents could easily connect to the rest of the world.
 The IT infrastructure in Singapore is praise -worthy. The penetration rate for
household broadband internet is over 70% . E-commerce and eB2Cmodels
have flourished in turn. More than 10Mbps of broadband internet service is
available. The widespread IT infrastructure has encouraged multinational
companies to set up regional operations in Singapore. The government is also
moving towards an electronic government era.
12.3.6.5 Environmental Factors
 Both consumers and governments penalize firms for having adverse effect on
the environment. Governments levy huge fines upon companies for
polluting. Companies are also rewarded for having positive impact on the
environment. The consumers are willing to switch brands if they find a
business is ignoring its environmental duties.
99
 Impact on the environment is a rising concern. Note that the envi ronment
benefits the company too. Running water for a hydro-power plant is an example.
Few common environmental factors are:
 Waste disposal laws
 Environmental protection laws
 Energy consumption regulation
 Popular attitude towards the environment
 The Ministry of the Environment and Anti-Pollution Unit works relentlessly
to maintain air quality and other environmental factors. Pollution from the
transportation is the key problem in Singapore’s urban areas. There was a
time when Singapore was among countries with the highest level of
industrial carbon dioxide emissions.
Singapore lost almost 30% of its mangrove area. Many species are in danger of
extinction.
 The Water Pollution Control and Drainage Act helps control water quality.
One of the major concerns for Singaporeans is that the country does not
have enough water to support their needs. Pollution from the industrial
byproducts like oil increases the problem. As a solution, water is recycled
after desalination.
 As there is a lack of water resources, Singapore is dependent on Malaysian
supplied water. A local brand called NEWater supplies sewage water after
purifying it using dual-membrane. More solutions to this problem are needed.
 After analyzing all these factors, It is clear that Singapore is a remarkabl e
country. It houses talented and motivated people. It also provides great business
opportunities. I can conclude that its business success in both domestic and
international platforms is highly benefited by government policies. Its enterprise
friendly approach boosts business as well. Singapore’s continuing development
has made it a major competitor in the international market. The compulsory
primary education and hardworking citizen are contributing factors.
12.3.6.6 Legal Factors
 This step involves learning about the laws and regulations in your region. It
is critical for avoiding unnecessary legal costs. This is the last factor in
PESTEL. These factors examine the legal elements. Often, start-ups link
these elements to the political framework. Many legal issues can affect a
company that does not act responsibly. This step helps to avoid legal pitfalls.
You should always remain within the confines of established regulations.
Common legal factors that companies focus on include:
 Employment regulations
 Competitive regulations
 Health and safety regulations
 Product regulations
 Antitrust laws
 Patent infringements
100
 It is common to conduct a PESTEL analysis before serious decisions. Managers

might conduct it before any large projects are undertaken. Understanding all the
influencing factors is the first step to addressing them.
 Remember, there are many factors other than these which can have an effect
on business success. The evaluation is a one-to-one process. Each company
should do it for themselves and find the key drivers of change. You must
identify the factors which have strategic and competitive consequences.
 Analyzing the total macro-environment is an extensive task. Even though, it
is complex, understanding the framework of basic influences will allow you
to maintain an organized and strategic approach. These will isolate each
opportunity or threat.
 After conducting a PESTEL analysis, company managers can create
strategies. The macro environmental factors will shape the strategies. I am
sure that the thinking process will be as sensitive as current and future
environmental factors.
 If you are planning to align strategies for your company, I suggest you should
conduct PESTEL analysis first. It is always good to have more information about
the surrounding. The tool really helps take better decisions.
 Over the last decade, Singapore has shown extraordinary economic growth.
Today it is considered a high-income economy. The growth is driven by
several factors. Some of them are private consumption expenditure, local
and external demand, and investments.
 Singapore’s leading sectors like as pharmaceutical and petroleum refining
industry have the potential to attract other countries to invest. In this article, I
will talk about the external factors that have an impact on Singapore. I have
added a PESTLE analysis of Singapore. PESTLE is a business tool used to study
the macro-environmental factors. It is an acronym for political, economic, social,
technological, legal and environmental factors. Let’s see how each of these factors
impacts the country.
 The government thinks that growth of electronic commerce depends on
transparent and market favorable legislations and regulations. Certain legal,
regulatory and business settings are needed to support industry
development and economic growth.
E-commerce program was launched in 1996. The aim was to develop the e -
commerce services. Singapore has introduced some e -commerce policy initiatives.
There are cross-border e-commerce laws and policies. Some basic legal and
technical infrastructures to support secure e-commerce were available since 1998.
Some of them are Electronic Transactions Act, Intellectual Property Rights,
Amendments to the Evidence Act, CONTENTS Regulation, Tax Issues and Import
and Export Procedures.
 NIEO
 The North-South Dialogue
101
 Objectives of NIEO
 Programme of action for NIEO
 Conclusion
 SAARC
1. How NIEO was created and when?
2. List out the member countries of SAARC?
12.6 SUMMARY
1. This chapter tries to explain the structure, objectives and functions of NIEO.
2. The lesson also explains the foreign trade as a priority sector under rapid
globalization of their economics.
1. What is NIEO stands for?
2. What is meant by action programe of NIEO?
1. B.S. Sreekantaradhya “Economic integration among developing countries
with special reference to south – East Asia” Economic affairs.
2. South commission, The challenge to the south, New Delhi; Oxford University
Press, 1992, P 197
3. South Commission . op.cit., P.197
12.9 ASSIGNMENTS
1. What are the objectives of NIEO?
2. Explain the structure and functions of SAARC.
2. Robert A. Mundell, International Economics, 1968, Macmillan & co,
Newyork.
3. Jagdish Bhagawathi, International Trade & Economic expansion. The
Edition, 1994.
5. Francis Cherunilam, International business, Third Editi on 2004.
1995.
7. Bo Sodersten, International Economics II Edition 1980.
1. What are the implications of the north-south dialogue?
12.12 KEY WORDS
 General assembly, World without borders, Self-help, North-South
cooperation, preferential trade, R & D programs.

102
LESSON – 13
TRENDS IN INDIAN FOREIGN TRADE

13.1 INTRODUCTION
The performance of India on the trade and Balance of Payments front in the
last five decades is a reflection, naturally, of the economic policies followed and the
pattern of economic development that took place.
13.2 OBJECTIVES
This chapter reviews India's performance in respect to merchandise trade,
invisibles and the overall balance of payments trends.
13.3 CONTENTS
13.3.1 An Overview Of Merchandise Trade
13.3.1.1 Comparative Export Performance of India
13.3.1.2Highlights of India's Trade Performance
13.3.1.3 Foreign Trade through the Plan
13.3.2 Trade Ratios
13.3.3 Determinants of Exports
13.3.3.1 External Factors
13.3.3.2 Internal Factors
13.3.4 Determinants of Imports
13.3.5 Major Exports
13.3.5.1 Major Imports
13.3.5.2 Direction of Trade
13.3.1 An overview of Merchandise Trade
13.3.1.1 Comparative Export Performance of India
With a very low share of world exports, a tow export-GDP ratio, huge trade
deficits, weakened position of traditional exports and with no commendable
achievement of market position in new areas. India's export performance is considered
very poor, particularly in comparison with the export performance of several developing
countries.
In fact, in the early 1950s India's, economic position was much better than
that of many countries. Among the developing countries, India had a relatively
broad based industrial structure and significant export market share for several
commodities such as tea, jute and cotton textiles. However, advantage could not be
taken of this favourable position due to the absence of an effective export
development strategy.
This failure on the export development front had resulted in the gradual
decline of India's position in the international market. See Table.13.1
103
Table: 13.1 Share of India in World Exports
Year Share (%)
1950 2.0
1960 1.2
1970 0.7
1980 0.4
1990 0.5
2000 0.7
2006 1.0
2007 1.2
2009 1.3
2010 1.4
Source: IMF
Japan, which, in 1950, ranked only 19 th in terms of the size of exports

compared to the 13 rank of India, rapidly moved up to become the third largest
exporting nation by 1971. On the other hand, India's share in the world exports
more or less steadily declined from 2 per cent in 1950 to 0.4 per cent by 1980.
At the end of the 1990s, India's exports were about 0.6 per cent of the world
exports, and the value of Indian exports in 1996 amounted to only about 8 per cent
of that of Japan (In 1950 India's exports were 139 per cent of that of Japan.). While
South Korea, which is relatively poor in industrial raw materials, by vi rtu e of
be i n g a 'hu g e tran sformation si te', was abl e to ac hi e ve a spe c tac u l ar e xport
g rowth as to increase the export-GDP ratio from less than 2 per cent in 1961 to
about 32 per cent in 2003. In case of India, which launched its economic
planning about one decade ahead of South Korea, exports were stagnating at
about 6 per cent of the GDP until the early 1990s. India's export-GDP ratio
compares very poorly with several other developing countries too. Although there
has been some improvements after the economic reforms introduced in India in
1991, even in 2007 it was less than 15 per cent. The export-GDP ratio of China,
which was near to that of India at the end of 1970s, was about 33 per cent in 2005.
India’s share in world merchandise exports has started risi ng since 2007 albeit by a
very slow 0.1 percentage point so as to reach 1.3 per cent in 2009 and 1.4 per cent
in 2010 (January-June). This was mainly due to the relatively slow rise or greater
fall in world export growth than India’s.
Table 13.2 presents a comparative picture of the export growth rates of India
and some East Asian economies.
104
Export Growth and Share in World Exports of Select Countries

Value Grow th rate (%) Change
(USS Share in World Exports (%) in
billion) CAGR Annual Shares
Country
2000- 2007/
2006 2005 2006 2007* 2001 2005 2006 2007*
2004 2001
1. China 969 24.2 28.6 27.2 27.6 4.3 7.3 8.0 8.4 4.1
2. Hong Kong 317 6.4 11.6 9.7 10.0 3.1 2.8 2.6 2.4 -0.7
3. Malaysia 161 6.4 12.1 14.0 7.7 1.4 1.4 1.3 1.3 -0.1
4. Indonesia 104 2.0 22.9 19.0 18.6 0.9 0.8 0.9 0.8 -0.1
5. Thailand 131 8.6 14.8 19.1 13.7 1.1 1.1 1.1 1.1 0.0
6. Singapore 325 10.2 11.8 14.4 36.2 2.4 2.7 2.7 2.7 0.3
7. India 120 15.9 29.8 21.0 14.5 0.7 1.0 1.0 1.0 0.3
8. Brazil 138 15.2 22.7 16.0 19.6 0.9 1.1 1.1 1.1 0.2
9. Mexico 250 3.2 13.2 16.8 4.8 2.6 2.1 2.1 2.0 -0.6
10. Russia 305 14.7 33.9 26.0 8.4 1.7 2.3 2.5 2.4 0.7
11. Korea 272 9.6 15.8 18.4 -8.7 2.0 2.2 2.3 2.2 0.2
12. Developing 5458 12.1 22.0 19.7 15.5 36.8 43.8 45.3 45.0 8.2
Countries
13. World 2040 09.4 14.1 15.7 13.8 100 100 100 100 0.0
* January-June 2007.
** January-December 2007, DGCI&S data.
Source: IFS statistics. October, 2007 IMF (cited by Government of India : Economic Survey, 2007-08)
India's share in global exports of some items, like tea, jute and spices, declined
sharply over the decades.
In conclusion, we may say that the growth of India's exports has India's share
of several items in been poor in comparison with those of many, including
developing, countries. While many countries have achieved commendable progress
through economic policy reforms and other measures. India has continued with its
conservative and inward-looking policies. In 1985, the trade deficit of China was
much more than double the deficit of India. But by 1990, China enjoyed a surplus
which was nearly equivalent to the large trade deficit India had and at the end of
1990s the trade surplus was much larger than the value of India's total exports.
Economic policy reforms and the infusion of foreign capital and technology
significantly contributed to the spectacular achievement of China.
13.3.1.2 Highlights of India's Trade Performance
A review of India's foreign trade since the commencement of planning reveals
the following important points.
1. Both exports and imports have grown considerably.
2. Except for two years, in all the years since 1951, imports were larger than exports.
3. Until about the mid 1980s, the export performance of India was very poor
in comparison with other countries in general: it was very poo r even in
comparison with several other developing countries. This is clear from the
following facts.
105
a) The share of India in the total world exports fell from about 2 per cent in
1950 to 0.4 per cent in 1980. Since the mid eighties, there has, however,
been some improvement. In 2006 it was 1.0 per cent.
b) India was the 13th largest exporter in 1950, but there are more than two
dozen countries above India now.
c) India's exports as a percentage of the GDP had been stagnating around 5
per cent. Although it has improved since the liberalisation, it is still very
low (about 15 percent) even in comparison with many other developing
countries.
4. The term of trade has, on the whole, been favourable to India. (There was
deterioration for several years due to the oil price hike, and in some years
prior to that and after that).
5. There has been a very significant change in the composition of India's exports.
Manufactured products now account for overt three -fourths of the exports as
against the dominance of primary commodities in the early period.
6. There have been significant changes in the direction (i.e. the source of
imports and destination of exports) of India's foreign trade.
7. The export-import ratio has improved in the recent period.
13.3.1.3 Foreign Trade Through The Plan
The First Five Year Plan period. 1951-56, actually witnessed a fall in India's
exports and imports. This was attributed mainly to: (i ) in the initial years of
planning the developmental and investment activities were still in doldrums
causing both imports and exports to fall, and ( i i ) after the Korean war boom, unit
prices of exports and imports were falling.
During the First Plan, 89 per cent of the imports could be paid for by exports.
Only during the Fourth Plan, when as much as 92 per cent of the imports were
financed by the exports, the situation was better than in the First Plan.
During the ten-year period covering the Second and Third Plans, imports more
than doubled from Rs. 1.024 crores in 1955-56 to Rs. 2.194 crores in 1965-66, as
against a mere 37 per cent increase in the exports during the same period. The
Mahalanobis model which gave much importance to the basic and heavy industries
necessitated large capital goods imports. The large development and the ancillary and
consequential expenditures increased the demand for consumer goods and necessitated
considerable import of consumer goods also. During the above-mentioned one decade,
while the imports grew at an average annual rate of 7.9 per cent, growth of export was a
tardy : 3.2 per cent annually, on an average.
During the Second Plan, the export earnings were sufficient to meet only
about 63 per cent of the import bill: during the Third Plan it was still lower at 60
per cent. The Fourth Five year Plan which should have commenced in 1966 was put
off by three years (during which we had annual plans).
The situation further improved during the Fourth Plan (1969 -70 to 1973-
74). As much as 92 per cent of the i mport bi l l c ou l d be me t by the e xport
earnings—a ratio never reached in any other Plan. In 1972-73, for the first time in
the history of independent India, there was a trade surplus. But the oil price hikes
since 1973 had been creating serious problem. However, in 1976 -77, once again
106
there was a small trade surplus. Thereafter, India always had a trade deficit.
Thus, in the last more than five decades, in all years, except 1972-73 and 1976-
77. India had an adverse balance of trade.
Despite the oil crisis, during the Fifth Plan (1974-75 to 1978-79 the period
originally envisaged for the Fifth Plan) the situation was on the whole better
compared to the Second, Third and Annual Plans: export earnings were equivalent
to about 83 per cent of the import bi l l .
Trade deficit burgeoned since the late 1970s. The oil price hike was a major
reason. The deficit much more than doubled in 1979 -80 (Rs. 2725 crores) from
the previous year's figure (Rs. 1085 crores). It further, more than doubted in
1980-81 to Rs. 5838 crores. Throughout the Sixth Plan ( 1 9 8 0 81 to 1984-85)
the trade deficit remained at very high levels. Although during the Seventh Plan
(1986-89 to 1989-90) trade deficit was much larger than during the Sixth Plan in
absolute terms, the deficit declined to 31 per cent of the imports from 39 per cent
during the Sixth Plan. The export-import ratio was about 85 per cent during the
decade 1990-91 to 1999-2000, but declined to 82 per cent in 2003-04 and
further to 68 per cent in 2006-07.
13.3.2 Trade Ratios
The export -GDP ratio which was almost stagnant for a very long time had
almost doubled during the one decade following the initiation of the l i beralisati on ,
i n dicating that the In di an e c onomy has be c ome more globally competitive. The
import ratio also grew but at a lower pace than the exports. The trade GDP ratio,
a measure of integration of the economy with the global economy, has improved
substantially from less than 12 per cent in the 1980s to over 25 per cent in
2003-2004 and to 35 per cent in 2006-07.
Table 13.3 India's Foreign Trade Ratios
Period Average X/GDP M/GDP T/GDP X/M
1980-81 to 1989-90 4.6 7.2 11.8 64.0
1990-91 to 1999-00* 8.0 9.5 17.4 84.1
1990-91 to1994-95* 7.3 8.4 15.7 88.9
1995-96 to 1999-00 8.5 10.4 18.9 81.8
2000-01 to 2001-02 9.4 10.8 20.2 86.7
2001-02 to 2002-03 11.3 13.1 24.4 83.4
2003-04 to 2004-05 11.6 14.2 25.8 80.7
2005-06 to 2006-07 14.0 20.9 34.9 68.0
2009-2010 to 2010-11 15.5 23.5 33.5 68.0
2011-12 to 2012-13 15.8 25.0 30.2 63.0
2013-14 to2014-15 14.7 24.8 30.5 61.0
2015-16 15.5 25.5 32.4 69.0
* Excluding 1991-92. Note: X = Exports, GDP = Gross Domestic Product at current market prices in
rupees.
Sources: Directorate General of Commercial Intelligence & Statistics (as presented in RBI, Report on
Currency and Finance, 2014-15), and Government of India, Economic Survey (various years)
The average export-import ratio, an indicator of the import financing capacity
of exports, improved sharply from 64.0 per cent to 84.1 per cent, between the
1980s and 1990s and further to nearly 87 percent in 200-02; but declined later.
107
The trade deficit as a percentage of GDP recorded a decline since the early
eighties. In 1990-91, the trade deficit was three per cent of the GDP compared to 4.6
per cent in 1980-81. The average figure for the Seventh plan period was 3.2 per cent
compared to 3.4 per cent for the Sixth Plan. During 2000-01 to 2003-04. it ranged
between 2.1 and 2.7 per cent but increased to nearly 7 per cent in 2006 -07.
13.3.3 Determinants of Exports
Analysis of empirical data reveals that India's export performance is affected
by certain important factors. They include a set of external factors, a set of
internal factors and the real exchange rate.
13.3.3.1 External Factors
1. The rate of growth of the economies of the importing, countries.
2. The rate of growth of the world trade.
3. The rate of change in the price level in the importing country.
13.3.3.2 Internal Factors
1. The rate of growth of the Indian economy
2. The rate of change-in the domestic price level.
The most favourable condition for the growth of the Indian exports is a
combination of the high growth rates for all the three external factors, a high
growth rate with price stability for the Indian economy and a fall in the real
exchange rate for exports (RERx). If some of the above conditions are satisfied and
other conditions are not favourable, the export' performance should be expected to
be determined by the relative strengths of the favourable and unfavourable
factors. We will have the worst situation when the reverse of the ideal
combination of conditions occurs.
13.3.4 Determinants of Imports
Besides import regulations, the important factors which determine the volume
of India's imports are :
1. The rate of growth of the Indian economy - High rate of growth, ceteris
paribus, is associated with rise in imports.
2. The relative price of imports (i.e. the relative change in the prices of imports
and domestic goods). An increase in the imports, ceteris paribus, is associated
with a fall in the relative price of imports.
From the above two factors, it can be inferred that the volume of imports
tends to be very high when there is a conjuncture of high rate of economic growth
and a sharp fall in the relative price of imports and vice versa.
The study by da Costa, referred to above, has revealed that:
1. In a number of years, the volume of imports was kept down by moderate
growth of the economy together with relatively high price of imports.
2. For over a fairly long period of 12 years since 1977-78, higher growth of
the economy together with a downward trend in the relative prices of
imports (and with import liberalisation) were associated with rising imports
to India.
108
3. A sharp decrease in the volume of imports was noticed when there was a
combination of low growth of the economy and a sharp increase in the
relative price of imports.
4. On the other hand, there was a large increase in imports when there was a
combination of good growth of the Indian economy and a sharp decrease in
the relative price of imports.
5. Large imports in several years were associated with moderate growth of the
economy and substantial fall in the relative price of imports.
When change in the relative price of imports has been moderate, low growth of
the Indian economy has been associated with low growth in the volume of
imports.
13.3.5 MAJOR EXPORTS
A fte r In de pe n de n c e , In di a has ac hi e ve d c on si de r abl e diversification
in exports, both product-wise and country-wise.
Reflecting the evolving pattern of economic and industrial development, as also
the policy thrust India has gradually transformed from a predominantly primary
products exporting country into an exporter of manufactured goods. Today,
manufactures account for about three-fourths of the total exports compared to 45
per cent in 1960-61. The share of manufactured goods in India's total exports
increased from about 71 per cent during 1987-90 to 75per cent during. 1992-97
and to 78 per cent in 2000-01 but declined to 69 per cent is 2006-07. It may be
noted that the diversification of exports was more prominent in the 1970s. The
progress has been very tardy thereafter. This can be attributed to two factors. After
a certain level, as a general rule, further improvement would be at a very low pace
and may eventually tend to stagnate. Second, the deficiencies and failures of the
development strategy in achieving the objectives.
Table 13.4 Top 10 Countries of India's Export
Values in US$ Millions
(P) Provisional
Rank Country Apr- Mar 2014 Apr- Mar 2015(P) %Share
1 USA 39,158.02 42,399.22 13.7
2 UARABEMTS 30,520.42 33,025.28 10.67
3 HONG KONG 12,731.74 13,511.42 4.36
4 CHINAPRP 14,867.10 11,956.36 3.86
5 SAUDIARAB 12,218.96 11,155.82 3.6
6 SINGAPORE 12,511.00 9,990.81 3.23
7 UK 9,821.65 9,343.58 3.02
8 GERMANY 7,522.72 7,535.03 2.43
9 SRI LANKA DSR 4,534.35 6,704.44 2.17

109
Rank Country Apr- Mar 2014 Apr- Mar 2015(P) %Share
10 NETHERLAND 7,997.60 6,326.15 2.04
Total 314,405.29 309,566.56 100

Data Source: DGCIS, Kolkata
The growth of non-traditional exports deserves special mention. In 1960-61,
four major non-traditional items, viz. engineering goods, iron and steel, iron ore
and chemicals and allied products contributed only about one fifth of the total
exports in 2003-04. The above four items along with other three non -traditional,
namely, gems and jewellery, marine products and leather and leather
manufactures today made about 60 per cent of India's export earnings; about two
and a half decades ago this share was about one -third.
In recent years, readymade garments came second (first being gems and
jewellery) in export earnings. Neatly two-thirds of India's export earnings are
contributed by the eight product groups mentioned above. Exports of petroleum
products have also increased in the recent years.
Though there has been a significant growth of non -traditional items, a
number of traditional items continue to have considerable weightage in India's
export basket. These include tea. jute, tobacco, coffee, sugar, cashew kemals,
spices, oil cake etc.
The commodity composition within the major groups has also undergone a
considerable transformation. Within the 'primary products' group, the share of "ores
and minerals" in total exports has declined while the share of "agricultural and
allied products" has remained almost unchanged at around 18 per cent between
1990-91 and 1998-99 but declined thereafter to 13.4 per cent in 2000-01; but
improved to about 16 per cent during 2002-03 to 2003-04 and declined to about
10 per cent during 2005-06 to 2006-07. The falling share of "ores and minerals'
has been offset by the increase i n share of ‘e n g i n e e ri n g g oods' wi thi n the
man u fac tu re d produ c ts g rou p- an i n di c ati on of u pward movement of India's
exports in the value-addition chain. Similarly, exports of processed agricultural
products has also showed marked improvement in the post-reform years whereas
the shares of traditional export items such as tea- coffee, cereals, handicrafts and
carpets have declined. Among other major manufactured products, the share of
'chemicals and allied products' has improved while that of 'leather an d
manufactures’ has declined between the years 1990-91 and 2006-07. Recently
India emerged as a major exporter of rice.
13.3.5.1 Major Imports

Petroleum oil and lubricants now account for considerable part of India's
import bill. POL which accounted for 6 per cent of the total i mports i n 1960 -
61 an d 8 pe r c e n t i n 1970 -71 amounted to 43 per cent m 1980-81. The
increase m domestic output enabled to reduce it; however even today this is the
110
single item contributing to the largest share (31 per cent in 2000 -01 and 34 per
cent in 2006-07) to the import bill). While the share and absolute value of these
imports showed sharp fluctuations over the years mainly on account of the large
movements in international crude prices, the volume of such imports has grown
significantly on account of increase in domestic consumption and the
stagnation in domestic crude oil production. Given the large swings in
international crude prices, as also a rising trend in the oil import bill, there is a
need for a comprehensive review of energy policy of the country covering the
demand-supply aspects, as well as the price policy. Renewed efforts to improve
energy supply from domestic sources by encouraging explorations, and stepping
up of production and refining capacities are necessary to bring about a
structural change in this area.
Table 13.5 Top 10 Countries of India's Import
Values in US$ Millions
(P) Provisional
Rank Country Apr-Mar 2014 Apr-Mar 2015(P) %Share
1 CHINA P RP 51,034.62 60,395.27 13.50
2 SAUDI ARAB 36,403.65 28,241.81 6.31
3 U ARAB EMTS 29,019.82 26,194.27 5.85

4 SWITZERLAND 19,311.01 22,132.28 4.95
5 USA 22,505.08 21,585.69 4.82
6 INDONESIA 14,748.30 14,918.85 3.33
7 QATAR 15,707.99 14,604.28 3.26
8 IRAQ 18,520.86 14,247.66 3.18

9 NIGERIA 14,097.84 13,682.72 3.06
10 KOREA RP 12,470.60 13,528.85 3.02
Total 450,199.78 447,521.79 100
Data Source : DGCIS, Kolkata
A l though the re had be e n a de c l i n e i n the share of c api tal g oods i n the
total i mport (32 pe r c e n t in 1960-61, 25 per cent in 1970-71 and 15 percent in
1980-81), in the years following the initiation of liberalisation there was a sharp
increase. It was, however, only 11 per cent during 2000 -01 and 2001-02 and
nearly 15 per cent during 2005-06 and 2006-2007. The drop in the import of
capital goods may be a reflection of lack of investment demand associated with
the sluggish pace of domestic industrial activity.
13.3.5.2 Direction of Trade
The direction of India's foreign trade has also undergone some notable
changes.
111
In the early 1950s, the UK accounted for over on -fifth of India's developing
countries sharply increased. foreign trade; in recent years it has been about 5 to
6 per cent.
As a single country USA has been our largest trading partner. In 1950 -51,
the US accounted for 18 per cent of our imports and 19 per cent of the exports. In
2006-07 the share of US in India's exports was about 15 per cent but its share in
India's imports has declined considerably (only about 6 per cent recently).
The share of Japan in India's foreign trade was very low in the early 1950s.
However, Japan's share in India's trade rose significantly and then has fallen.
During 2006-07, the European Union accounted for about one -fifth of India's
exports and more than 17 per cent of imports.
The USSR was one of the major trading partners of India. Between 1960-61
and 1990-91, the share of India's exports to Eastern Europe had more than
doubled (from 7 per cent to 17 per cent). The political and economic policy
changes in the Eastern Europe has disrupted the trade with this region, it may
be noted that India was not earning hard currency by exporting to this region. It
was imprudent on the part of India to pay too much attention to trade expansion
with this region. Communist China has been concentrating on exports to the
developed economies and she has become one of the largest trading partners of
USA. There was a steep erosion in the relative position of the Eastern Europe in
India's exports. With the break-up of the Soviet Union, the share of the East
European countries fell dramatically from about 18 per cent in 1990-91 to below 2
percent in 2003-04, primarily on account of the termination of Rupee trade and its
adverse impact on exports of agricultural products such as tea, tobacco and
spices to this region. The loss of this market share was, however, made up by
increasing the shares in developing countries and the OPEC region, both of which
doubled between the years 1987-88 and 2001-02.
Although the US is India's major export market, the share of India in the
total imports of USA is negligible. The industrial market economies have recently
accounted for less than half of India's exports compared to about two-thirds
around 1960. Of late, China emerged as the largest source of India's imports,
increasing its share in India's imports from 7.3 per cent in 2005-06 to 9.1 per cent
in 2006-2007.
Recently, more than one-third of India's imports have originated from the
industrial market economies: about 30 per cent each has come from OPEC countries
and Non-OPEC developing countries. About 16 per cent of the exports has gone to
non-OPEC developing countries and about 40 per cent to the OPEC countries.
 Merchandise trade, Export Performance of India, Highlights of India's Trade
Performance, foreign trade through the plan, Trade Ratios, Determinants of
Exports, External Factors, Internal Factors, Determinants of Imports,
major exports, major imports, direction of trade.
112
1. What are the Determinants of Imports?

2. What are the Determinants of Exports?
13.6 SUMMARY
this chapter explains trade, export performance of India, India's trade
performance, foreign trade through the plan period, trade ratios, determinants of
exports, external factors, internal factors, determinants of imports, major exports,
major imports, direction of trade.
1. Explain India’s direction of Trade?
1. Robert A. Mundell, International Economics, 1968, Macmillan & co, New york.
2. Jagdish Bhagawathi, International trade & Economic expansion. The American
economics review, dec.1958.
13.9 ASSIGNMENTS
1. Calculate the India's Foreign Trade Ratios for the years 2010 -11, 2011-12,
2012-13, 2013-14
1. Peter B. Keren, The International Economy, Third Edition, Cambridge
edition, 1994.
2. Francis Cherunilam, International trade and export management, himalaya
Third Edition 2013.
1995.
4. Dr. P. Subba Rao, International Business, (text and cases, Third Edition,
Himalaya Public House), 201.
1. Take an Asian country and compare it with India on the ratios of
international trade.
13.12 KEY WORDS
 Export Performance, Trade Performance, Foreign Trade, Trade Ratios, Major
Exports, Major Imports.

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LESSON – 14
EXPORT PROMOTION AND IMPORT SUBSTITUTION

14.1 INTRODUCTION
Although export promotion has been pursued since the third plan, the highly
protected domestic market and the unrealistic exchange rate made the domestic
market much more attractive than exports
14.2 OBJECTIVES
 This chapter aims to explain import substitution strategy and harmful
effects of trade and also describe the liberalisation policies that favour
export promotion and export promotion measures .
14.3 CONTENTSS
14.3.1. Multinationals in India
14.3.2. Export Pessimism and Import Substitution Strategy
14.3.3. Harmful Effects of Trade
14.3.4. Prebisch-Singer Thesis (Secular Deterioration Thesis)
14.3.5. Immiserising Growth
14.3.6. Export promotion
14.3.6.1. Importance and Objectives
14.3.6.2. Export Promotion Measures
14.3.6.3. Organisational Set-up
14.3.6.4. Incentives
14.3.7. Duty Exemption / Drawback
14.3.7.1. Other Incentives
14.3.7.2. Income Tax Concession
14.3.8. IPRS
14.3.8.1. Other Schemes
14.3.8.2. Awards
14.3.9. Marketing Assistance
14.3.10. Export Credit
14.3.1 Multinationals in India
Comparatively very little foreign investment had taken place in I ndia due to
several reasons, like the dominant role assigned to the public sector in the
industrial policy and the restrictive Government policy towards foreign investment.
Some multinationals, Coca Coca and IBM, even left India in the late 1970s as the
Government conditions were unacceptable to them.
A common criticism against the MNCs is that they tend to invest in the low
priority and high profit sectors in the developing countries, ignoring the national
priorities. However, in India the Government policy confined the foreign investment
to the priority areas like high technology and heavy investment sectors of national
importance and export sectors. Firms which had been established in non -priority
areas prior to the implementation of this policy have, however, been allowed to
continue in those sectors.
114
The controversial Foreign Exchange Regulation Act (FERA), 1973, required the
foreign companies in India to dilute the foreign equity holding to 40 per cent
(exceptions were allowed in certain cases like high technology and export orie nted
sectors).
An often heard criticism is that multinationals drain the foreign exchange
resources of the developing countries. However, Aiyar’s study indicates that,
contrary to the popular belief, foreign companies are less of a drain on foreign
exchange reserves than Indian ones. He also points out that the public sector has a
higher propensity to use foreign exchange on a net basis than multinationals. In
fact, the foreign exchange outgo of the public sector alone was greater than the
entire trade deficit of the country.
It is not a right approach to estimate the net impact of multinationals on the
foreign exchange reserves by taking the net foreign exchange outflow or inflow. If a
multinational is operating in an import substitution industry, the net e ffect on the
foreign exchange reserves could be favourable even if there is a net foreign
exchange outflow by the company.
Multinationals is several developing countries make substantial contribution to
export earnings. The performance in the case of India has, however, been very dismal.
This is attributed mostly to the Government policy. “We have consistently followed
policies in India that discriminate against export production and in favour of production
for the local market. In this milieu it has not made sense for the Indian private sector or
public sector to focus on exports. Naturally, it has not made sense for foreign companies
either. In 1947, foreign companies did not have an anti-export image. Indeed, the most
prominent ones were engaged in the export of tea and jute manufactures. Only after
Jawaharlal Nehru decided to emphasise import-substitution at the expense of exports
did foreign (and Indian) companies shun exports.
However, since the mid 1980s with the economic liberalization that increased
domestic competition and the steady depreciation of the rupee, exports began to
become attractive and several foreign companies and companies with foreign
participation, as well as Indian companies, have become serious about exports.
This was reflected in the acceleration of the export growth.
The new policy is expected to give a considerable impetus for MNC’s
investment in India. However, foreign companies find the policy and procedural
environment in India still perplexing and disgusting.
Since the economic liberalization ushered in 1991, many multinationals in
different lines of business have entered the Indian market. A number of
multinational which were in India prior to this have expanded their business.
Recently, FDI in India has surged.
14.3.2 Export Pessimism and Import Substitution Strategy
As mentioned earlier, in the 1950s economists like Prebisch, Myrdal and Nurkse
purported the export pessimism, i.e. pessimism about demand for LDC exports in the
markets of the developed countries. Arguing that the demand for ‘periphery countries’
115
exports in the 20 th century were far weaker than they were in the 19 th century, trade as
an engine of growth, a function which Nurkse, like several others, felt it served in the
19th century. Nurkse listed several factors for the deterioration of the demand for LDC
exports. They are summarized by Cairncross as follows :
 The change in industrial structure in favour of heavy industries with a low
content of imported raw materials.
 The rising share of services in total output of advanced countries.
 The low income elasticity of consumer demand for many agricultural
products.
 Agricultural protectionism.
 Economies in the use of raw materials, e.g. through reprocessing of scrap
and the introduction of synthetic materials.
Nurkse, however, failed to take into account the price factor adversely affecting
the developing country exports. The terms of trade issue was introduced primarily
by Prebisch and Myrdal who, as Kravis points out, “went beyon d Nurkse’s
pessimism about the adequacy of markets and claimed that free trade would be an
impediment to economic advance in the poor countries.”
The solution prescribed in the 1950s by Nurkse and several others with export
pessimism was an inward looking (i.e. import substitution) strategy, see the chapter
on Trade Strategies). Nurkse, for instance, maintained that “when developing
countries face difficulties in exporting both traditional and new exports, import
substitution strategy may be adopted by them as an escape route from economic
stagnation.”
The ISI strategy was received with warmth, perhaps, also due to reasons other
than those mentioned above. For instance, Meier argues : “The promotion of a
sheltered home market had a common appeal to the bureaucratic-authoritarian
state, urban manufacturers, and multinationals that supplied technology and
capital. Protection also met the State’s objective of pursuing revenue and
expenditure-maximising activities through maximum revenue tariffs and export
taxes.”
Whatever be the real combination of motives, a number of countries pursued
the import substitution strategy in different forms, for different periods and with
different intensities and extent.
Import substitution strategy has contributed to the indu strial development of a
number of countries. In several cases import substitution set the stage for
successful export promotion. However, in India and several Latin American
countries, where the import substitution strategy has been extended too far,
neglecting export development, it has severely hampered economic progress (see the
chapter on Trade Policy of India). On the other hand, countries which, after a
certain period of import substitution strategy, shifted emphasis to export
promotion, (South Korea, for example) have achieved impressive economic growth.
116
Several studies indicate that the major drawbacks of the excessively inward
looking trade regime of India was that it led to an inefficient and high cost
industrial structure, which also adversely affected the prospects for export growth.
Also see the section Import Substitution in the chapter on Trade Regulation and
Promotion.
14.3.3 Harmful Effects of Trade
While trade can be beneficial to nations and the world as a whole, it can also
have harmful effects on some countries and the world as a whole.
The international trading system is biased against the developing countries,
particularly the poor among them, because of factors like their weak bargaining
power vis-à-vis the advanced countries, the parti cipation gap, dependence on the
developed countries for various needs etc.
The important harmful effects of trade are the following.
 Trade may lead to indiscriminate exploitation of natural resource,
particularly of developing nations. Trade has been resul ting in the drain of
resources from the developing to developed countries.
 Trade also causes environmental problems because of the indiscriminate
exploitation of resources and location / relocation of polluting and
hazardous industries in the developing world for the benefit of the developed
world.
 The deterioration of the terms of trade of the developing countries causes
large income transfers from the developing to the developed countries.
 International trade may also give rise to demonstration effect in the
developing countries. Demonstration effect, a term associated with Nurkse,
refers to the tendency of poor people to imitate the life styles of the rich. In
international economics, it refers to the tendency of the people of developing
countries to follow the consumption habits of the people of the advanced
countries by importing. This could have harmful social and economic effects.
It could also have some favourable effect if it can encourage the development
of the domestic industries of the developing countries.
 Another important harmful effect of trade is what is described as the
backwash effect. Some of the domestic industries of the developing
countries, particularly small scale units, which are unable to compete with
the well developed industries of the advanced countries, could be destroyed
or damaged by unregulated imports. India has had a paradoxical policy of
reserving many items for the small scale sector but allowing the import of
these items. The recent trade liberalization is adversely affecting the
agricultural, often subsistence, sector of many developing countries even as
the agricultural sector is heavily protected in the developed world.
 Globalisation and free trade are now adversely affecting the developed
countries too because of the edge the developing countries have over the
developed ones in the production of many products.
117
 Trade also results in the introduction of the pope and cola cultures to the
developing countries which have important social implications.
14.3.4 Prebisch-Singer Thesis (Secular Deterioration Thesis)
Economists like Gunnar Myrdal, Raul Prebisch and Hans Singer have argued
that the primary exporting countries, particularly those of the Third World, have
been experiencing a secular (i.e. long-term) deterioration in the terms of trade. The
implications of this argument, which is often referred to as the Prebisch-Singer
thesis, is that less developed countries had to export increasing amounts of their
primary products in exchange for imports of manufactured goods from the
industrially advanced countries. The secular deterioration in the terms of trade was
considered as one of the important reasons for these countries economic
backwardness.
This deterioration in the terms of trade causes large transfer of income from
developing to developed countries, as indicated towards the end of this section.
In support of the secular deterioration thesis it has been claimed, for instance,
that between the latter part of the 19 th century and 1939, there was a fall in the
prices of primary goods relative to the prices of manufactured goods. On average, a
given bundle of primary goods reduced, in exchange, to 60 per cent of the quantity
of manufactures that could be secured earlier. From this, it has been deduced that
there must have been a comparable worsening of the terms of trade of the
underdeveloped countries. Some studies have indicated that the terms of trade of
the developing countries have deteriorated in the recent decades also.
14.3.5 Immiserising Growth
The theory of immiserising growth, put forward by Jagdish N. Bhagwati,
purposts that under certain circumstances economic expansion and trade may
harm the developing country. Immiserising growth refers to a case where growth
(due to technical progress and / or factor accumulation) leads to a sufficiently
acute deterioration in the terms of trade, which imposes a loss of real income
outweighing the primary gain in real income due to the growth itself.
In other words, the concept of immiserising growth is that a substantial
increase in the export of a commodity can depress its price in the world market to
such an extent of making growth damaging for the country. That is, the negative
terms of trade effect outweights the positive effect outweighs the positive effect of
increased output.
The following three crucial conditions are necessary for immiserising growth to occur.
a) The country’s growth must be biased towards the export sector.
b) The foreign demand for the country’s exports must be price inelastic, so
that an expansion in export supply leads to a large drop in price.
c) The country already be heavily engaged in trade for the welfare meaning of
the drop in the terms of trade to be great enough to offset the gains from
being able to supply more.
118
Industries Products
I1 E
T1 C
A1 E1 C1
A
T1
B T B1
Primary Products
Figure 14.1 illustrates a case of immiserising growth. In the figure, we
represent an underdeveloped country exporting primary products and importing
industrial goods. Originally, with the AB-production possibility curve, and IT-terms
of trade, the country is on the consumption point E on the indifference curve IC.
Now suppose that the production possibility curve shifts from AB to A 1 B1 ,
reflecting an increase in the production potential biased strongly towards primary
products and the terms of trade become T 1 T1, which is flatter than TT, implying a
deterioration for the country. (This is because the increase in the supply of the
primary product results in a fall in its price, demand for the primary product being
relatively inelastic). Now, the country is on the consumption point E1 on the
indifference I 1C1 , which represents a lower level of welfare than IC. This implies that
the production gain is more than offset by the declining terms of trade, resulting in
a decreased welfare position.
Supplementing Bhagwati’s proposition, Harry Johnson has shown that the
phenomenon of immiserising growth, involving reduction in social welfare below the
initial pre-growth level, can arise also in the case of a small country without any
monopoly power in trade if technical progress occurs in a tariff-protected import
competing industry or if the factor in the use of which this industry is intensive is
augmented.
The case presented by Bhagwati and Johnson belong to a general class of
immiserising growth phenomena which can arise in the presence of distortions. In
the case presented by Bhagwati, where gains from growth were outweighed by
losses from worsened terms of trade, the distortion is foreign; the average terms of
trade differ from the marginal. In the tariff situation for a small country analysed by
Johnson, the distortion is policy imposed. In either case, the essential point is that
the gain which would accrue from growth is outweighed by the incremental loss of
real income which the distortion imposes in the post-growth situation. Thus, the
phenomenon of immiserising growth can occur, in principle, whenever distortions
occur in an economic system.
119
14.3.6 Export Promotion

14.3.6.1 Importance and Objectives
Governments all over the world actively promote exports for various reasons.
When the domestic market is small, the foreign market provides opportunities
to achieve economies of scale and growth. Second, the supply of many commodities,
as in the case of a number of agricultural products in India, is more than the
domestic demand. Third, exports enable certain countries to achieve export-led
growth. Fourth, export markets may help mitigate the effects of domestic recession.
Fifth, a country may need to boost its exports to earn enough foreign exchange to
finance its imports and service its foreign debt. It may be noted that many
countries are suffering from trade deficit and foreign debt. Sixth, even in the case of
countries with trade surplus, export promotion may be required to maintain its
position against the international competition and the level of domestic economic
activity. Last, higher exports facilitate larger imports and help increase
consumption levels and economic welfare.
Most of the benefits of exports mentioned above call for a vigorous export
promotion in India.
The important objectives of export promotion are :
1. To provide organizational and infrastructural facilities for development of export.
2. To provide production, marketing and financial support for the development of
exports.
3. To compensate the exporters for the high domestic cost of production.
4. To provide necessary assistance to the new and small exporters to develop export
business.
5. To increase the relative profitability of the export business vis-à-vis the domestic
business
14.3.6.2 Export Promotion Measures
Export promotion includes measures to increase export production, establishment
of organizations to assist exporters in different ways, export marketing assistance and
measures to reduce business risks and increase profitability.
A brief account of the measures taken by the Government of India for export
promotion is given below.
14.3.6.3 Organisational Set-up
The government has established or sponsored a number of organizations to
provide different types of assistance to the export sector. While some of these
organisations are product specific, others are general. Apart from the organizations
set up exclusively for export promotion, there are also a number of others which
assist the export sector in different ways.
Assistance provided by these organizations cover areas such as identification
of markets and market development; identification of products with export potential
and product development; financing of foreign trade; education and training in
120
export marketing; export intelligence, incl uding research and collection and
dissemination of information; insurance covers against export risks; organization of
and participation in, trade fairs and exhibitions; packaging; pre -shipment
inspection and quality control ; export documentation and proc edures; and so on.
14.3.6.4 Incentives
Export incentives are a widely employed strategy of export promotion. The
main aim of these incentives is to increase the profitability of export business.
Important export incentives in India include rebate of duties, income tax
concession, interest subsidies, freight subsidy, etc. However, as the Abid Hussain
Committee has observed, they are more of a compensation for the comparative
disadvantages faced by the Indian exporter than incentives. A brief account of these
‘incentives’ is given below.
14.3.7 Duty Exemption / Drawback
Duty exemption as an export promotion measures had its origin in India during the
Second Plan. Over the years, the scheme has been enlarged and modified.
The scheme of duty exemption is designed to avoid the incidence of commodity
taxes like exercise duty and customs duty on the exports so as to make the exports
more price competitive. The exporters are either exempted from the payment of duty
while procuring inputs like raw materials and intermediates or, in cases where the
duty is paid on the inputs, the duty paid is refunded. Thus, under the duty
drawback system, the exporters are reimbursed for tariff paid on the imported raw
materials and intermediates and central excise duty on domestically procured
inputs which enter into export production.
Due to a series of modifications in the import policy for registered exporters,
particularly with the introduction of the advance licensing system, the exporter can
now make most of the import of inputs without payment of customs duty. Eligible
exporters are entitled to interest-free bank credit against the duty drawback
applicable to them up to a period of 90 days or up to the time they realize the
drawback, whichever is earlier.
14.3.7.1 Other Incentives
Other important export promotion measures include the following :
14.3.7.2 Income Tax Concession
Besides the exemption or rebate of indirect taxes, a special fiscal treatment
granted to exports is in the form of certain tax concessions with respec t to income
from exports. Such income tax rebates have been provided to exporters in India
since the early 1960s.
14.3.8 IPRS
The International Price Reimbursement Scheme was designed to make
specified inputs, like steel and aluminium, available to the exporters at
international prices. Under this scheme, the difference between price of the
indigenously procured material and its international price was reimbursed to the
121
exporter to offset the cost difference because of the difference in the input prices.
The IPRS has been replaced by the Engineering Products Exports (Replenishment of
Iron and Steel Intermediates) Scheme.
14.3.8.1 Other Schemes
In addition, schemes were put in place for imports undertaken by exporters so
as to neutralize the impact of any duties on those imports. Such schemes are
Export Promotion Capital Goods (EPCG), Duty Free Replenishment Certificate
(DFRC), Duty Remission Scheme and the Duty Entitlement Passbook (DEPB)
Scheme.
14.3.8.2 Awards
A number of awards have been instituted to encourage exports and to
recognize excellence in exports. There are separate awards for different categories of
exporters. Awards are given on the basis of certain specified criteria such as
development of a market for products which have not been exported pre viously,
substantial increase in exports, successful introduction f new products, product
development, successful break though in foreign markets where conditions have
been especially difficult, etc.
Some incentives like the Cash Compensatory Support Scheme (CCS),
Replenishment Licence (REP) / Exim Scrip were abolished following the economic
reforms.
References to some other incentives are made in the subsection on Marketing
Assistance.
14.3.9 Marketing Assistance
A number of steps have been taken to assist the exporters in their marketing
efforts. These include conducting, sponsoring or otherwise assisting, market
surveys and research; collection, storage and dissemination of marketing
information, organizing and facilitating participation in international trade fairs and
exhibitions; credit and insurance facilities; release of foreign exchange for export
marketing activities; assistance in export procedures; quality control and pre -
shipment inspection; identifying markets and products with export potential ;
helping buyer-seller interaction, etc.
14.3.10 Export Credit
From time to time, the Reserve Bank has undertaken several measures to
ensure adequate and timely availability of credit for exports at competitive interest
rates. The RBI’s export credit refinance schemes have played a pivotal role in this
area. Commercial banks have been providing credit to exporters at pre -shipment
and post-shipment stages, both in rupees as well as foreign currency.
The rupee export credit has been generally available at rate of interest linked
to the Prime Lending Rate (PLR). The export credit in foreign currency is provided at
internationally competitive interest rates linked to London Inter-Bank Offer Rate
122
(LIBOR) or similar interest rates. The Reserve Bank has been adjusting interest
rates o0n rupee export credit from time to time taking into account the need to
maintain competitiveness by looking at interest rate differentials, as also other
factors like inflation and developments in financial markets. The Reserve Bank has
also taken measures to support institutional arrangements for export promotion,
such as policy initiatives to provide a liberalized environment for the operations of
SEZ units. These measures include : (i) exemption from interest rate surcharge on
import finance ; (ii) release of foreign exchange to DTA units for buying goods from
EOU / EPZ/ SEZ units ; (iii) permitting 100 per cent retention of foreign exchange
in Exchange Earners Foreign Currency (EEFC) accounts; (iv) permitting overseas
investment by SEZ units from the EEFC accounts through the automatic route,
write-off of unrealized export bills and (v) permitting SEZ units to enter into a
contract with overseas commodity exchanges or markets to hedge the price risk in
the commodity on export/import provided that the contract is made on a ‘stand
alone’ basis.
1. Export Pessimism
2. Import Substitution Strategy
3. Harmful Effects of Trade, Prebisch-Singer Thesis (Secular Deterioration
Thesis)
4. Immiserising Growth
5. export promotion, Importance and Objectives of Export Promotion Measures.
1. What is meant by import substitution?
2. What is Immiserising Growth?
14.6 SUMMARY
This chapter examines Export Pessimism and Import Substitution Strategy,
Harmful Effects of Trade, Prebisch-Singer Thesis (Secular Deterioration Thesis),
Immiserising Growth, export promotion, Importance and Objectives of Export
Promotion Measures, Organisational Set-up, Incentives, Duty
Exemption/Drawback
Other Incentives, Income Tax Concession, IPRS
1. Explain the Importance and Objectives of Export Promotion Measures?
2. Jagdish Bhagawathi, International trade & Economic expansion. The
American economic review, dec.1958.
14.9 ASSIGNMENTS
1. How Import Substitution and Export Promotion measures help the Indian
economy for its growth?
123

1. Peter B. Keren, The International Economy, Third Edition, CAMBRIDGE
EDITION, 1994.
2. Francis Cherunilam, International trade and export management, Himalaya
Third Edition 2013.
1995.
1. Whe the r import substitution measure or export promotion measure; which is
more suitable for India? Why?
14.12 KEY WORDS
 Export Pessimism , Import Substitution Strategy, Trade, Export Promotion,
Importance and Objectives of Export Promotion Measures, Organisational
Set-up, Incentives, Duty Exemption /

124
LESSON - 15
EXPORT PROMOTION COUNCILS

15.1 INTRODUCTION
Each council is responsible for the promotion of a particular group o f
products,, projects and services. They are non -profit organizations registered under
the India Companies Act or the Societies Registration Act, as the case may be and
supported by Financial assistance from the Government of India.
15.2 OBJECTIVES
 The basic objective of Export promotion councils is to promote and develop
the exports of the country.
15.3 CONTENTSS
15.3.1. EPC role in export promotion
15.3.1.1. Functions
15.3.2. Professional bodies
15.3.3. Autonomy
15.3.4. Government support
15.3.5. State trading corporation
15.3.6. Exports from India
15.3.6.1 Principal items of exports
15.3.7. Imports in to India
15.3.7.1. Principal items of imports
15.3.7.2. Performance indictors
15.3.7.3. Recent initiatives
15.3.8. MMTC’s unique position
15.3.8.1. Four decades of global excellence
15.3.8.2. MMTC – the minerals success story
15.3.9. Commitments with the buyer
State Trade - Role and objectives - Performance of STC - Subsidiaries of STC -
Minerals and Metal Trading Corporation (MMTC) - Handicraft and Handlooms
Export Corporation (HHEC) - The Tea Trading Corporation of India (TTCI) - Project
Equipment Corporation (PEC) Central Cottage industries Corporation (CCIC) -
Cotton Corporation of India (CCI).
15.3.1 EPC Role in Export Promotion
The main role of the EPCs is to project India's image abroad as a reliable
supplier of high quality goods and services. In particular, the EPCs encourage and
monitor the observance of international standards and specifications by exporters.
The EPCs keep abreast of the trends and opportunities in international markets for
goods and services and assist their members in taking advantage of such
opportunities in order to expand and diversity exports.
125
15.3.1.1 Functions
The major functions of the EPCs are as follows:
1. To provide commercially useful information and assistance to their
members in developing and increasing their exports.
2. To offer professional advice to their members in areas such as technology
upgradation, quality and design improvement, standards and
specifications, product development and innovation etc.,
3. To organize visits of delegations of its members abroad to explore overseas
market opportunities.
4. To organize participation in trade fairs, exhibitions and buyer-seller meets in
India and abroad.
5. To promote interaction between the exporting community and the
Government both at the Central and State levels, and
6. To build a statistical base and provide data on the exports and imports of
the country, exports and imports of their members, as well as othe r relevant
international trade data.
15.3.2 Professional Bodies
In order to give a boost and in impetus to exports, it is imperative that the
EPCs function as professional bodies. For this purpose, executives with a
professional background in commerce, management and international marketing
and having experience in government and industry are brought in to the EPCs.
15.3.3 Autonomy
The EPCs are autonomous and regulate their own affairs. However, if the
Central Government frames uniform bye-laws for the constitution and/or for the
transaction of business of EPCs, they are required to adopt the same with such
modifications and Central Government may approve having regard to the special
nature or functioning of such EPC. The EPCs shall not be required to o btain the
approval of the Central Government for participation in trade fairs, exhibitions etc
and sending sales teams/delegations abroad. The Ministry of Commerce and
Industry/Ministry of Textiles of the Government of India, as the case may be, would
interact with the Managing committee of the council concerned, twice a year, once
for approving their annual plans and budget and again for a mid -year appraisal and
review of their performance.
15.3.4 Government Support
The EPCs may be provided financial assistance by the Central Government.
The following are the names of the export, councils operating in India and the
details of the head quarters, addresses, etc., the students may browse the internet
which all most all the EPC has one.
1. Agricultural and Processed Food Product Export Development Authority,
New Delhi
2. Apparel Export Promotion Council, New Delhi
126
3. Basic Chemicals, Pharmaceuticals and Cosmetics Export Promotion

Council, Mumbai.
4. Cashew Export Promotion Council, Cochin
5. Carpet Export Promotion Council, Safdarganj, 110 029.
6. Chemicals and Allied Products Export Promotion Council, Mumbai.
7. Cotton Textiles Export Promotion Council, Mumbai
8. Electronics and Computer Software Export Promotion Council, New
Delhi
9. Engineering Export Promotion Council, Kolkotta
10. Gem and Jeweller Export Promotion Council, Mumbai
11. Export Promotion Council for Handicrafts, Delhi.
12. Handlooms Export Promotion Council, Chennai
13. The India Silk Export Promotion Council, Mumbai
14. Council for Leather Exports, Chennai
15. Overseas Construction Council of India, Mumbai
16. Plastics Export Promotion Council, Mumbai
17. Shellac Export Promotion Council, Mumbai
18. Sports Goods Export. Promotion Council, New Delhi
19. Synthetic & Rayon Textiles Export Promotion Council, Mumbai
20. Wool and Woolens Export Promotion Council, New De lhi.
21. Power loom Development and Export Promotion Council, Mumbai.
22. Jute Manufacturers Development Council, Kolkota
23. Export Promotion Council (EPC) for EOUs/SEZs, NEW DELHI
The following agencies and commodity boards shall also be regarded as an Export
Promotion Council.
1. Coffee Board, Bangalore
2. Coir Board, Kochi
3. Federation of India Export Organizations (FIEO)
4. The Marine Products Export Development Authority, Kochi
5. Rubber Boar, Kottoyam
6. Spices Board, Cochin
7. Tea Board, Kolkota
8. Tobacco Board, Guntur
9. Wool Industry Export Promotion Organization (WOOLTEXPRO), Mumbai
15.3.5 State Trading Corporation
The State Trading Corporation of India Ltd. (STC) is a premier international
trading house owned by the Government of India. Having been set up in 1956, the
Corporation has developed vast expertise in handling bulk international trade
though, dealing largely with the East European countries during the early years of
its formation, today it trades with almost all the countries of the world.
127
By virtue of infrastructure and experience possessed by the Corporation, it

plays an important role in arranging import of essential items into India and
developing exports of a large number of items from India. It exports a large number
of items ranging from agricultural commodities to manufactured products from
India to all parts of the world. Because of Corporation's in depth knowledge about
the Indian market, STC is able to supply quality products at most competitive
prices and ensure that the goods reach the foreign buyer within the prescribed
delivery schedule. It also imports bulk commodities for Indian consumer as per
demand in the domestic market.
The eventful track record of 48 years has helped STC to gear itself to face the
fierce competitive challenges, seize business initiatives and build on its core
competencies.
With a global vision in effective management, result oriented approach, strong
belief in productivity and accountability, STC is future ready to take advantage of
the opportunities in the 21 st century and help propel India towards the new
frontiers in world trade.
Areas of Operation :
 Exports from India
 Off-Shore Trading
 Counter Trade
 Joint Ventures
 Imports into India
 Domestic Trading
 Market support operation - Rubber, Tobacco, etc.
Performance Indicators
Annual Turnover: 2003-04 (Provisional) Rs 8194 Crore (US$ 1787 million)
Net Profit: 2003-04 (Provisional) Rs 23.6 Crore (US$ 5 million)
Equity Rs 30 Crore (US$ 6.5 million)
15.3.6 Exports from India
STC exports a diverse range of items to a number of destinations throughout
the world. Exports by STC vary from traditional agricultural commodities to
sophisticated manufactured products.
Besides negotiating, contracting and shipping, STC seeks to introduce new -
products, explore new markets and undertake wide ranging ancilliary functions
such as Product Development, Financing, Quality Control and Import of machinery
and raw materials for export production.
STC makes purposeful use of its world-wide connections, abundant
experience, upto-date information about the market trends and long term
perspective on various commodities to ensure competitive prices, right quality and
adherence to delivery schedules to the buyers abroad.
128
15.3.6.1 Principal Items of Exports

Agricultural Commodities Manufactured Products
Wheat Chemicals, Drugs & Medical Disposables
Cashew Engineering & Construction Materials
Coffee Consumer Products
Rice Textiles and Garments
Tea Leatherware
Tobacco & Rubber Processed Foods
Sugar
Extractions
Opium
HPS Groundnut
Spices
Castor Oil & Seeds
Jute Goods
15.3.7 Imports in to India
STC imports a number of essential commodities to cover the domestic
shortfalls and hold the price line. STC serves the national objective by arranging
timely imports at most competitive prices. In the process, the Corporation makes
best use of its strength in handling bulk imports, vast infrastructure and above all
an experience of over four decades in fulfi lling the needs of the industry.
15.3.7.1 Principal Items of imports
 Edible oils  Hydrocarbons
 Sugar  Gold & Silver
 Wheat  Minerals / Metals
 Fatty Acids  Fertilisers
 Pulses  Scientific Instruments & Hospital / Police
equipments
15.3.7.2 Performance Indictors
Annual Turnover: 2003-04 (Provisional) Rs 8194 Crore (US$ 1787 million)
Net Profit: 2003-04 (Provisional) Rs 23.6 Crore (US$ 5 million)
Equity Rs 30 Crore (US$ 6.5 million)
Net Worth(as on 31.3.2003) Rs 273 Crore (US$ 59 million)

15.3.7.3 Recent Initiatives
 Undertook export of 1.6 million tonnes of foodgrains during 2003 -04.
 Entered into imports of a number of new items such as coal/coke, minerals,
metals, fertilisers and vanaspati.
 Undertook export of roofing sheets.
129
 Planning to set up a joint venture for import, refining, packing and retailing
of edible oils in India.
 Planning to undertake brand marketing of agricultural commodities like rice,
sugar, tea, coffee, spices in India.
While undertaking import and export operations, the Corporation renders following services
To the Overseas buyer
STC acts as an expert guide for buyers interested in Indian goods, For them,
STC finds the best Indian manufacturers, undertakes negotiations, fixes delivery
schedules, oversees quality control - all the way to the final shipment to the entire
satisfaction of the buyer.
To the Indian industry
The Indian manufacturers, whose products sail the seas via STC, benefit a lot
from, its expertise. STC helps thousands of Indian manufacturers to find markets
abroad for their products. STC assists the manufacturers to use the best raw -
materials, guides and helps them manufacture products that will attract buyers
broad. Some of the other services offered by STC to the Indian manufac turers
include:
 Financial assistance 10 exporters on easy terms.
 Taking products of small scale manufacturers to international trade fairs
and exhibitions.
 Import of machinery and raw material for export production.
 Assistance in the areas of marketing, te chnical know-how, quality control,
packaging, documentation, etc.
 Supply of imported goods in small quantities as per convenience of buyers.
 Market intervention on behalf of the Government.
To the Indian Consumer
The Indian consumers also benefit from STC's expertise and infrastructure.
STC imports essential commodities for them to cover shortfalls arising in the
domestic market. During the last 5-6 years, STC imported sugar, wheat and pulses
to meet domestic requirements at a very short notice.
In MMTC we focus on fashioning our HR policies towards providing more non -
monetary incentives stemming from job satisfaction, diverse learning opportunities
and wider exposure to ever-changing global business environment. MMTC Ltd.,
which is a global trading organization and one of Asia's leading trading companies,
has been the first corporate in the public sector to realize the vital role which online
trading has come to occupy in today's global business.
HR mantra in MMTC is to provide more and more job enrichmen t
opportunities to all so as to ensure that employees remain motivated to realize their
full potential for organizational goals and self-development. Opportunities are also
provided to all to enrich their knowledge base and technical skills through in -house
130
training programmes and through trainings/seminars organized by reputed outside

agencies. Human resource development in MMTC, therefore, is a continuous
exercise compatible with the change in business patterns and technological
innovations in an era of diversification and search for new business opportunities.
Notwithstanding the culture of a public sector organization, we in MMTC realize
that our most important asset is the employee. We design our HR policies to meet
the above objective. Following are some of the HR politics followed in MMTC.
i) In an IT driven culture, computer literacy is imparted to all employees
ii) Non-graduate employees are encouraged through various incentive
schemes to become graduates. Likewise, post-graduate qualifications are
encouraged through incentives for promotion to higher levels.
iii) Graduate employees are encouraged to obtain professional qualifications
through corporate sponsorships.
iv) Through job rotation employees are constantly motivated to acquire
knowledge and operational skills in different areas of company's operations.
This exercise obviously prepares employees for managing higher positions
more competently.
v) As an incentive to better performers, merit based promotions are considered.
vi) Regular training programmes for upgrading employee skills, knowledge and
attitudes, in areas like IT, ERP, e-commerce, international trading practices,
general management techniques etc. are organized in an effort to keep
employee morale and commitment high.
vii) Specialization is encouraged in higher management positions through
specialized management development programmes arranged within India
and outside India. LME training, hedging in metals, global bullion pricing,
third country trading, offshore trading, counter-trade mechanism are some
of such specialized trainings.
viii) General management training programmes for all categories of managers are
periodically organized through reputed institutions like IIM, ASCI, IIFT, MDI
etc.
ix) Periodical training programmes axe also organized for the development of
SC/ST/OBC employees and women employees.
In short, corporate philosophy at MMTC towards HR is to ensure continuous
development of human resource for fast changing global business through
individual freedom and flexibility.
During the year 2002-03 MMTC has achieved considerable success in minerals
exports leading to an impressive turnover of 1244 crores. In quantitative terms, MMTC
was able to export 13.02 million tonnes of iron ore, 2.31 lakh tones of Manganese ore
and 5.81 lakh tonnes of Chrome Ore during 2002-2003. As a recognition of the above
achievements during the year 2002-03, MMTC was awarded the Highest Export Award
for export of minerals once again for Twelfth Time in a row.
131
MMTC has been consistently striving to en hance its competitiveness in the

area of value addition. It has set up a crushing and screening plant at Banehatti in
Bellary, Hospet Sector not only to source higher value realization in the
international market but also to compete with the international suppliers like
Australia and Brazil in the markets like Japan and South Korea.
MMTC has been consistently striving to enhance its competitiveness in the
area of value addition. It has set up a crushing and screening plant at Banehatti in
Bellan-Hospet Sector not only to source higher value realization in the international
market but also to compete with the international suppliers like Australia and
Brazil in the markets Like Japan and South Korea.
Supply of Iron Ore lumps and Fines to the Steel Plant in Orissa (NiNL)
promoted by MMTC would provide further fillip to value addition to minerals. The
1.1 million ton Steel Plant consumes about 2 million tons of various types of
minerals annually being supplied by MMTC. The company has also taken an
initiative to link import of canital equipments required for modernizing mining
activities in the country to promote export of minerals. The import of the
earthmoving equipments was linked to export of Iron Ore under EPCG scheme.
15.3.8 MMTC’s Unique Position
15.3.8.1 Four Decades of Global Excellence
MMTC continues to lead India's foray in mineral exports with global success
for four decades by redefining standards of global excellence by customer
satisfaction worldwide. It continues to be the largest supplier of iron ore, handling
more than one fourth of India's total exports.
MMTC has managed with commendable elan the bulk operations spread
across far - flung areas in the mineral rich states of the country and by exporting
minerals from all the major ports of India., thus utilizing the extensive network
of infrastructure facilities.
MMTC’s drive for excellence is reinforced by its marketing thrust in traditional
markets like Japan and S, Korea and Pakistan. MMTC is the catalyst in developing
the Chinese market for Indian iron Ore.
MMTC, India's largest foreign trade enterprise, reiterates its commitment to
augment India's share in the global market for minerals and ores. For our
consistent and sustained performance in the global arena, we deeply thank our
valued patrons, associates and partners who have helped us reach the pinnacle of
global standards.
15.3.8.2 MMTC – The Minerals Success Story
Widely recognized as a major foreign exchange earner, MMTC has
strengthened its capabilities with an extensive network of comprehensive
132
infrastructural facilities to optimize the efficiency of its mineral operations. Today, it

is the single largest minerals exporter from India.
Close interaction with users to quickly translate their requirement into
products and services, meeting buyer's aspiration in terms of quality and price with
a variety of grades available for shipment from various ports from India has helped
in improving its market share successively over the years, There has also been a
shift in the demand pattern with users preferring to go for low value input costs
which commensurates with advancements in technology. This has made some low
and medium grades of iron more attractive to buyers if offered at competitive rates,
MMTC was quick to locate such potential demand linking it with economically
viable sources of iron ore supplies in India and its corresponding logistic
arrangements.
15.3.9 Commitments with the Buyer
Another significant achievement by MMTC has been the signing of fresh long -
term contracts with Japanese Steel Mills, Pohang iron & Steel Company! (POSCO),
South Korea-and also with the leading Chinese Steel Mills, Commencing from 1st
April 2001 for the next five years, MMTC and Kudremukti will supply iron ore to the
Japanese Steel Mills covering a quantity of 5,3 million tones to 9,3 million tones
annually. Another Memorandum of Understanding was signed for the next long
term contract with POSCO from FY2001 - FY2005, with an annual quantity to
range from 2.0 to 2.8 million tones. Similar Long Term MOUs are also signed with
Chine Buyers for a quantity ranging from 2.30 to 3.96 million tones.
EPC role in export promotion, Functions, Professional bodies, Autonomy,
Government support, State trading corporation, Exports from India, Principal
items of exports, Imports in to India,
1. What is EPC?
2. What are the principal items of exports?
15.6 SUMMARY
In this chapter we discussed about EPC role in export promotion, Functions,
Professional bodies, Autonomy, Government support, State trading corporation,
Exports from India, Principal items of exports, Imports in to India, Principal items
of imports, Performance indicators, Recent initiatives , MMTC’s unique position,
Four decades of global excellenc e, MMTC – the minerals success story,
Commitments with the buyer.
1. What is the Functions of State trading corporation?
133

American economics review, dec.1958.
15.9 ASSIGNMENTS
1. Exami n e the Principal items of exports and Imports in to India?
Edition, 1994.
Third Edition 2013.
3. M.C. Vaish & Sudama Singh, International Economics, sixth Edition, reprint
1995.
Himalaya public house), 201.
1. Exami n e the Performance and Recent initiatives of MMTC?
15.12 KEYWORDS
 EPC, export promotion, Functions, Professional bodies, Autonomy,
Government support, State trading corporation, Exports from India,
Principal items of exports, Imports in to India,

134
LESSON - 16
MEETING INTERNATIONAL STANDARDS

16.1 INTRODUCTION
Going up the ladder of value addition to meet international standards, MMTC
has moved ahead from its position as supplier of ‘run of mine’ lumpy iron ore to
sized lumps.
16.2 OBJECTIVES
 To understand how the STC’s attain the international standards
16.3 CONTENTS
16.3.1. Meeting international standards
16.3.1.1. MMTC-Pioneering Infrastructure Development
16.3.2. Items of trade
16.3.3. Logistic support
16.3.4. Destination of exports
16.3.4.1. Leader in Mineral Exports
16.3.4.2. Corporative Objectives
16.3.5. The handicrafts & handlooms exports corporation
16.3.6. Mission
16.3.7. Corporation values
16.3.7.1. Corporation Commitments
16.3.7.2. Corporation Objectives
16.3.8. Corporation main products handlooms
16.3.9Cotton corporation of India
16.3.9.2Commercial operations
16.3.9.1. Commitments
16.3.1 Meeting international standards
Such a move presupposes stringent quality control and unrelenting attention
on monitoring, sourcing, moving and shipping of the product MMTC is confident of
living up to the expectations of the buyers in delivering the products to the total
satisfaction of the end users.
16.3.1.1 MMTC-Pioneering Infrastructure Development
MMTC’s role in the Nation’s mineral export does not stop with increasing the
volume. MMTC has been making certain strategic plans which would facilitate in
not only sustaining the present level of exports but, also equip the country to meet
the challenges of larger volume of exports in future.
One of the bottlenecks in increasing the Indian Iron Ore exports is the
deficiency in port facilities especially in the East-Coast where the operations are
free from the vagaries of weather like, closing of port operations during the
monsoon period in Goa, Mangalore, Bellikari etc. In this direction, MMTC has be en
successful in obtaining an exclusive right to develop a temporary Iron Ore Terminal
135
at Ennore near Chennai. This facility is likely to be operational by May / June ’04
which will facilitate export of about 2.5 million tones Iron Ore per annum. This, in
turn, will de-congest the Chennai port where presently the pre -berthing waiting
time for Iron Ore vessels is more than a month. MMTC is also in dialogue with
Ennore Port for developing the permanent Terminal at Ennore which will facilitate
loading of super cape-size vessels to cater the increased demand for Iron Ore from
the Asian markets like, Japan, China, South Korea and Taiwan. This facility would
be comparable to the international standards presently now being operated from
Australia and Brazil. MMTC is also in constant dialogue with the various Ministries,
Railways, Ports and exporters to assess the development potential for a
comprehensive infrastructure requirements for larger volume of exports. MMTC will
continue to play a vital role in these directions.
16.3.2 Items of Trade
 IRON ORE
 MANGANESE ORE
 CHROME ORE
 OTHERS
(Mud Chemicals, Barytes, Bentonite, Bauxite, Talc, Gypsum,
Feldspar, Quartz/Silica Sand, Garnet Sand, Kaolin (China Clay), Vermiculite)
16.3.3 Logistic Support
At all the loading ports, MMTC ensures proper receipt, stacking, quality
control and delivery of the cargo into the vessels for shipment. The entire
arrangement guarantees delivery of minerals & ores contracted in continuous
manner all around the year.
Table 16.1. All ports are equipped with mechanical loading facilities
Mechanical Berth and Handling Facilities
Vizag Outer Chennai Outer Marmagao Berth Paradip
Harbour Harbour (9)**
Outer Channel M-Meters
Length 1400 M 5900 M 4500 M 2020 M
Width 250 M 244 M 250 M 190 M
Depth 19 M 19.2 M 13.7 M 15 M
Inner / Entrance
Length 1250 M 780 M - 1100 M
Width 250 M 220 M - 160 M
Depth 19 M 18.6 M 13.1 M 12.8 M
Turning Basin
Diameter 610 M 549 M 480 M 520 M
Depth 18 M 17.4 M 11.3 M 12.8 M
Berth
Length 263 M 222 M 222 M 155 M
Depth 17.5 M 17.4 M 11.3 M 13.2 M
Loader
136
Vizag Outer Chennai Outer Marmagao Berth Paradip

Harbour Harbour (9)**
Travelling 225 M 200 M 200 M (by 2 loaders) 138.7 M
Distance
Outreach 27 M 21.9 M 21.5 M 27.1 M
Clear Height 21 M 20.55 M 20.3 M 18.9 M
Loading Rate 4000 MT / Hr 4000 MT / Hr x 2 4000 MT / Hr x 2 2500 MT / Hr
Loa 270 M 274 M 335 M 260 M
Beam 42 M 47.8 M 50 M 40 M
Sailing Draft 16 M 16.2 M 13 M # 12.8 M (12 M during
Mar.– Nov.)
# - in conjunction with tide.
** - Remains closed for shipment of fines during 15th May to end Septembers (Monsoon) only
washed lump shipments can be effected. Sailing drafted! limits to 11 mt. during monsoon.
No right navigation also during monsoon.
Vessels of less than 35,000 DWT loaded in midstream, either by Transfers vessel or by
ships/grabs or manually, for which facilities exist.
16.3.4 Destination Of Exports
MMTC exports Iron ore to Japan, South Korea, China, Pakistan, Middle East,
Thailand, Romania etc. The export is both on the Basis of long lean aim annual
spot contracts.
16.3.4.1 Leader in Mineral Exports
MMTC's performance in mineral trade has been acknowledged by the CAPEXIL
(Chemicals and Allied Products Export Promotion Council) by conferring the
nation's highest award for excellence in mineral exports twelve times in succession.
MMTC's mineral sales are on FOB basis only.
As a major trading company in Asia (with special focus on international
trading particularly in the field of bulk handling), MMTC aims at achieving
sustainable and viable growth rate by achieving excellence in all its activities,
generating optimum profits through total satisfaction of shareholders,
customers, suppliers, employees and society.
16.3.4.2 Corporative Objectives
 To be a leading International Trading House operating in the competitive
global trading environment, particularly specializing in bulk handling
activities, and adequate returns on capital employed.
 To strive to become market leader in most of its traditional product lines like
Minerals, Metals, Fertilisers and Gold, Gems & Jewellery.
 To aim at becoming a major exporter of Agro products.
 To render high quality of service to all categories of customers with
professionalism and efficiency and to provide high quality of goods and
services to all our customers.
 To put in place a streamlined and efficient system within the company for
settlement of commercial disputes.
137
 To promote development of infrastructural facilities to facilitate trade related

activities.
With liberalization, competition became severe and posed an immediate threat
to the traditional lines of business as it became free for all. In this completely
changed business scenario, MMTC quickly converged its focus to consolidate the
core business areas like minerals, metals and fertilizers. To complement
consolidation and support expansion, diversification into new areas like agro,
precious metals, coal and hydrocarbon were initiated with added emphasis on
expanding trade related infrastructure like warehouses, distribution and retail
outlets.
No doubt increased competition means higher pressure on .margins and
business success rates, but to deal with these challenges, the company has been
putting greater emphasis on enhancing operational efficiencies and increased
customer focus.
To increase profit margins and tackle both global and domestic competition,
MMTC has set forth processes to enhance their knowledge base, sharpen marketing
skills, optimize internal systems and adopt a new IT driven mechanism to enhance
responsiveness and have effective monitoring and control.
Management focus is on improving efficiencies of all their resources including
the key asset - human resources through innovative schemes. IT will be the key
enabler, which will not only reinforce the core activities of the business transactions
but would also broaden the range of the business opportunities. As an
organization, MMTC will continue to be customer driven. Profits in future will be
influenced by the intent of the company to give customer value for money, improved
responsiveness and providing specific and most appropriate solu tions to customer
needs.
MMTC has reinforced its business setting a strong foundation for an
accelerated growth in the years ahead. Strategic initiatives and aggressive
marketing efforts have been well rewarded with an all round growth in the
company's performance amidst highly challenging operating environment driven by
intense competition.
MMTC is diversifying, establishing and expanding into new areas of core
competency i.e. bulk handling. Coal & Hydrocarbon and Agro have been identified
as promising and new business areas having potential to make MMTC bigger am
more profitable.
MMTC has made forays into various new products for value addition. In the
area of mineral exports, value added product in the form of sized lumpy ore is now
being exported to Japan and S.Korea. MMTC promoted project in Orissa will
provide value addition of nearly 6 times to the iron ore hitherto exported from the
region.
MMTC - the public sector trading giant has successfully transformed to adjust
to the new economic order.
138
16.3.5 The Handicrafts & Handlooms Exports Corporation

The Handicrafts and Handlooms Export Corporation is a, A Central Public
Sector Undertaking under the administrative control of the Ministry of Textiles,
Government of India established with the twin objective s of :
i) To undertake export of Handicrafts, Handlooms Products, Khadi & Prod ucts
of Village Industries from India.
ii) Export Promotion and Trade development of Handicrafts and Handlooms
products (including hand-knotted woolen carpets and ready made
garments) and also to undertake export of gold and silver; jewellery
articles and import of bullion, timber and other raw materials.
16.3.6 MISSION
Strive to make available Indian handicrafts and Handlooms products
traditionally produced in the remote parts of the country to all parts of Globe. Strive
to achieve qualitative improvement in goods produced by the artisans, weavers and
crafts persons in order to augment the credibility of India handlooms and
handicrafts products in the export markets. Strive to improve the productivity of
the artisans, weavers and crafts persons through developmental activities in order
to improve and sustain their quality of life.
16.3.7 Corporation VALUES
Buyers satisfaction Transparency and courtesy Prompt and professional
service Compassion and better business sense.
16.3.7.1 Corporation Commitments
 To provide quality merchandise to foreign buyers within the stipulated
delivery schedule.
 To provide avenues for better prices to the artisans, weavers and craft
persons.
 To Provide technical, financial, marketing and other assistance to the
artisans, weavers, and crafts persons viz a viz foreign buyers.
 To improve the profitability of the Corporation and to give the Government
better returns for the money invested by it.
 To ensure original handmade/ crafted products of Indian origin.
 To ensure revival of languishing art. & craft of India.
16.3.7.2 Corporation Objectives
Social
1. Contributing to better quality of life of craftsmen and preservation of
traditional crafts as national heritage.
2. Benchmarking for wage/equitable return to artisans/weavers as a role
model employer.
Economic
139
1. Development and export of handicrafts /handlooms of India and to exploit

their potential to the maximum extent.
2. Catalytic agent's role for the Industry and as a platforms/marketing arms to
lower rung of artisans/weavers who otherwise do not have means to export of
their products and are reduced to daily rated workers
16.3.8 Corporation MAIN PRODUCTS Handlooms
Exhaustic range of fabrics for dresses and home furnishings in cotton, jute,
silk, wool in various blends and textures, dobby, jacquard, prints, embroideries etc.
including carpets.
Handicrafts
Wooden, stoneware, metalware, grabsware, papier machie. glassware, clay,
teracotta, ceramics and their various blends as objects of art and utility.
Jewellery
Gold, Silver and studded, semi-precious and costume jewellery.
The Audited Results of the Corporation for the year 1999-2000 and previous three financial
years are as under
1996- 1997- 1998- Rs. In 97 98 99 Crores
Actuals Actuals Actuals 1999-00 Actuals
Bullion, Silk, Cotton, Timber and any other raw material required by end
users.
Corporation CLIENTS
Foreign buyers
Located all over the globe and particularly in France, USA, Japan, Spain, Italy,
UK, South Africa, Kuwait and UAE etc.
Domestic customers
 At our Souvenir shops,
 PSUs,
 Corporates,
 Various Govt. departments
 Foreign missions
 Indian Missions abroad
Suppliers
 Original Crafts persons,
 Original Weavers,
 Cluster of Artisans & their Societies
 Dealers/ Jewellery Associates who in turn adopt any of the above three.
Corporation REACH
140
 Corporate Office in New Delhi.

 Regional Branches at Chennai, Kolkata, Mumbai, Delhi, Srinagar &
Bhadohi.
 Overseas Branches at Tokyo & New York.
 Souvenir Shops at Dilli Haat, Craft Museum and National Museum at Delhi
and Weavers Service Centre at Mumbai.
 Procurement Centres at various places throughout India.
Corporation LIAISON
 Ministry of Textiles
 Ministry of Commerce
 Standing Conference on Public Enterprises
 Office of the Development Commissioner (Handicrafts)
 Office of the Development Commissioner (Handlooms)
 All PSUs under the Ministry of Textiles
 Indian Trade Promotion Organization
 Export promotion Council for Handicrafts
 Wool & Woolen Export Promotion Council
 Carpet Export Promotion Council
 All State Emporia.
 Various Councils in India and Abroad
 Foreign Missions- Indian Embassies etc.
Corporation RESPONSE TO COMPLAINTS AND GRIEVANCES
Corporation is committed to act upon any complaint / suggestion / grievance
in the quickest possible time, not later than 30 days after receipt for which we have
a public grievance committee headed by a general manager with the overall
supervision of the chairman & managing director.
The artisans / suppliers / designers may file their suggestions, grievances /
complaints in any of the regional offices or in the corporate office and they may also
be dropped in the complaint / suggestion boxes kept at the entrance of each office
on any working day.
The foreign buyers can register their complaints / suggestions through our e -
mail address. Or through e-mail address of various regional offices as under :
Corporate Office : hhecnd @nd c. vsnl.net.in
Delhi Regional Office : hhecdbo@ndf. vsnl. net.in
Mumbai Regional Office : hhecmbi @vsnl.net.in
Kolkata Regional Office : hheccal. hhec@elnet. vsnl. net. in
Chennai Regional Office : hhecmd s@md 2.vsnl. net. in
16.3.9 Cotton Corporation of India
141
Setting up of CCI and objectives

The Cotton Corporation of India was set up in 1970 by the Government of
India, as the only Public Sector Organization in the field of cotton marketing. Ever-
since its inception, the Corporation has been operating in competition with private
cotton traders and other institutional buyers, its market share being less than 8% .
With the changing cotton scenario, the role and functions of the Corporation were
reviewed and revised from time to time. As per the policy directives received from
the Ministry in 1985, the CCI is the sole agency of the Government for undertaki ng
Price Support operations, whenever the price of kapas (seed cotton) fall to the
support level. However, in the absence of price support operations, the Corporation
undertakes commercial operations for supplying cotton to NTC mills, unit mills of
State Textile Corporations, Co-operative Spinning Mills and private mills, in
addition to purchasing cotton for fulfilling export quotas released in its favour. The
role assigned to the Corporation, in brief, is as under :
i) To undertake price support operation s, whenever the market prices of
kapas touch the support prices announced by the Government of India,
without any quantitative limit;
ii) To undertake commercial operations only at CCI's own risk; and
iii) To purchase cotton to fulfill the export quotas given to CCI.
The occasions for undertaking price support operation being far and few,
Corporation has been undertaking commercial operations at its own risk and costs.
All these operations are dovetailed to benefit the cotton growers through
remunerative prices for their produce on the one hand and supply of quality cotton
to the Textile Mills and especially EOU's on the other hand. In such commercial
operations, Corporation does not keep the profit motive in mind and operates at
very low margins so that farmers get competitive price for their produce. Even while
purchasing against export quotas, CCI operates on the above lines and gives
preference to cover those varieties and in those states where the prices are under
pressure. Similarly, to meet the growing demand of quality cotton by domestic
textile industry as well as overseas buyers, CCI has adopted stringent measures to
maintain quality with least contamination.
 Singgle largest Government of India Undertaking for cotton marketing in the
country (except Maharashtra). Annual Turnover exceeds Rs.1000 Crores.
 Assisting cotton growers in ensuring remunerative prices for their produce from the
day one of arrivals till the end of the season and field support through
developmental activities and extension schemes spread over 200 procurement
centres under 17 Branch Offices situated in various cotton growing areas.
 Assuming the role of leadership as a dependable supplier of quality cotton on
most competitive terms, to indigenous textile industry including EOUs.
 In pursuit of qualitative improvements in Indian cotton, has launched an
Incentive Scheme for up-gradation of G&P Factories to process cotton with
least contamination.
142
 Associated closely in the ambitious "Cotton Technology Mission" for all round
development in cotton production, productivity, quality and upgradation
of market infrastructure.
 Has been rated "Excellent" for its performance for the last five Years.
16.3.9.1 Commitments
 To maintain a constant dialogue with the cotton industry in differen t
sectors, with the consuming textile industry (who are our buyers) to
ascertain their precise requirement of cotton, with the ginning and pressing
industry for bringing improvement in cotton processing, with the
international buyers to meet their cotton requirements and to fulfill our export
commitments, so as to bring about improvement in the overall functioning of
the Corporation.
 To fulfill our commitment towards the cotton farmers in ensuring
remunerative price to them on the one hand and to procure entire quantity of
kapas to prevent distress sale by them on the other, in the event of MSP
operations. To also ensure that payment to farmers for their kapas purchase
is made within 10 days.
 Constantly make efforts to keep our actions and programmes open and
transparent reflecting the high ideals of the Corporation.
16.3.9.2 Commercial operations
The Corporation has been undertaking commercial operations, with the twin
objectives of rendering necessary support and help to cotton growers in getting
remunerative prices for their produce and to meet the equality cotton requirements
of Textile Mills, both in the institutional and private sector. As a matter of policy,
CCI purchases kapas from the cotton growers directly or through commission
agents in open auctions in the regulated markets under the supervision of APMCs
to ensure remunerative prices to the cotton farmers.
In order to meet the growing demand of quality cotton with least
contamination by the Textile mills, Corporation has undertaken various measu res
of procuring and processing quality cotton. All operations being sales driven,
quality cotton of any grade and parameters are supplied to meet the specific -
demand from the mills including EOUs. Over the years, Corporation has acquired
the reputation of a 'dependable supplier of quality cotton' in large quantity along
with dependable after-sales service. Many of the prestigious textile groups in the
country, including EOUs, have shown keen interest in CCI cotton resulting into
manifold increase of its domestic sales to private sector mills, as will be evident
from the following chart.
The increasing share of domestic sales to private sector mills is a
manifestation of the confidence of buyer mills in the quality of cotton supplied by
CCI and its after-sales services. The highlights of the domestic sales policy could be
summarised as under:
 Offers for sale any variety and grade of cotton with choice from more than one
state and even from a particular tract/centre.
143
 Supplies of cotton on type sample basis / actual lot sample basis/specific

grades of varieties.
 Supplies of cotton on type sample basis / actual lot sample basis/specific
grades of varieties.
 stock availability and sales quotations communicated directly to the buyers
and through field offices with full opportunity to choose the type of cotton
more suitable for producing required count of yarn.
 All offers/inquiries/counters are replied on the same day.
 Sufficient free period of completing selection, vigilante and deliveries and all
ancillary services rendered at spot to the buyer.
 all sales made against nominal deposit of 10% of the value to help mills to
meet their working capital requirements and programme
 Cotton coverage for lean period - godown storage facility extended on
selective basis inside mill/CWC/SWC godowns to facilitate deliveries of
cotton from the shelf and cut down lead period.
 Transperancy in all business transactions from contracting to performance.
 Tea Trading Corporation, Project Equipment Corporation and Central Cottage
Industries Corporation:
The tea trading Corporation of India, Project Equipment Corporation and
Central Cottage Industrial Corporation are all functioning under the Minister of
Commerce, Government of India with a view to promote the trade of Tea, P roject
Financing and Equipment leasing (e.g. Kongan Railways) and also Central Cottage
industries to promote the cottage industries. They need to be protected from the
Multinational Companies as they have a place in the Independent India as they
generate foreign exchange to the country, apart from offering huge employment
potential for the rural and semi urban population
Central Cottage Industries play a very vital role especially in the marketing of
Self help groups and augmenting the marketing efforts of such an unorganized set
up in order to gain the scale of operation to compete internationally to earn foreign
exchange. As the Village and Cottage industries of respective state Government like
Khadi and Village Industries (KVIC) play a vital role in the respective state these
cottage industries at the apex level with a solo mission of employment generation,
promoting the Indian mp.de cottage products in the international market to earn
foreign exchange. Each organization has their web sites to propagate their
promotional measures. The students are advised to refer to the respective web sites
to know the more details on the corporations functioning
 Meeting international standards, MMTC-Pioneering Infrastructure
Development, Items of trade, Logistic support, Destination of exports,
Leader in Mineral Exports, Corporative Objectives, The handicrafts &
handlooms exports corporation,
144

1. What are the roles of State trading corporation and what are their
achievements in the International bade in India?
2. How does the MMTC work and what are their achievements in the recent
past?
3. What are the significant roles played by Handicrafts and Handloom
Export Corporation in the Global trade?
16.6 SUMMARY
The chapter explains Meeting international standards, MMTC-Pioneering
Infrastructure Development, Items of trade, Logistic support, Destination of exports,
Leader in Mineral Exports, Corporative Objectives, The handicrafts & handlooms
exports corporation, Mission, Corporation values , Corporation Commitments ,
Corporation Objectives , Corporation, main products handlooms, Cotton corporation of
India, Commercial operations Commitments.
1. What are the significant roles played by Handicrafts and Handloom Export
Corporation in the Global trade?
2. What are the achievement of Cotton Corporation of India and in the
liberalized quota regime, what will be the role of Cotton Corporation of India?
16.9 ASSIGNMENTS
1. What are the achievement of Cotton Corporation of India and in the
liberalized quota regime, what will be the role of Cotton Corporation of India?
1. Peter B. Kenen, The International Economy, Third Edition, Cambridge Edition,
1994.
Third Edition 2013.
3. M.C.Vaish & Sudama Singh, International Economics, sixth Edition, reprint 1995.
1. What are the needs and importance of central cottage industries
corporation?
16.12 KEY WORDS
 Infrastructure Development, Items of trade, Logistic support, Destination of
exports, Leader in Mineral Exports.

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LESSON – 17
ROLE OF ECGC
17.1 INTRODUCTION
ECGC is essentially an export promotion organization, seeking to improve the
competitiveness of the Indian exporters by providing them with credit insurance
covers. ECGC keeps its premium rates at the optimal level.
17.2 OBJECTIVES
 The mission of ECGC is to support the Indian Export Industry by providing
cost effective insurance and trade related services to meet the growing needs
of Indian export market by optimal utilization of available resources.
17.3 CONTENTS
17.3.1History of ECGC
17.3.1.1 Vision
17.3.1.2 What does ECGC do
17.3.1.3 How does ECGC help exporters
17.3.1.4 Need for export credit insurance
17.3.1.5 Objectives
17.3.2 Shipments Comprehensive Risks Policy - (SCR)
17.3.2.1 SCR or Standard Policy
17.3.3 Small Exporters Policy - (SEP)
17.3.3.1 Credit Insurance Policies for Small Exporters
17.3.4 Specific Shipment Policy (SSP)
17.3.5 Services Policy - (SRC)
17.3.6 Export Turnover Policy - (ETP)
17.3.7 Exports (Specific Buyers) Policy (BWP)
17.3.8 Consignment Exports Policy (Stockholding Agent) – (CSA)
17.3.9 Buyer Exposure Policy (SBEP)
17.3.10 IT-Enabled Services Policy-Single Customer (SITES)
17.3.11 Small and Medium Enterprise - (SME)
17.3.12 Software Project Policy (SPP)
ECGC Ltd. (Formerly Export Credit Guarantee Corporation of India Ltd.),
wholly owned by Government of India, was set up in 1957 with the objective of
promoting exports from the country by providing Credit Risk Insurance and related
services for exports. It functions under the administrative control of Ministry of
Commerce & Industry, and is managed by a Board of Directors comprising
representatives of the Government, Reserve Bank of India, banking, and insurance
and exporting community. Over the years it has designed different export credit risk
insurance products to suit the requirements of Indian exporters and commercial
banks extending export credit.
17.3.1 History of ECGC
The need for export promotion had started immediately after Independence in
1947. In 1953, a proposal for initiation of an export credit guarantee scheme was
put forward at a meeting of the Export Advisory Council . Ministry of Commerce &
146
Industry analyzed in depth the pros and cons of the Export Credit Insurance
Scheme and a revised draft proposal on the scheme was presented to the Export
Advisory Council in 1955.
Shri T T Krishnamachari, Finance Minister in Pandit Nehru’s cabinet
appointed a special committee under the Chairmanship of Shri T.C.Kapur to
examine the feasibility of setting up an effective organization to provide insurance
against export credit risks. The Government accepted the recommendations of
Kapur Committee and thus the Export Risk Insurance Corporation (ERIC) was
registered on 30th July 1957 in Mumbai as a Private Ltd. Company, entirely state
owned, under the Companies Act with an authorized capital of Rs.5 crores and paid
up capital of Rs.25 lakhs. Shri Ratilal M Gandhi was the First Chairman and Shri T
C Kapur was the First Managing Director of the Corporation. Shri Morarji Desai,
Union Commerce Minister inaugurated ERIC and the first Policy was issued on 14 th
October 1957.
After introduction of insurance covers to banks during the period 1962 -64,
ERIC’s name was changed to Export Credit & Guarantee Corporation Ltd in 1964.
The above name was changed to Export Credit Guarantee Corporation of India
Ltd. in the year 1983. Subsequently in August 2014, it was renamed as ECGC Ltd.
17.3.1.1 Vision
The vision of ECGC Ltd. Is to excel in providing export credit insurance and
trade related services.
17.3.1.2 What does ECGC do?
Provides a range of credit risk insurance covers to exporters against loss in
export of goods and services
Offers Export Credit Insurance covers to banks and financial institutions to
enable exporters to obtain better facilities from them
Provides Overseas Investment Insurance to Indian companies investing in joint
ventures abroad in the form of equity or loan
17.3.1.3 How does ECGC help exporters?
ECGC Offers insurance protection to exporters against payment risks Provides
guidance in export-related activities Makes available information on different
countries with it's own credit ratings Makes it easy to obtain export finance from
banks/financial institutions Assists exporters in recovering bad debts Provides
information on credit-worthiness of overseas buyers.
17.3.1.4 Need for export credit insurance
Payments for exports are open to risks even at the best of times. The risks have
assumed large proportions today due to the far-reaching political and economic
changes that are sweeping the world. An outbreak of war or civil war may block or
delay payment for goods exported. A coup or an insurrection may also bring about the
same result. Economic difficulties or balance of payment problems may lead a country
to impose restrictions on either import of certain goods or on transfer of payments for
147
goods imported. In addition, the exporters have to face commercial risks of insolvency
or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt
or losing his capacity to pay are aggravated due to the political and economic
uncertainties. Export credit insurance is designed to protect exporters from the
consequences of the payment risks, both political and commercial, and to enable them
to expand their overseas business without fear of loss.
17.3.1.5 Objectives
The Corporation has set before itself the following objectives:
1. To encourage and facilitate globalization of India’s trade.
2. To assist Indian exporters in managing their credit risks by providing timely
information on worthiness of the buyers, bankers and the countries.
3. To protect the Indian exporters against unforeseen losses, which may arise
due to failure of the buyer, bank or problems faced by the country of the
buyer by providing cost effective credit insurance covers in the form of
Policy, Factoring and Investment Insurance Services comparable to similar
covers available to exporters in other countries.
4. To facilitate availability of adequate bank finance to the Indian exporters by
providing surety insurance covers for bankers at competitive rates.
5. To achieve improved performance in terms of profitability, financial and
operational efficiency indicators and achieve optimum return on investment.
6. To develop world class expertise in credit insurance among employees and
ensure continuous innovation and achieve the highest customer satisfaction
by delivering top quality service.
7. To educate the customers by continuous publicity and effective marketing.
8. Export Credit Insurance for Exporter
17.3.2 Shipments Comprehensive Risks Policy - (SCR)
17.3.2.1 SCR or Standard Policy
An exporter whose annual export turnover is more than Rs.500 lakhs is
eligible for this Policy. This is a Standard Wholeturnover Policy wherein all
shipments are required to be covered under the Policy.
Period of Policy: 12 Months
Exclusions Permitted:
 Exports to Associates
 Shipments backed by Letters of Credit
Risks Covered:
 Commercial Risk / Buyer Risk
 Political Risk
 L/C Opening Bank Risk
 Percentage of Cover: 90%
 Minimum Premium: Rs. 10,000/- shall be adjusted towards premiums
falling due on the shipments effected under the policy and is non -
refundable.
148
Important Obligations of the Exporter:

 Obtaining valid credit limit on buyers and banks from ECGC.
 Premium is payable in advance before commencement of risks and sufficient
premium deposit is also to be maintained in advance based on the turnover
projection at all times during the policy.
 Submission of Monthly declaration of shipments by 15th of the su bsequent
month.
 Notifying/Declaration of payments for bills that have remained unpaid beyond 30
days from its due date of payment, by the 15th of the subsequent month.
 Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
 Initiating recovery steps including legal action.
 Sharing of recovery.
Highlights
 Higher percentage of cover.
 Competitive premium rate.
 No Claim Bonus (NCB) of 5% subject to no claim, upto a maximum of 50% .
 Discrepancy covers for L/C transactions subject to certain conditions.
 Automatic cover for resale/reshipment up to 25% of Gross Invoice Value (GIV).
 Availability of Discretionary Limits on buyers on conditions.
 Cover for Merchanting trade with prior approval by an endorsement.
17.3.2.2 The risks covered under the Standard Policy:
Under the Standard Policy, ECGC covers, from the date of shipment, the following risks:
a. Commercial Risks
I. Risks covered on the overseas buyers:
 Insolvency of the buyer.
 Failure of the buyer to make the payment due within a specified period,
normally four months from the due date.
 Buyer's failure to accept the goods, subject to certain conditions.
I. Risks covered on the L/c opening Bank:
 Insolvency of the L/c Opening bank.
 Failure of the L/C opening bank to make the payment due within a specified
period normally four months from the due date.
 Insolvency of the L/c Opening bank.
b. Political Risks
 Imposition of restriction by the Governme nt of the buyer's country or any
Government action, which may block or delay the transfer of payment made
by the buyer.
 War, civil war, revolution or civil disturbances in the buyer's country. New import
restrictions or cancellation of a valid import lice nse in the buyer's country.
 Interruption or diversion of voyage outside India resulting in payment of additional
freight or insurance charges which cannot be recovered from the buyer.
 Any other cause of loss occurring outside India not normally insured by
general insurers, and beyond the control of both the exporter and the buyer.
149
17.3.3 Small Exporters Policy - (SEP)

17.3.3.1 Credit Insurance Policies for Small Exporters
The Small Exporter's Policy is basically the Standard Policy, incorporating
certain improvements in terms of cover, in order to encourage small exporters to
obtain and operate the policy. It is issued to exporters whose anticipated export
turnover for the period of one year does not exceed Rs. 5 crores. The Maximum
Liability under the SEP shall be fixed as per laid down guidelines, but shall not
exceed Rs. 2 crores. The nature of commercial risks and political risks cover is
similar to that of the Shipment Comprehensive Risk (SCR) or Standard policy.
The salient features of Small Exporters Policy
Period of Policy
Small Exporter's Policy is issued for a period of 12 months.
Minimum premium
Premium payable will be determined on the basis of projected exports on an
annual basis subject to a minimum premium of Rs. 5000/- for the policy period. No
claim bonus in the premium rate is granted every year at the rate of 5% .
Declaration of shipments
Shipments need to be declared monthly.
Declaration of overdue payments
Small exporters are required to submit monthly declarations of all payments
remaining overdue by more than 60 days from the due date, as against 30 days in
the case of exporters holding the Standard Policy.
Waiting period for claims
The normal waiting period of 4 months under the Standard Policy has been
halved in the case of claims arising under the Small Exporter's Policy.
Change in terms of payment of extension in credit period:
In order to enable small exporters to deal with their buyers in a flexible
manner, the following facilities are allowed:
A small exporter may, without prior approval of ECGC convert a D/P bill into
DA bill, provided that he has already obtained suitable credit limit on the buyer on
D/A terms.
Where the value of this bill is not more than Rs.3 lacs, conversion of D/P bill
into D/A bill is permitted even if credit limit on the buyer has been obtained on D/P
terms only, but only one claim can be considered during the policy period on
account of losses arising from such conversions.
A small exporter may, without the prior approval of ECGC extend the due date
of payment of a D/A bill provided that a credit limit on the buyer on D/A terms is
in force at the time of such extension.
150
Resale of unaccepted goods

If, upon non-acceptance of goods by a buyer, the exporter sells the goods to an
alternate buyer without obtaining prior approval of ECGC even when the loss
exceeds 25% of the gross invoice value, ECGC may consider payment of claims up
to an amount considered reasonable, provided that ECGC is satisfied that the
exporter did his best under the circumstances to minimize the loss. In all other
respects, the Small Exporter's Policy has the same features as the Standard Policy.
17.3.4 Specific Shipment Policy (SSP)
These policies can be availed of by exporters who do not hold any of the Standard
Policy/Whole turnovers Policy or by an exporter having a Standard Policy, wherein
shipments have been excluded from the purview of cover. Exporter can pick and choose
the contract/shipment to be covered and indicate the type of risk cover requi red.
Period of Policy
The policy would be valid for shipment(s) made from the date of issue of the
policy and upto the last date for shipment under the relevant contract.
Risks Covered
 Political Risk
Percentage of Cover: 80%
Important Obligations of the Exporter
 Processing fee of Rs.2000/- (non-refundable) is payable.
 Upfront premium payment in full.
 Submission of Monthly declaration of shipments by 15th of the subsequent
month.
 Submission of Payment Advice Slip (PAS).
Highlights
 Selection of Insurance cover.
 All other exports, if any, not to be declared.
 Cover for Merchanting trade with prior approval by making necessary
endorsement.
17.3.5 Services Policy - (SRC)
Credit Insurance Policies
Service Policy
Where Indian companies conclude contracts with foreign principals for
providing them with technical or profession al services, payments due under the
contracts are open to risks similar to those under supply contracts. In order to give
a measure of protection to such exporters of services, ECGC has introduced the
Services Policy.
151
What are the different types of Services Policy and what protection do they offer?
 Specific Services Contract (Comprehensive Risks) Policy;
 Specific Services Contract (Political Risks) Policy;
 Whole-turnover Services (Comprehensive Risks) Policy; and
 Whole-turnover Services (Political Risks) Policy
Specific Services Policy, as its name indicates, is issued to cover a single
specified contract. It is issued to provide cover for contracts, which are large in
value and extend over a relatively long period. Whole -turnover services policies are
appropriate for exporters who provide services to a set of principles on a repetitive
basis and where the period of each contract is relatively short. Such policies are
issued to cover all services contracts that may be concluded by the exporter over a
period of 24 months ahead.
The Corporation would expect that the terms of payment for the services are in
line with customary practices in international trade in these lines. Contracts should
normally provide for an adequate advance payment and the balance sho uld be
payable periodically based on the progress of work. The payments should be backed
by satisfactory security in the form of Letters of Credit or bank guarantees.
Services policies are designed to cover contracts under which only services are
to be rendered. Contracts under which the value of services to be rendered forms
only a small part of a contract involving supply of machinery or equipment will be
covered under an appropriate specific policy for supply contracts.
17.3.6 Export Turnover Policy - (ETP)
Turnover Policy is for the benefit of large exporters who contribute not less
than Rs.10 lakhs per annum towards premium based on projection of the export
turnover of the policy holder for a year.This is a Wholeturnover declaration based
Policy wherein all shipments are required to be covered under the Policy.
Period of Policy : 12 months
Exclusions Permitted:
 Exports to Associates
 Shipments backed by Letters of Credit
Risks Covered
 Political Risk
 Obtaining valid credit limit on buyers and banks from ECGC.
 Premium is payable in four equal quarterly installments in advance before
commencement of risks and sufficient premium deposit i s also to be
maintained in advance based on the turnover projection at all times during
the policy.
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month.
days from its due date of payment, by the 15th of the subsequent month
 Initiating recovery steps including l egal action.
Highlights
 Higher percentage of cover.
 Competitive premium rate.
 A turnover discount in the standard premium rate is offered subject to the
total discount including NCB being not less than 20% to those exporters
whose net annual premium payable exceeds Rs. 20 lacs.
 Additional discount in standard premium rate is offered if the actual
premium exceeds beyond 10% of the projected premium.
 Discrepancy cover for L/C transactions subject to certain conditions.
 Automatic cover for resale/reshipment up to 25% of Gross Invoice Value (GIV).
 Availability of Discretionary Limits on buyers on conditions.
Cover for Merchanting trade with prior approval by making necessary
endorsement.
17.3.7 Exports (Specific Buyers) Policy (BWP)
The Specific Buyers Policy provides cover for shipments made to a particular
buyer or on LC opening bank for a set of buyers. Exporters not holding the
Standard Policy/Wholeturnover Policy can avail of this to cover their shipments to
one or more buyers. Exporters holding Standard Policy can also avail of this policy
for covering shipments to individual buyers, if all shipments to such buyers have
been permitted to be excluded from the purview of the Standard Policy.
Risks Covered
 Political Risk
 Premium is payable in four equal quarterly installments in advance before
commencement of risk and sufficient premium deposit is also to be
maintained in advance based on the turnover projection at all times during
the policy.
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month.
 Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the subsequent
month.
Highlights
 Selective buyer can be insured.
 All other exports, if any, not to be declared.
 No Claim Bonus (NCB) of 5% subject to non claim, upto a maximum of 50% .
Separate Policy per buyer
17.3.8 Consignment Exports Policy (Stockholding Agent) – (CSA)
A method increasingly adopted by Indian exporters is to have an agency
agreement with independent and separate entities which receive and hold stocks
ready for sale to overseas buyers as and when orders are received, finds buyers and
sells to them in consideration of a commission on such sales. Thus, a separate
credit insurance policy as CSA is introduced to cover exclusively shipments made
by exporters on consignment basis to their agent.
Risks Covered
 Commercial Risk on Stockholding Agent and/or ultimate buyers Political Risk
Percentage of Cover: 90% for Standard Policyholder and 80% for others
 Premium is payable on quarterly or monthly basis in advance before
commencement of risks and sufficient premium deposit is also to be maintained
in advance based on the turnover projection at all times during the policy.
 Obtaining credit limit on ultimate buyers beyond the discretionary limit.
month along with statement of the stock with the agent and details of sales
effected to the ultimate buyers.
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Highlights
 Covers only the exports effected under consignment sale.
 Extended period for realization up to 360 days.
 Automatic cover on ultimate buyers up to discretionary limits subject to
buyers being in a country placed in Open Cover category an d not in the list
of buyers on whom the Corporation has adverse information referred to as
Buyer Specific Approval List (BSAL)
 Commercial risks on agents covered.
17.3.9 Buyer Exposure Policy (SBEP)
The Buyer Exposure Policy is to insure exporters having a large number of
shipments to a particular buyer with simplified procedure and rationalized
premium. An exporter can choose to obtain exposure based cover on a selected
buyer. The cover would be against commercial and political risks. The option to
exclude L/C shipment is available. If L/C shipment has been opted for commercial
and political risks cover, failure of L/C opening bank with World Rank upto 25000
as per latest Banker’s Almanac is available. If exporter opts for only political risks,
premium at lesser rate is offered.
Risks Covered
 Political Risk
Percentage of Cover: 90% for Standard Policyholders and 80% for others.
 Upfront premium payment in full on the Loss Limit.
 Obtaining prior approval for extending the due date of payment of the expo rt
bill where the total credit period of realization exceeds180 days.
 Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the subsequent
month.
Highlights
 Protection is available upto the Loss Limit approved on the buyer under the Policy.
 Premium is payable only on the Loss Limit approved on the buyer,
irrespective of the shipments effected to the buyer.
 No Claim Bonus (NCB) of 5% subject to non claim, upto a maximum of 50% .
 Declaration procedure waived.
 Separate Policy per buyer.
 Selective buyer can be insured.
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17.3.10 IT-Enabled Services Policy-Single Customer (SITES)

IT-enabled Services (Single Customer) Policy would be given in respect of
contracts for rendering service during a defined period with bi lling on the basis of
service rendered during a period say, a week, a month or a quarter. One policy for
one buyer shall be issued.
Risks Covered
 Political Risk
Distinct Characteristics OF ITES Contracts
 Contract is for providing certain service during a defined period.
 Billing for the service rendered at a pre-determined interval.
 Where there is a non-payment problem, there can be certain servic es
invoiced and accepted, certain services invoiced but not accepted and
certain services rendered but yet to be invoiced.
 No requirement of physical documentation as the process is carried out
through electronic media.
 Provision for correction in case of errors and omissions.
 The policy will be offered for contracts, which contain standard terms and conditions
as per the norms and practices of the IT-enabled Services export industry.
 Right to verify documents by the Corporation or by an authorized agen cy.
 Monthly declaration indicating the services rendered, invoices raised and invoices
paid to be submitted by the exporter by 15th of the subsequent month.
 No separate overdue report.
 Filing of claim within 360 days from the due date of the export bill or 5 40
Highlights
 Protection is available upto the Loss Limit approved on the buyer under the
Policy.
 Premium is payable only on the Loss Limit approved on the buyer,
irrespective of the shipments effected to the buyer.
 No Claim Bonus (NCB) of 5% subject to no claim, upto a maximum of 50%
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16.3.11 Small and Medium Enterprise - (SME)

Policy For SME Sector
ECGC introduced a Policy exclusively for the SME sector units in 4th July,
2008. The Policy particularly provides the SME Sector easy administrative and
operational convenience.
The risks covered under the policy:
a. Commercial Risks
I. Risks covered on the overseas buyers
 Insolvency of the buyer.
 Failure of the buyer to make the payment due within a specified period,
normally 2 months from the due date.
 Buyer's failure to accept the goods, subject to certain conditions.
II .Risks covered on the L/c opening Bank
 Insolvency of the L/c Opening bank
 Failure of the L/C opening bank to make the payment due within a specified
period normally 2 months from the due date.
b. Political Risks
 Imposition of restriction by the Government of the buyer's country or any
Government action, which may block or delay the transfer of payment made
by the buyer.
 War, civil war, revolution or civil disturbances in the buyer's country. New
import restrictions or cancellation of a valid import license in buyer's
country.
 Interruption or diversion of voyage outside India resulting in payment of
additional freight or insurance charges which cannot be recovered from the
buyer.
 Any other cause of loss occurring outside India not normally insured by
general insurers, and beyond the control of both the exporter and the buyer.
The features of the SME Policy are as under
Features of Small and Medium Exporters Policy at a glance No. Particulars Details
1. Policy period : 12 months
2. Processing Fees : Rs.1000
3. Credit limit fees : No
4. Declarations : No
5. Premium : Rs5000
6. Maximum Loss Limit : Rs.10 lacs
7. Single Loss Limit : Rs. 3 lacs
8. Report of overdue : more than 60 days from the due date
9. Waiting period : 2 months from the due date or extended Due date
10. Percentage of cover : 90%
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This Policy is meant for exporters engaged in manufacturing activities having

invested in plant and machinery or engaged in export of services having invested in
equipment as per MSMED Act, 2006. This Policy can be issued to an exporter
qualifying as per the MSMED Act, 2006.
This Policy can be issued to an exporter qualifying as per the MSMED Act,
2006. The exporter desirous of obtaining the Policy should furnish the certificate
issued by the designated authority. (District Industries Centers)
This Policy is not meant for the exporters carrying out trade activities only.
17.3.12 Software Project Policy (SPP)
Software Project Policy provides protection to exporters of software and related
services where the payments will be received in foreign exchange. Under SPP,
supply of software products and packages, or staffing and programming services or
both off-shore and on-site development is covered. It is meant for each contract for
a particular job.
Period of Policy : Depending on the contract.
Risks Covered
 Political Risk
Distinct Characteristics OF ITES Contracts
 Billing for the service rendered mostly on milestones progress report.
 Exact due dates not possible.
 Where there is a non-payment problem, there can be certain services
invoiced and accepted, certain services invoiced but not accepted and
certain services rendered but yet to be invoiced.
 No requirement of physical documentation as the process is carried out
through electronic media.
 Provision for correction in case of errors and omissions.
 No salvage in almost all the cases.
 Right to verify documents by the Corporation or by an authorized agency.
 Exporter would be required to submit a progress report indicating the level of
completion, payment sought and payment received and deviations in these areas.
 The exporter has to specify in advance the manner in which the work in
progress would be estimated.
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Highlights
 Protection is available upto the Loss Limit approved on the buyer under the Policy.
 Premium is payable only on the Loss Limit approved on the buyer, irrespective
of the shipments effected to the buyer.
History of ECGC, Vision, , Need for export credit insurance, Objectives,
Shipments Comprehensive Risks Policy - (SCR), SCR or Standard Policy Small
Exporters Policy - (SEP), Credit Insurance Policies for Small Exporters , Specific
Shipment Policy (SSP), Services Policy - (SRC)
1. What does ECGC do?
2. How does ECGC help exporters?
17.6 SUMMARY
History of ECGC, Vision, What does ECGC do, How does ECGC help exporters,
Need for export credit insurance, Objectives, Shipments Comprehensive Risks
Policy - (SCR), SCR or Standard Policy Small Exporters Policy - (SEP), Credit
Insurance Policies for Small Exporters , Specific Shipment Policy (SSP), Services
Policy - (SRC), Export Turnover Policy - (ETP), Exports (Specific Buyers) Policy
(BWP), Consignment Exports Policy (Stockholding Agent) – (CSA), Buyer Exposure
Policy (SBEP), IT-Enabled Services Policy-Single Customer (SITES), Small and
Medium Enterprise - (SME), Software Project Policy (SPP).
1. Explain the features of the SME Policy?
17.9 ASSIGNMENTS
1. Elucidate the Distinct Characteristics OF ITES Contracts?
1. Peter B. Kenen, The International Economy, Third Edition, Cambridge Edition, 1994.
Third Edition 2013.
3. M.C.Vaish & Sudama Singh, International Economics, sixth Edition, reprint 1995.
1. How do Consignment Exports Policy (Stockholding Agent) – (CSA)
2. Important for the Exporter?
17.12 KEY WORDS
 Consignment Exports Policy (Stockholding Agent) – (CSA), Buyer Exposure
Policy (SBEP), IT-Enabled Services Policy-Single Customer (SITES), Small and
Medium Enterprise - (SME), Software Project Policy (SPP).

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LESSON - 18
BASICS OF EXPORT
18.1 INTRODUCTION
To the inexperienced, international trade may appear to be a very complex
undertaking requiring extensive resources, a large and expensive marketing and
export department, a significant volume of the product to be marketed .
18.2 OBJECTIVES
 The goal of this chapter is to lay these myths to rest and open the world of
exporting to companies, which have previously abandoned the idea
and new to export companies of high-value agricultural products. We
will begin by exploring some common misconceptions, which many
companies possess concerning exporting.
18.3 CONTENTS
18.3.1. Four common misconceptions about exporting
18.3.1.1. You have to be Big to Export
18.3.1.2. To Export You Must Have a Big Export Department
18.3.1.3. To Export You Must Have Substantial Volume
18.3.1.4. You Must be Fluent In Foreign Languages to Export
18.3.1.5. Your Export Potential
18.3.2. Making the Export Decision
18.3.3. The value of planning
18.3.4. Export plan outline
18.3.4.1. Twelve Most Common Mistakes New Exporters Should Avoid
18.3.4.2. Export Intermediaries
18.3.4.3. Export Merchants
18.3.4.4. Export Commission House
18.3.4.5. Export Broker
18.3.4.6. Buyer for Export
18.3.5. Piggyback marketing
18.3.5.1. Export Trading Companies
18.3.5.2. Freight Forwarder
18.3.6. Evaluating your distributor or agent
18.3.1 Four common misconceptions about exporting
18.3.1.1 You have to be Big to Export
To begin, let us look at the issue of company size. While large companies do the
greatest volume of international trade, smaller companies are also taking advantage of
the opportunities available in foreign markets. In fact, small businesses are big into
exports a survey by the U.S. Department of Commerce found that 60 percent of
American firms now exporting successfully have fewer than 100 employees, thus they
qualify as small businesses. Rather than company size, product quality, price, and
service determine a firm's success in the export market.
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18.3.1.2 To Export You Must Have a Big Export Department

The size of the company's export department depends significantly upon the
method by which the products are to be marketed. A direct exporter sells to a
company or agency in a foreign country and is responsible for the transport of the
product to the overseas destination. These types of exporters tend to be companies,
which consistently move large volumes of product overseas. In such cases, the
export department usually consists of several specialists in areas such as
marketing, finance, transportation and insurance. On the other hand, if the
company ships sporadically and in small quantities, then one employee in addition
to his regular duties can handle the transportation and marketing responsibilities.
Many companies begin their export business as indirect exporters, selling and
delivering to an intermediary in the United States. If a company decides to become
an indirect exporter by selling through an intermediary, it requires no more
specialized staff than is necessary for domestic sales. However, should a company
decide to become a direct exporter, i t would need to develop an in-house export
capability of some type.
18.3.1.3 To Export You Must Have Substantial Volume
The fact that many smaller companies are actively involved in international
trade is a testament to the fact that substantial volume is not a market entry
requirement. The foreign buyer, like his American counterpart, is seldom looking
for a "spot" purchase. Instead, he is looking for a quality product at a fair price with
continued availability. If a U.S. company is merely looking to mark et its sporadic
Surplus capacity, then its entry into the foreign trade market will probably be
a disappointment. On the other hand, if the company is willing to devote even 10
percent of its production capacity to foreign markets and the servicing of these
accounts, then it can reasonably expect to build substantial and permanent trade
in those markets suited to its products. The servicing of these initial accounts is
extremely important. Thus, the volume of product marketed is not as important as
the consistent supply of the product. A company that is not committed to exporting
often makes this mistake. Taking for granted your foreign representatives or lack of
set-vice and attention to foreign accounts can cripple your efforts to export.
18.3.1.4 You must be Fluent In Foreign Languages to Export
Occasionally management will cite the lack of in -house foreign language
capability as an impediment to entry into international trade. While it is true that
foreign language skills are helpful when negotiating export agreements they are not
essential. On the few occasions when correspondence and documents in English
will not suffice, exporters can usually find many sources of translation capabilities
for the more popular European languages. Language capability can be
advantageous since it facilitates cultural and social relationships. However, success
depends more upon the sound management of the business relationship rather
than the language spoken.
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18.3.1.5 Your Export Potential

While it is true that the technical details of selling abroad are quite different
than those used when selling domestically, such details are reasonably
standardized and available to all those who want to learn them. Once this
knowledge is acquired, selling abroad is no more complicated than selling
domestically. In turn, your product 's success in the U.S. is a good indication of its
potential in overseas markets where similar needs and conditions exist.
Nevertheless, even if the sales of a product are declining in the U.S., sizeable
export markets may still exist. This is especially true of products, which have
reached market maturity as well as technically advanced products. Less developed
countries may have less demand for state of the art technology and may therefore
prefer older more cost effective equipment.
It is essential, however, that exporters carefully consider the differences and
similarities, which exist between the United States and target markets. Failure to
do so may result in less than profitable sales. An often -cited example of this
phenomenon is Chevrolet's introduction of the nova car into Mexico. The company
did not consider that "nova" means "does not go" in Spanish. Needless to say, sales
were not as high as anticipated. An oversight such as this can be extremely costly
and embarrassing for a company.
In order to avoid such colossal mistakes, exporter should conduct market
research about the country to which they intend to export. Methods of market
research are discussed in a subsequent section of this book.
18.3.2 Making the Export Decision
Once a company determines that it has exportable products, it must still
consider whether the development of an export business adheres to company
objectives. In order to arrive at this conclusion the management should ask itself
the following questions:
1. What does the company want to gain from exporting?
2. Is the goal of exporting consistent with other company goals?
3. What demands will exporting place upon the company's key resources,
personnel, production capacity and finances?
4. How will these demands be met?
5. Are the expected benefits worth the cost or would company resources be
better spent developing new domestic business?
Additionally, the management's answers to the following questions will help to
clarify the methods by which exporting should be undertaken, if at all:
I. Management's Export Experience
1. In which countries has business already been conducted (or from which
countries have inquiries already been received)?
2. Which product lines are mentioned most often?
162
3. What countries are inquiries coming from? (A list of the sales inquiries of
each buyer by product and by country will be helpful.)
4. Is the trend of sales/inquiries up or down?
5. Who are the main domestic and foreign competitors?
6. What general and specific lessons have been learn ed from past export
experiences?
II. Management and Personnel
1. What kind of commitment is the top level of management willing to make to
an exporting effort?
2. Who will be responsible for the export department's organization and staff?
3. How much senior management time should be allocated? How much could
be allocated?
4. What are management's expectations for the effort?
5. What organizational structure is required to ensure that export sales are
adequately serviced?
6. Who will follow through after the planning is accomplished?
III. Production Capacity
1. How is the present capacity being used?
2. Will filling export orders hurt domestic sales?
3. What will be the cost of additional production?
4. Are there fluctuations in the annual workload? When? Why?
5. What minimum order quantity is required?
6. What would be required to design and package products specifically for
export?
IV. Financial Capacity
1. What amount of capital can be tied up in exports?
2. What level of export operating costs can be supported?
3. How are the initial expenses of the export effort to be allocated?
4. What other new development plans are in. the works, that may compete with
export plans?
5. By what date must an export effort pay for itself?
6. Is outside capital necessary to support, efforts?
Truthful and realistic answers to these questions will assist a company to
explore both the positive and negative aspects of entering the export market.
Knowing as much as possible before beginning the exporting process will help
ensure a smooth transition into international business and help avoid costly
mistakes.
18.3.3 The Value of Planning
Formulating an export strategy based upon good information and its proper
assessment increases the chances that the best options will be selected, resources
will be utilized effectively, and efforts will consequently be carried through to
163
completion. The export plan fulfills two major functions. First, it assembles the
facts, constraints, and goals for a market. Second, it creates a plan of action, which
takes all these factors into account. The statement includes specific objectives, it.
propounds time schedules for implementation, and it marks milestones so the
degree of success can be measured and be employed to motivate personnel. At first
the plan may be quite short and simple, but it should be come more detailed and
complete as you gain exporting experience. Ultimately, the export plan should
address the following questions:
1. What products are selected for export development? Also, what modifications,
if any, must be made to adapt them to overseas markets?
2. What countries are targeted for sales development?
3. In each country, what is the basic customer profile? What marketing and
distribution channels should be used to reach customers?
4. What special challenges pertain to each market (competition, cu ltural
differences, import controls etc.) and what strategies will be used to address
them?
5. How will the product's export sales price be determined?
6. What specific operational steps must be taken and when?
7. What will be the time frame for implementing each e lement of the plan?
8. What personnel and company resources will be dedicated to exporting?
9. What will be the cost in time and money for each element?
10. How will the results be evaluated and used to modify the plan?
The plan should be reviewed periodically and actual results should be
compared with plan objectives. It is necessary to keep in mind that the plan is a
management tool and not a static document, thus you 'should not hesitate to
modify the plan to make it more specific as new information and experience is
gained. An export plan outline has been given here for your understanding.
18.3.4 Export Plan Outline
1. Executive Summary (one to two pages maximum)
2. Introduction: Identify reasons why your company should export.
3. Export Policy Commitment Statement
4. Situation/Background Analysis
a. Product
b. Operations
c. Personnel and Export Organization
d. Resources of the Firm
e. Industry Structure, Competition, and Demand
5. Marketing Component
a. Identification, Evaluation, and Selection of Target Markets
b. Product Selection and Pricing
c. Distribution Method
164
d. Terms and Conditions

e. International Organization and Procedures
f. Sales Goals: Profit and Loss Forecasts
6. Action Steps
a. Countries Where Firm has Special Advantages
b. Primary Target Countries
c. Secondary Target Countries
d. Indirect Marketing Efforts
7. Export Budget
a. Financial Statements: Projected Sales and Expenses
b. Long-term Financial Forecasts
c. Export Taxes
8. Implementation Schedule
a. Follow-up
b. Periodic Operational/Management Review: Measurement of Results
Against a Plan
9. Background Data on Target Countries and Markets
a. Basic Market Statistics: Historical and Projected
b. Background Facts
c. Competitive environment
18.3.4.1 Twelve Most Common Mistakes New Exporters Should Avoid
1. Failure to Obtain Qualified Export Counseling and Develop a. Master
International Strategy and Marketing Plan Before Starting an Export
Business. To be successful, you must first clearly define your goals,
objectives and the constraints you will face in a parti cular market. Secondly,
you m ;t develop a definitive plan to accomplish your objectives and
counteract potential problems. Many times outside assistance is necessary
to complete this first step, since most small companies do not have a staff
with considerable exporting expertise.
2. Insufficient Commitment by Top Management to Overcome the Initial
Difficulties and Financial Requirements of Exporting. It may require more
time to establish yourself in a foreign market than in the domestic one.
Although the early delays and costs involved in exporting may seem difficult
to justify when compared to your established domestic trade, you should
take a long-range view of this process and utilize your international
marketing efforts to overcome these early difficulties. If you lay a solid
foundation for your export business, the benefits derived should eventually
outweigh your investment.
3. Insufficient Care in Selecting Overseas Sales Representatives and
Distributors. The selection of a foreign distributor is crucial. The
complications involved in overseas communications and transportation
require international distributors to act with greater Independence than
165
their domestic counterparts. Also, since a new exporter's history,

trademarks, and reputation are usually unknown in the foreign market,
foreign buyers will select goods based upon the strength of your distributor's
reputation. Therefore, you should conduct a personal, evaluation of the
personnel handling your account, the distributor's facilities and the
management methods employed. For additional information on selecting a
distributor or agent, see the section on Export Intermediaries.
4. Reliance on Orders from Around the World Rather than Concentrating on
One or Two Geographical Areas and Establishing a Basis for Profitable
Operations and Orderly Growth. If you expect distributors to promote your
account actively they must be trained and assisted, and their performance
continually monitored. This requires a company marketing executive
permanently located in the distributor's geographical region. New exporters
should concentrate their efforts in one region or two geographical areas until
there is sufficient business to warrant a company representative. Then,
while this core area is expanded, the exporter can move into the next
selected geographical area.
5. Neglect of Export Business When the Domestic Market Booms. An
overwhelming number of companies turn to exporting when business falls
off in the United States. With the return of a boom in domestic business,
many companies neglect their export trade or relegate it to a secondary
position. Such neglect can seriously harm the business and motivation of
overseas representatives, leaving exporters without recourse when domestic
business falls off once more. Even if domestic business remains strong,
companies may eventually realize that they have only succeeded in shutting
off a valuable source of additional profits.
6. Failure to Treat International Distributors and Customers on an Equal Basis
with Domestic Counterparts. Many times, companies carry out institutional
advertising campaigns, special discount offers, sales incentive programs,
special credit term programs, warranty offers and similar options in the U.S.
market. These companies fail to offer similar assistance to their
International distributors. This lack of assistance can destroy the vitality of
your overseas marketing efforts. Also,' many new to export companies fail to
take into consideration gross margin requirements.
7. Assumption that a Given Market Technique and Product Will Automatically
be Successful in All Countries. All markets differ due to a multitude of
reasons including the culture and customs of the targeted area. If a product
sells well in the United States, it will not necessarily have an equal level o f
success in all foreign markets. In addition, the methods of promoting and
selling a product can be radically different. Countries all have different
means of product distribution and selling, such as the existence of large
supermarket chains versus small family owned shops. An exporter must
complete adequate market research in order to determine which strategy will
best serve their objective.
166
8. Unwillingness to Modify Products to Meet Regulations or Cultural

Preferences of Other Countries. Foreign distributors cannot ignore local
safety and security codes, as well as import restrictions. If necessary
modifications are not made at the factory, the distributor must do them -
usually at a greater cost and, perhaps, not at such a high level of quality. It
should also be noted that the resulting smaller profit margin makes the
account less attractive. For long term success, food products usually must
be packaged according to local import regulations.
9. Failure to Print Service, Sales, and. Warranty Messages in Fore ign
Languages. Although your distributor's top management may speak English,
it is unlikely that all sales personnel will have this capability. Without a
clear understanding of sales messages or service instructions, these
personnel will be less effective in performing their functions. In turn, the
customers will not understand the terms of service of a particular product
and many times will receive false information from a salesman who is unable
to discern the messages. For food products unfamiliar to loc al consumers,
instructions and recipes in local languages can help educate consumers on
new cuisine.
10. Failure to Consider Use of an Export Management Company. If a company
decides it cannot afford it own export department (or has tried one
unsuccessfully), it should consider the possibility of appointing an
appropriate export managing company (EMC). An EMC will effectively assist
in market research, promotion, sales and distribution of a company's
product, therefore saving the company large amounts of time and money.
The section on Export Intermediaries has additional information on this
topic.
11. Failure to Consider Licensing or Joint Venture Agreements. Import
restrictions in some countries, insufficient personnel, financial resources,
or a narrowly limited product line cause many companies to dismiss
international marketing as simply not feasible. Nearly any product that can
be successfully marketed in the United States can be successfully marketed
in any market of the world. A licensing or joint venture agreement may be
the simple, profitable answer to your reservations. In general, all that is
required for success is flexibility in using the proper combination of
marketing techniques.
12. Failure to Provide Readily Available Servicing for the Product. Consumers
and distributors will be less likely to purchase products, which cannot be
maintained or repaired. An exporter should provide information as well as a
contact of how to carry out the necessary procedures.
18.3.4.2 Export Intermediaries
Once you've made the decision to export, it is time to decide how you want to
market your goods and services abroad. The most common methods are direct
marketing and indirect marketing through intermediaries.
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Direct marketing requires a total dedication of time and resources, as well as a

financial commitment to identify sales in a foreign market. The company and its
management team are responsible for market research, planning and distribution
of the product in a manner, which will produce satisfactory sales results. This is a
feasible option for larger companies that: have the time and resources available to
devote to the export process. Another factor to consider is the importance of
personal relationships in exporting. Many times, in the long run it may be more
profitable for a company to build relationships themselves rather than do so
through a third party.
For small and medium sized companies, indirect marketing through
intermediaries is a more feasible option. The use of Export Management Companies'
(EMC's) and Export Trading Companies (ETC's) can give a small or medium size
company representation in foreign markets without the commitment of precious
time and money to the sales process. In the process of indirect marketing,
management maintains control over the export process while benefiting from the
knowledge and expertise of an intermediary. Frequentl y, the exporting company has
a reduced level of financial risk because the intermediary assumes the
responsibility for finding overseas buyers, shipping products and getting paid.
18.3.4.3 Export Merchants
The export merchant buys and sells on his own account. He purchases
products directly from the U.S. manufacturer, marks and packages the goods using
his own specifications and preferences. Then under his own name, the export
merchant sells these products overseas therefore assuming all of the risk. Bec ause
of the high level of personal risk, export merchants primarily deal in staple
commodities. For you, the producer, selling to an export merchant involves the
same process as other domestic sales. Export Agents
An export agent operates in the same capac ity as a manufacturer's
representative. Because the agent is simply promoting and marketing the product,
the risk of loss remains with the manufacturer, not the agent. In transactions with
export agents, a U.S. company relinquishes control over the marketi ng and
promotion of its products. This relinquishment of control by the manufacturer can
have adverse effects upon future sales efforts if the product is underpriced,
incorrectly positioned, or after-sales services are neglected.
18.3.4.4 Export Commission House
An export commission house located in the U.S. acts as a buying agent for
foreign companies. Its primary concern is compliance with the instructions of its
buyer (by whom it is paid) rather than the interests of the seller. However, there are
advantages for the seller. Many times, the seller receives a cash payment in the
U.S. and is relieved of the technicalities involving the export of his product.
18.3.4.5 Export Broker
The principal function of the export broker is to bring buyers and sellers to -
gether. The broker is paid by a commission from either the buyer or seller, and ass-
168
umes no financial responsibility for the transaction. Normally, a broker works in no

more than two staples. For example, there are cotton brokers and wheat brokers.
18.3.4.6 Buyer for Export
The buyer for export represents large consumers of industrial goods, such as
foreign government purchasing missions. Export Management Company (EMC) The
services of an export management company (EMC) are extensive. Various services
of an EMC include foreign market research, marketing strategies, foreign
distribution, establishment of a logistics system, the management and training of a
foreign sales force, shipping and export information and details, the arrangement of
financial assistance and foreign language translation services. Some EMC's works
on a buy-and-sell arrangement while others operate on commission. They are
experts in foreign trade and recognize the strongest market for an individual
product as well as the best sales strate gy to utilize in that market. While there are
thousands of EMC's in the U.S., most are quite small. As a consequence, most
EMC's specialize by product, by foreign market, or both. Resulting from this
specialization, the best EMC's are very familiar with their products and the markets
they serve and these EMC's usually have well -established networks of foreign
distributors already in place. This immediate access to foreign markets is one of the
principle advantages of using an EMC. On the other hand, one of the disadvantages
of using an EMC is that the manufacturer risks losing control over foreign sales. A
method to avoid such a situation is for the company to carefully select an EMC that
can meet the company's needs and maintain in close communication. A co mpany
may request regular reports on the efforts employed to sell its product and may set
provisions which require approval before certain types of promotions may be carried
out. Such issues should be negotiated before an agreement is contracted since
some EMC's are not willing to comply with such limitations upon their activities.
For a new exporter, selling through an experienced EMC is an excellent way to
enter the international arena with a minimum amount of effort.
18.3.5 Piggyback marketing
Piggyback marketing occurs when one manufacturer distributes another's
product. The situation, which most commonly encourages piggybacking, is when a
U.S. company has a contract with an overseas buyer to provide a wide range of
products or services. Because the company is not able to produce all the contracted
products, it turns to other U.S. companies to provide the remaining products.
These additional manufacturers "piggyback" their products without incurring the
marketing and distribution costs associated with exporting. In most cases, the
piggybacked product lines are complimentary and appeal to the same range of
customers.
18.3.5.1 Export Trading Companies
An export trading company is an organization designed to facilitate the export
of U.S. goods and services. It serves either as a trade intermediary, providing export
related services to producers, or as an organization set up by the producers
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themselves. While providing similar services as an EMC, an Export Trading

Company accepts the title of the goods to be exported whereas an EMC does not.
18.3.5.2 Freight Forwarder
A freight forwarder is an independent agent who assists and facilitates the
shipments of exported goods. A freight forwarder can be of tremendous assistance
regarding the presentation of the sales proposal or quotation to a foreign customer.
A freight forwarder can help determine the proper terms of sale (i.e. F.O.B.
warehouse, F.O.B. vessel, etc.), alert the exporter of required import/export license
or particular consular documentation, and help the exporter select a term of
payment' such as cash-in-advance, open account, payment by sight draft, or by
letter of credit. (All of these terms are defined in subsequent sections of this book.)
The freight forwarder coordinates the movement of freight from its point of origin to
export ports for timely delivery and proper loading to the vessel. The freight
forwarder will prepare the necessary export declaration required by the U.S.
Department of Commerce, the ocean bills of lading required by the steamship
company for carriage of the goods, the insurance certificate and other documentary
requirements specified by the letter of credit or shipping instructions. (Again, these
terms will later be defined.)
In summary, the freight forwarder can best be viewed as a "travel agent for
freight," familiar with all the procedures and regulations for shipping your product
overseas. As an agent of the exporter, the forwarder becomes the port
representative for the exporter ready to oversee and coordinate proper movement of
the export shipment. He will assist the exporter in moving the shipment to the
customer in the fastest and most economical way. Years of experience, gained from
the handling of many thousands of international shipments, will thus be available
to the exporter. To locate an appropriate freight forwarder, the FAS has a "Directory
of Freight Forwarders serving Agricultural Shippers" which is accessible via their
website at http://www.fas.usda.gov (under the export assistance sections).
How to Locate an Importer, Agent or Distributor in a Foreign Country
One of the most ominous obstacles for exporters, small and large alike, can be
the search to contact, attract and secure a good importer, distributor or agent. If
your company doesn't have the personnel or fi nancial resources needed to establish
a business presence in a foreign market, there are several alternative methods:
1. U.S. Federal and State Government Offices Abroad - The USDA's Foreign
Agricultural Service (FAS) and the U.S. Department of Commerce offer many
trade contact services to the American exporter. Additionally, many states
have representative offices established in foreign countries, which help
facilitate contacts between U.S. manufacturers, exporters and foreign buyers.
Another excellent source of assistance is the Agricultural Trade Offices (ATOs)
of the Foreign Agricultural Service, which are located throughout the world.
These offices are sources of valuable market information and often give advice
about the importers in their country. Contac t information for all of the
Agricultural Trade Offices (ATOs) are available from the FAS homepage.
170
2. Direct Mail: You can write a letter directly to a company requesting that it
represent your product. Most companies will respond that they are not
interested or that they already carry a competitive line. However, only a few
positive replies are needed to continue your search and evaluation of
prospective distributors.
3. Personal Visits: Once you receive a number of "interested" replies plan a trip to
that market. Additionally while traveling, stop in other potential markets to
assess the situation as well as attempt to make contacts. Many times a personal
visit will pay for itself in terms of the gained benefits. Just one order or sale of
sample products, could cover the cost of your round-trip airline ticket.
4. Trade Shows & Exhibitions: Trade shows and exhibitions are perhaps the
best single source for finding distributors. Most competent distributors visit
these events to learn about new products and to evaluate the competition If
you are ready to introduce your product or service to the market, rent booth
space and many distributors will come to you. Even if you are just getting
started and not quite ready to export, you should at least visit the shows. You
will be able to speak with non-competing manufacturers in your industry
who can provide names of distributors. Occasionally, personal introductions
with distributors may even be" arranged.
5. Caution: Beware of professional "exclusive distributor hustlers" who work on
behalf of domestic manufacturers by attempting to sign up all foreign
manufacturers in order to control and restrict competition. Always investigate
and evaluate several distributors before making a definite decision.
6. Mail Lists: Domestic and international trade magazines often publish or sell
lists of distributors and agents. Also, these publications compile "Annual
Buyer's Guide" issues, which should not be overlooked.
7. Foreign Consulates and Banks: Generally speaking, U.S. based foreign
consulates, trade promotion offices and banks are not good sources for
potential distributor lists. The mission of these entities is to encourage the
entrance of imports from their home countries into the United States, rather
than to increase the number of U.S. exports their country receives. However,
Japan is an exception to this rule. The quasi -governmental JETRO/Japan
Trade Center, established in Chicago and several other U.S. cities, actively
promotes a "U.S. Exports to Japan" program.
8. Foreign Magazines and Newspapers; Placing "distributor wanted” to
"representative wanted" advertisements in foreign publications can venerate
many responses. However, it is important to investigate and qualify the
respondents Many times, this is difficult to ac hieve without personally
visiting the distributor's offices.
9. Private Marketing Consultants: Several nationwide companies offer senders
(for a fee) that ultimately bring together an American exporter and a foreign
buyer. Typically, the primary "international marketing program" offered by
these consultants includes market assessment and analysis, a distributor
search and recommendations, and a marketing- sales promotion plan. As
secondary services, these consultants also offer joint venture or licensing
development, manufacturing assistance, and observation of your overseas
operations.
18.3.6 Evaluating Your Distributor Or Agent
When searching for a potential overseas distributor or agent, the following
information should be obtained in order to adequately evaluate all candidates:
171
1. Basic Information
1. Name, address, location, telephone/fax numbers, email addresses and
contact person.
2. Annual sales, number of sales outlets, number of salespersons and support
staff.
3. How is the company organized? Who are the people in charge?
4. How much international business experience does the company have?
5. What is their experience in your product category?
6. How informed (up-to-date) are their personnel about your potential market?
2. Sales Staff
1. Do they hire their own sales staff? How many are on the payroll?
2. What are their sales techniques and methods of conducting sales?
3. How many customers do they currently serve?
4. What is the status of their relationship with their current customers? If
possible, assess this relationship by contacting customers directly.
5. Are they able to inventory and warehouse your goods if necessary? At what
additional cost?
6. How are deliveries made? Do they have their own delivery fleet, or do they use
common carriers?
3. Product Awareness
1. What related, but non-competitive products do they sell? Also, do they handle
any competitive products?
2. Why do they think your product will be successful in the market?
3. What do they assess as your product's strengths and weaknesses?
4. What modifications do they recommend? Can they assist you in making any of
these recommended modifications?
In addition to the previously mentioned methods, alternative contacts for
locating a distributor or agent include: AgExport Connections: The AgExport
Connections Office of the Foreign Agric ultural Service has "AgExport Action kits"
available. They include information on the following services:
1. Sales leads from foreign buyers
2. Free advertising for your product overseas
3. Lists of foreign buyers of food and agricultural products
4. Assistance in presenting your products at international trade shows
For more information contact the AgExport Connections Office of FAS. In
addition, the Trade Assistance and Promotion Office (TAPO) office provides export
counseling and referrals to other services of the USDA. The U.S. Department of
Commerce offers many services that are helpful for a small to medium sized
exporter such as The Agent/Distributor Service. This service can help you
determine the best markets for your product and prepare a. comprehensive
package to promote your product or service in the market you select. After they
receive a specific request, commercial specialists at U.S. embassies and consulates
172
abroad then search the market for qualified agents, distributors, or representatives
according to your specifications. Prospective agents or distributors are screened for
capability and interest and within 30-60 days you will receive information on up to
six of the most qualified candidates. Your company may also request a Customized,
Market Analysis with detailed information needed to make the most efficient and
beneficial marketing decisions. Sixty days after the request is placed, you will
receive information about sales potential, competitors, best channels for market
arrival, prices for comparable products, the best way to gain exposure in market,
impediments to sales, the best potential representatives and buyers, and potential
licensing or joint venture partners. The Commercial News, a U.S. government
catalog-magazine provides the opportunity to advertise you product as well as
attract potential distributors for as little as $395. The publication will promote your
product in over 152 countries at a fraction of the cost of commercial advertising. It
is printed ten times a year and distributed overse as, at no charge to the recipient.
Once you have narrowed down the field to one potential distributor or agent,
the Dept. of Commerce provides at a very reasonable cost, International Company
Profiles (ICP). This profile serves as a thorough background che ck on your potential
client, which will reduce your risk and allow you to enter new into a business
relationship with confidence. Within 30-45 days of the request, commercial
specialists abroad will give their assessment of whether or not you should enter
into this relationship. The profile includes bank and trade references, product lines
of that distributor, number of employees, financial data, sales volume, reputation
and market outlook. In addition, your ICP will qualify as one of the r-rpi.rts
required for you to obtain foreign credit risk insurance coverage.
 Export Broker
 Buyer for Export
 Piggyback marketing
 Export Trading Companies
 Freight Forwarder
1. Make a review of basics of exporting.
2. What are the common mistakes one has to avoid in the business of
exporting?
3. Examine the strength and weakness of export intermediaries.
18.6 SUMMARY
This chapter explained the Export Decision, The value of planning, Export plan
outline, Most Common Mistakes New Exporters Should Avoid, Export
Intermediaries, Export Merchants and Export Commission House
1. Create an export outline and highlight the features step by step
173

1. Robert A. Mundell, International Economics, 1968, Macmillan & co, New York.
18.9 ASSIGNMENTS
1. What are the common mistakes one has to avoid in the business of
exporting?
2. Create an export outline and highlight the features step by step.
1. Francis Cherunilam, International Trade and Export Management, Himalaya
Third Edition 2013.
1995.
1. Analyse the sources to identify the exporter and importer in the global
market.
18.12 KEY WORDS
 Export Broker, Buyer for Export, Piggyback marketing, Export Trading
Companies, Freight Forwarder, Export Intermediaries, Export Merchants
and Export Commission House.

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LESSON – 19
PACKAGING AND LABELLING

19.1 INTRODUCTION
To establish an overseas price this chapter need to consider many of the same
factors involved in pricing for the domestic market. These factors include
competition-costs such as production, packaging, transportation and handling,
promotion and selling expenses and Effective packaging and labeling;
19.2 OBJECTIVES
 To know the Packing Methods
 To know the meaning of Labelling and Loading methods
19.3 CONTENTS
19.3.1. Effective packaging and labeling
19.3.1.1. Packaging must withstand:
19.3.1.2. Widely used packaging materials include
19.3.2. Stacking
19.3.3. Packing methods
19.3.3.1. Types of packs
19.3.3.2. Packing fresh fruits and vegetables
19.3.3.3. Packing methods for fresh produce include
19.3.4. Packing meat, poultry, and seafood products
19.3.5. Standardization
19.3.6. Unit loads
19.3.6.1. Unit loads may include some of the following features
19.3.6.2. Pallets
19.3.6.3. Slipsheets
19.3.7. Labeling and branding
19.3.8. Temperature, humidity, and other environmental controls
19.3.8.1. Precooling factors
19.3.8.2. Precooling methods
19.3.8.3. Precautionary measures
19.3.9. Transportation
19.3.9.1. Selection factors
19.3.9.2. Available equipment
19.3.10. Refrigeration aw ventilation systems
19.3.11. Equipment features
19.3.11.1. Loading methods
To establish an overseas price, you need to conside r many of the same factors
involved in pricing for the domestic market. These factors include competition-costs
such as production, packaging, transportation and handling, promotion and selling
expenses; the demand for your product or service and the maximum price which
the market is willing to pay.
There are three common methods of pricing exports
1. Domestic Pricing is a common but not necessarily accurate method of pricing
exports. This type of pricing uses the domestic price of the product or service
as a base and add export costs, including packaging, shipping and insurance.
Because the domestic price already includes an allocation of domestic
marketing costs, prices determined using the method might be too high to be
competitive.
175
2. Incremental cost pricing determines a basic unit cost that takes into account
the costs of producing and selling products for export, and then adds a mark -
up to arrive at the desired profit margin. To determine a price using this
method, first, establish the "export base cost" by stripping profit markup and
the cost of domestic selling. In addition to the base cost, include genuine
export expenses (export overheads, special packing, shipping, port charges,
insurance, overseas commissions, and allowance for sales promotion and
advertising) and the unit price necessary to yield the desired profit margin.
3. Cost modification involves reducing the quality of an item by using cheaper
materials, simplifying the product or modifying your marketing program,
which lowers the price. In addition, when making pricing decisions, you
should also consider your company's objectives, the price sensitivity and
uniqueness of your product.
In addition to obtaining competitive freight rates and services, a shipper should
ensure that the product will arrive in excellent condition. Of particular concern are
products of a perishable nature, such as frozen and chilled foods, as well as processed
and packaged foods, drinks, and juices. Important considerations include:
1. Effective packaging and labeling;
2. Temperature, humidity, and other environmental controls;
3. Well-maintained transportation equipment; and
4. Proper loading, in-transit monitoring, and unloading.
Under the best circumstances, product quality can only be maintained, not
improved, during transportation. Initial product quality should be the highest
possible. Products in top-quality condition:
1. Have a longer shelf life;
2. Allow more time for transportation, storage, and marketing;
3. Satisfy importers, brokers, and consumers;
4. Increase repeat sales and profits; and
5. Help expand markets.
Exporters should keep in mind that products must be protected from:

1. Rough handling during loading and unloading;
2. Compression from the overhead weight of other product containers;
3. Impact and vibration during land, ocean, and air transportation;
4. Rolling, pitching, yawing, heaving, swaying, and surging during ocean
transportation;
5. Loss or gain of moisture to or from the surrounding air;
6. Higher or lower than recommended temperature; and
7. Cross-contamination or odors from other products or residues.
By selecting and packing only top-quality products, shippers can help ensure
good arrival condition. Effective packaging, environmental controls, and proper
transportation equipment are essential.
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19.31 Effective Packaging and Labeling

Proper packaging of agricultural products is essential to maintaining quality
during transportation and marketing. Packaging serves to enclose the product and
facilitate handling. Labeling provides required information and a further
opportunity to position the product. In the market through attractive graphics.
Shipping high-quality, high-value, perishable products in poor-quality packaging
can lead to damage, decay, low prices, or outright rejection by the buyer. Improper
labeling can also lead to delays and product loss.
19.3.1.1 Packaging must withstand:
1. Rough handling during loading and unloading;
2. Compression from the overhead, weight of other containers;
3. Impact and vibration during transportation; and
4. High humidity during precooling, transit, and storage.
Packaging materials are chosen on the basis of the product and environmental
considerations. Factors to be considered are method of packing, temperature,
humidity, desired atmosphere around the product, packaging strength, cost,
availability, buyer specifications, graphics, labeling, freight rates, and government
regulations. Packaging manufacturers, foreign buyers, wholesale markets, retail
stores, packaging magazines, and consultants are an important source
of information on current packaging trends and desires.
All packaging should be recyclable or reusable, and the necessary amount of
material should be used to protect the product. The options of incinerating
packaging waste or shipping waste to landfills are being reduced throughout the
United States and Europe. Mandatory recycling programs, packaging bans, and
solid waste reduction programs have been established in many countries.
Packaging also should be standardized to facilitate unit loading on standard
size, reusable pallets in use in the United States, Europe, and other countries Pallet
handling and leasing companies have been established in response to economic
as well as environmental concerns.
Boxes should be sized and filled in accordance with the importer's or buy er's5
desires. Boxes that are very wide and weigh more than 20 kg (44 lb) encourage
rougher handling, product damage, and container failure. Excessive weights and
damaged packaging are common complaints of importers of U.S. meat products
who receive boxes weighing up to 45 kg (100 lb). In the Netherlands, for example, a
single worker does not have to lift over 15 kg (33 lb) unassisted, in accordance with
labor regulations and occupational safety concerns.
Overfilling causes product damage and excessive bu lging of the box, which
leads to reduced compression strength and container failure. Underfilling also may
cause product damage. The product may be bruised as it moves around inside the
box during transport and handling or during crushing of the available headspace. '
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19.3.1.2 Widely used packaging materials include:

1. Fiberboard—Pallets, slipsheets, bins, boxes (glued, stapled, interlocking),
lugs, trays, flats, dividers, and partitions.
2. Wood—Pallets, bins, crates (wirebound, nailed), baskets, trays, and lug s.
3. Paper—Bags, sleeves, wraps, liners, pads, excelsior, and labels.
4. Plastic—Pallets, bins, boxes, trays, bags (mesh, solid), containers, sleeves,
film wraps, liners, coatings, dividers, and slipsheets.
5. Polystyrene—Foam boxes, trays, lugs, sleeves, liners, dividers, and pads.
Fiberboard Boxes--Fiberboard boxes are the most widely used packaging, due
to their versatility and recyclability. There are many fiberboard box styles and sizes.
A minimum 19.3 kg/cm2 (275 lb/in2) bursting-test-strength or 7.86 kg/in (44
Ib/in) width edge crush test fiberboard is recommended for boxes intended for
export. The strength is needed for the handling, transport conditions, and high
humidity the boxes must endure. Many boxes are now certified with an edge crush
test instead of the bursting strength test. This information is available from the
packaging supplier and stamped on each box. Foreign buyers or importers should
be consulted about the size, pack, and box style desired.
Fiberboard boxes for products that are precooled in the box, packed wet, or
packed with ice are wax-impregnated or coated with water-resistant material. Wax-
treated fiberboard is generally not considered recyclable, so polyethylene and other
coatings have been developed instead.
Water-resistant coatings may be needed because the compression strength of
untreated fiberboard can be reduced by more than one -half in conditions of high
relative humidity common in refrigerated environments. In addition to maintaining
box strength, coatings help to reduce the loss of moisture from the product to the
fiberboard or weakening of the fiberboard from moisture from the product. All glued
boxes should be made with a water-resistant adhesive that also is recyclable.
Specially coated modified atmosphere fiberboard packaging has been
developed to slow product respiration rate and eliminate the need for ice and wax -
coatings in packages of fresh broccoli and other products. Film wraps of individual'
commodities and film wraps of fiberboard boxes of product have also been
developed with the same purpose in mind. Proper product precooling and
maintenance of refrigerated product temperatures are required for modified
atmosphere packaging to work as intended.
Holes are provided in fiberboard boxes of some products to provide ventil ation
of product heat (respiration) and allow circulation of cold air to the product when a
modified atmosphere is not required. Handholds provide a means of handling boxes
during loading and unloading. All holes must be designed and placed in a manner
that does not substantially weaken the box.
Wood Crates—Wood crates and wirebound wood crates are popular with some
shippers due to their material strength and resistance to high humidity and
moisture damage during precooling, transit, and storage. The crates are
178
constructed in a manner that allows a lot of air circulation around the packed
product. There is concern over whether wood crates are recyclable or reusable.
Machines are available to grind up wood crates for conversion into mulch or other
materials, but some countries in Europe have discouraged their use. Fasteners or
wire in wood crates to be recycled should be made of steel with a maximum
diameter of 10 mm, to allow grinding of the crates and extraction of the fastener
particles with magnets.
19.3.2 Stacking
The majority of fiberboard boxes and wood crates are designed to be stacked
top-to-bottom. Compression strength and product protection are sacrificed when
boxes or crates are stacked on their ends or sides. Misaligned fiberboard boxes can
lose up to 30 percent of their strength, while boxes that are not stacked top-to-
bottom {stacked either crosswise or off-center) can lose up to 50 percent of their
top-to.-bottom compression strength.
Various materials are added to boxes to provide additional strength and
product protection. Fiberboard trays, dividers, or partitions, and double or triple -
layer sides and ends in boxes provide additional compression strength and reduce
product damage.
Pads, wraps, sleeves, and excelsior are used to reduce bruisin g. Pads also are
used to: provide moisture, as with asparagus; absorb moisture as with retail
packages of meat, poultry, and seafood; provide chemical treatment to reduce
decay, as with sulfur dioxide pads for grapes; and absorb ethylene, as with
potassium permanganate pads used in boxes of bananas and flowers, or oxygen in
the case of some modified-atmosphere packaging.
Plastic Film Liners or Bags—Plastic film liners or bags are used to retain
moisture, provide for a modified atmosphere, or maintain produc t integrity, such as
in a cluster of grapes or tomatoes. Plastic with various size perforations, depending
on commodity requirements, is used to let oxygen in and carbon dioxide out.
Special films are used to seal the products and provide for a modified atmosphere
either by allowing the product to consume oxygen, releasing carbon dioxide and
therefore slow product respiration and ripening, or by flushing the package with a
modified atmosphere or by vacuum packaging. This is done for bananas,
strawberries, cherries, tomatoes, meat, poultry, seafood, and many other products
that benefit from a modified atmosphere.
Paper and Polystyrene Foam Liners-Liners help to insulate the product from
hot or cold temperatures when they are shipped in unrefrigerated air carg o holds
and uninsulated air cargo containers. Wet paper is used to provide moisture to
fresh cut herbs and flowers.
Shippers should check with the Foreign Agricultural Service' (FAS) or Animal
and Plant Health Inspection Service (APHIS) for packaging materials restrictions in
foreign countries, especially those made from plant parts such as wood, straw, or
leaves. Some of these items are prohibited in other countries or require special
179
documentation or quarantine treatments. Countries with phytosanitary or

environmental restrictions on packaging materials include Australia, New Zealand,
and the European Community. Soil also is restricted by many countries.
19.3.3 Packing Methods
19.3.3.1 Types of Packs
Types of packs include
1. Volume Fill-Products are placed by hand or machine into the box until the
desired capacity, weight, or count is reached.
2. Tray or Cell Pack— Products are placed in molded trays or cells which
provide separation and reduce bruising.
3. Place Pack— Products are wrapped and carefully placed in the box. This
provides reduced bruising and a pleasing appearance.
4. Consumer Pack or Pre-pack—Relatively small amounts of the product are
packaged, weighed, and labeled for retail sale.
5. Flexible Packaging-Each product is individually wrapped and sealed in film to
reduce moisture loss and decay, and in some cases, provide for a modified
atmosphere by letting oxygen in and carbon dioxide out through the design of
the film layers, at a rate that slows product respiration and ripening. For some
commodities the film may be treated with fungicides or other chemicals.
6. Modified Atmosphere — Individual commodities, consumer packs, boxes,
or pallet loads of commodities are sealed with special plastic film or bags
and flushed with nitrogen to slow respiration, ripenin g, or aging of the
product. In each case the packaging is formulated for a specific product.
19.3.3.2 Packing Fresh Fruits and Vegetables
The packing of fresh fruits and vegetables is of concern due to their highly
perishable nature. Growers, processors, packers, shippers, and repackers should:
1. Ensure adequate sanitation during harvesting and packing to avoid
contamination of produce with pathogenic organisms that can cause food -
borne illness;
2. Use a chlorinated wash to remove dirt, debris, and organisms present in
harvest operations;
3. Sort out bruised, cut, decayed, insect-infested, odd-sized, immature,
or overripe items;
4. Use the minimum amount necessary of fungicides / bactericides to limit
decay on certain products, strictly in accordance with l abel instructions and
foreign country restrictions;
5. Use the minimum amount necessary of officially approved wax or resin
coatings to reduce moisture loss on certain products, strictly in accordance
with label instructions and foreign country restrictions;
6. Use the minimum amount necessary of officially approved pesticides for
certain products to eliminate insect pests, strictly in accordance with label
instructions and foreign country restrictions;
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7. Remove field heat (precool) as soon as possible after harvest, and maintain
the cold chain ;
8. Use grade standards or buyer's specifications in packing;
9. Place only uniform sizes or amounts in each box:
10. Place only products with a uniform level of maturity in each box; and
11. Clearly mark the grade, size, weight, or count on the box, along with any
other required label information, such as country of origin, exporter,
importer, gross and net weights in kilograms, total number of packages, size
of package; in centimeters, handling marks (international pictorial symbols),
cautionary marks, port of entry, pesticides, and fungicides used, or wax or
resin coatings used, in a language accepted by the destination country.
Damaged fresh products can ruin an entire shipment and reduce importers'
confidence in the grower and shipper. Products in this condition:
1. Spread decay to other products in the load;
2. Produce more ethylene gas and heat, which cause further ripening and
decay; and
3. Lose more water resulting in shriveling and wilting.
19.3.3.3 Packing methods for fresh produce include
Field Packing--Products are placed in fiberboard boxes or wood crates during
harvesting. Some products are wrapped. The filled containers are then taken to a
precooling facility to reduce field heat.
Shed Packing--Products are processed or packed indoors or under cover at a
central location. The product is brought from the field to the packing shed in bulk
in field crates, bins, or trucks. The products are precooled either before or after
they are placed in shipping containers.
Repacking- Products are taken out of one container, regarded, and placed in
another. This is often done to make smaller boxes for the retailer or consumer
packages.
Fresh-cut Processing--Products are washed, trimmed, shredded, peeled, cut,
and otherwise processed into salad mixe s or ready-to-eat items under sanitary and
temperature-controlled conditions using Hazard Analysis Critical Control Point
(HACCP) or similar systems of quality control. These items are then placed in
modified-atmosphere consumer and foodservice packages which are then grouped
in fiberboard boxes for distribution under constant refrigeration.
19.3.4 Packing Meat, Poultry, and Seafood Products
Through careful sanitation, modified-atmosphere packaging technology,
temperature control, and loading of marine containers at meat packing plants,
extended shelf life of 70 days or more for chilled beef and lamb has been possible
since the late 1980's. This has provided higher revenues for the meat exporter as
compared to frozen product shipped by sea or chilled product shipped by air.
Recently instituted HACCP procedures may help additional firms get into the export
market with extended shelf-life, quality-assured chilled and frozen products.
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19.3.5 Standardization
Due to the large number of different box sizes in use, box and pallet standards
have been developed by the fresh produce, frozen food, floral, and grocery
industries in Europe and the United States to reduce handling damage and
packaging waste. Standardized boxes can:
1. Reduce box inventory for manufacturers and growers;
2. Provide unit loads and more stable mixed pallet loads;
3. Reduce transportation and marketing costs; and
4. Use 90 to 100 percent of the pallet surface with no overhang and little
underhang.
The following are standard pallet sizes:
1. Standard Grocery Manufacturers Association (GMA) pallet used in the
United States-1219 by 1016 mm (48 by 40 in).
2. International Standards Organization (ISO) pallet used in Europe -1200 by
1000 mm (47.24 by 39.37 in).
3. Europallet, also widely used in Europe-1200 by 800 mm (47.24 by 31.5 in).
The following five box sizes that fit well on all three of the above pallets are
recommended for international trade, especially in Europe.
1. 600 by 400 mm
2. 400 by 300 mm
3. 400 by 200 mm
4. 300 by 200 mm
5. 200 by 150 mm
19.3.6 Unit Loads
Shippers, carriers, and receivers prefer handling palletized unit loads instead
of individual boxes, one at a time. Most distribution centers are set up to store
palletized loads in three-tier or higher racks.
Unit loads provide for:
1. Reduced handling of boxes;
2. Less damage to the boxes and the products inside;
3. Faster loading and unloading of transportation equipment;
4. More efficient distribution center operations; and
5. Reduced pilferage of products.
19.3.6.1 Unit loads may include some of the following features
1. Standard size reusable or recyclable wood pallets or slipsheets;
2. Fiberboard, plastic, or wire vertical interlocking tabs between boxes;
3. Boxes with holes for air circulation, which align when the boxes are stacked
squarely on top of one another, corner to corner;
4. Recyclable glue between boxes to resist horizontal slipping;
5. Plastic netting around the pallet load of boxes; and
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6. Fiberboard, plastic, or metal cornerboards with plastic or metal strapping

around the cornerboards and boxes.
19.3.6.2 Pallets
Wood pallets must be strong enough to allow storage in racks. Pallets also
should be capable of being reused a number of times. Provisions for forklift and
pallet jack handling are necessary. The design of the bottom of the pallet should not
block air circulation.
Block-style 1200 by 1000 mm pallets are standard in European pallet pools
and should be used for any exports to Europe. The Europallet, 1200 by 800 ram,
also is popular in some European countries. Australia uses an 1100 by 1100 mm
pallet.
One-way pallets are increasingly being rejected by importers and receivers due
to recycling and disposal costs. Product received in Europe on pallets other than
the 1200 by 1000 mm and 1200 by 800 mm pallets used in those countries may be
required to be re-palletized at the port of entry, leading to additional handling costs,
product damage, and pallet disposal costs.
Pallets must have an adequate number of top deck boards to support
fiberboard boxes-. Otherwise the boxes may collapse between deck boards, crush
the product, or cause the entire load to lean or fall off the pallet. A sheet of
fiberboard with holes for air circulation can be used to help distribute weight across
the pallet.
Boxes must not overhang the edges of the pallets. Overhang can reduce the
strength of fiberboard boxes by one-third. This condition can lead to collapse of the
entire load, crushing of the product, and difficulty in loading, unloading^ and
storage in racks. On the other hand, boxes that use less than 90 percent of the
pallet surface and do not align with the pallet edge can shift in transit.
Pallet loads of boxes that are not strapped or netted should have at least the
top three layers of containers cross-stacked to provide stability. Some shippers use
film wrap, tape, or glue on the top layers i n addition to cross-stacking. The boxes
must be strong enough to be cross-stacked without collapsing. Film wrap should
not be used on boxes of products that need ventilation.
19.3.6.3 Slipsheets
Slipsheets, made of sheets of fiberboard or plastic, are used by some shippers
instead of pallets to reduce transportation costs. Slipsheets eliminate the cost of
buying, disposing, or returning pallets. A special forklift with a clamping device is
needed to transfer slipsheet loads to and from the warehouse pallets at the
shipper's and receiver's distribution center and into the trailer, container, or railcar.
If this special forklift is not available, the unit loads must be transferred box by box
onto pallets, leading to costly delay and product damage.
Slipsheets made of recyclable fiberboard or plastic must be strong enough to
be clamped and pulled onto the forklift tines or plate for lifting. Fiberboard
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slipsheets should be treated with a recyclable coating for use in wet conditions.
Slipsheets used in transportation equipment should have holes for air circulation
under the load. The use of slipsheets in refrigerated transportation equipment with
shallow floor channels is not recommended due to the need for adequate air
circulation under the load. Unit loads of boxes on slipsheets should be netted,
stretch-wrapped, or otherwise secured with cornerboards and strapping.
19.3.7 Labeling and Branding
Labeling of boxes may provide required information for export certification,
identify and advertise the products, and assist receivers in storing and retrieving
the boxes. Fiberboard boxes can be preprinted with colorful graphics. Wood
packaging has glued, stamped, or stenciled labeling. Some high-quality fruits and
vegetables are individually branded with small colorful trademark stickers. Some
shippers also provide selection, storage, recipes, posters, and other point-of-sale
material for the retailer or consumer.
All boxes and consumer packages should be clearly labeled, bar coded, and
branded in the language accepted by the destination country. The following
information should be included on boxes along with any other data required by the
foreign country:
1. Common name of the product;
2. Net weight, count, and/or volume;
3. Brand name as well as name and address of the packer or shipper;
4. Country of origin;
5. Size and grade, when standards are used;
6. Recommended storage temperature;
7. Special handling instructions; and
8. Name of officially approved fungicides or bactericides used in packaging.
Each country has labeling requirements that must be followed. Labeling of
consumer packages is mandatory under most national regulations. For example,
the United States requires that in addition to the product name, net weight, and
name and address of the manufacturer, packer, or distributor, processed items
must have a nutrition label and all ingredients listed in descending order of
prominence. The Food and Drug Administration (FDA) classifies fruits and
vegetables with wax or resin coatings as processed products which must be
properly labeled with names of the coating displayed at the point of retail sale or on
the individual items. Many processed products also are labeled with a "sell by" date
or "best if used by" date,
19.3.8 Temperature, Humidity, and other Environmental Controls
Removal of field heat by the process of precooling to a recommended storage
temperature and relative humidity is absolutely necessary to maintain the quality
of fresh fruits, vegetables, plants, and cut flowers. The quality of most products will
rapidly deteriorate if field heat is not removed before loading into transportation
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equipment. The rate of respiration and ripening increases two to three times for
every 10° C (18° F) above the recommended storage temperature.
Refrigerated transportation equipment is designed to maintain temperature
and should not be used to remove field heat from products packed in shipping
containers. The refrigeration units also are not capable of raising or controlling the
relative humidity.
A high temperature difference between the refrigeration unit evaporation coil
and the product will increase the loss of product moisture. This will cause the
evaporator to frost and the products to shrivel or wilt and weigh less. Most fruits
and vegetables have a water content between 80 and 95 percent.
19.3.8.1 Precooling Factors
Precooling extends product life by reducing:
1. Field heat;
2. Rate of respiration (heat generated by the product);
3. Rate of ripening;
4. Loss of moisture (shriveling and wilting);
5. Production of ethylene (ripening gas generated by the product); and
6. Spread of decay.
The success of precooling is dependent on:
1. Time between harvest and precooling;
2. Type of shipping container, if product is packed beforehand;
3. Initial product temperature;
4. Velocity or amount of cold air, water, or ice provided;
5. Final product temperature;
6. Sanitation of the precooling air or "water to reduce decay organisms; and
7. Maintenance of the recommended temperature after precooling.
Precooling should occur as soon as possible after harvest. Harvesting should
be done in early morning hours to minimize field heat and the refrigeration load on
precooling equipment. Harvested products should be protected from the sun with a
covering until they are placed in the precooling facility.
Many products are field or shed packed and then precooled. Wood wirebound
or nailed crates and waxed or coated fiberboard boxes are used for packed products
that are precooled with water or ice after packing. This process is being modified in
response to the demand for recyclable boxes.
Precooling of products packed in boxes and stacked in unitized pallet loads is
especially important as air circulation around and through the packaging may be
limited during transportation and storage.
Precooling is particularly important for products that produce a lot o f heat.
The following are examples of products that have high respiration rates, and short
transit and storage lives:
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 artichokes  brussels sprouts  onions, green

 asparagus  carrots, bunched  okra
 beans, lima  corn, sweet  parsley
 beans, snap  endive  peas
 bean sprouts  kale  raspberries
 blackberries  lettuce  spinach
 broccoli  mushrooms  strawberries
 watercress
19.3.8.2 Precooling Methods
The choice of precooling method depends on the nature, value, and quantity of
the product, as well as the cost of labour, equipment, and materials. Precooling
methods include:
1. Room Cooling—-Boxes of products are stacked in a refrigerated room. Some
products are misted or sprayed with water during room cooling.
2. Forced-Air Cooling or Wet Pressure Cooling--Air is drawn through stacks or
unit loads of boxes of products in a refrigerated room. For some products,
water is added to the air.
3. Hydrocooling—Products are flushed with ice water in bulk tanks, bins, or
boxes.
4. Vacuum Cooling--Heat is removed from products packed in boxes by
drawing a vacuum in a chamber.
5. Hydrovacuum Cooling--Moisture is added to products packed in boxes
before or during the vacuum process to speed the removal of heat.
6. Package-icing— Slush or crushed ice is injected into each box of product.
Some operations use bulk bins.
Portable ice plants, hydrocoolers, vacuum coolers, forced -air coolers, and
package-icing machines are available for use in the fields. This equipment is useful
for remote or small-scale operations that cannot justify investment in a fixed
precooling facility. Mounted on skids, dollies, or tractor trailers, the equipment can
follow the harvest from field to field and be shared by many growers.
Hydrocooling and vacuum cooling are the fastest cooling methods. Cooling
times of half an hour are possible. Products and packaging must be able to
withstand direct water contact in hydrocooling. In vacuum cooling, the products
should have a large surface area, low density, and high moisture content. The
boxes and wrapping must allow ventilation of heat.
Forced-air cooling can take 1 or 2 hours, depending on the amount of
packaging, while room cooling may take 24 to 72 hours. Packaging must allow
ventilation of heat for these methods to be successful. Package -icing provides
effective cooling and a high relative humidity for products and packaging that can
withstand direct contact with ice.
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Many tropical fruits, vegetables, plants, and cut flowers requ ire much less
cooling than products that are cooled to 0° C (32° F). All products should be
precooled as near as possible to the recommended storage temperature and relative
humidity. Product temperatures should be taken in sample boxes by inserting an'
electronic thermometer into the product. The data should be recorded for future,
reference.
19.3.8.3 Precautionary Measures
Some products are sensitive to chilling or freezing injury. Care must be taken
not to precool or store the products below the recommen ded temperature. Often the
visible effects of chilling injury are delayed until the product is offered for retail
sale. These effects include failure to ripen properly, pitting, decay, watery
breakdown, and discoloration in fruits and vegetables. Flowers and plants lose
florets or foliage, fail to open, discolor, or wilt.
All products are sensitive to decay. Precooling equipment and water should be
sanitized continuously with a hypochlorite solution to eliminate decay -producing
organisms. Care also must be taken not to allow products to warm up after
precooling. Condensation on cool product surfaces at higher air temperatures also
spreads decay.
Harvesting and packaging of most products should be closely coordinated with
transportation to minimize time in transit and storage, and maximize product
freshness in the hands of consumers. After precooling, the products must be
properly loaded and transported at or near the recommended storage temperature
and relative humidity to maintain quality.
19.3.9 Transportation
The design and condition of the transport equipment, and the loading method
used, are critical to maintaining product quality. The mode of transportation and
the carrier should be chosen carefully.
19.3.9.1 Selection Factors
The mode of transportation and type of equipment used should be based on:
1. Destination;
2. Value of the product;
3. Degree of product perishability;
4. Amount of product to be transported;
5. Recommended storage temperature and re'ative humidity;
6. Outside temperature conditions at origin rind destination points;
7. Time in transit to reach destination by air, land, or ocean transport;
8. Freight rates negotiated with the carriers; and
9. Quality of transportation service.
The reliability and quality of transportation services provided by different
carriers must be carefully considered along with the rates charged. Services and
schedules are subject to change. Shippers should contact air and ocean port
187
authorities at their origin and destination locations to receive the most current
information on available services. Local trade publications also are excellent
sources of information, as many carriers and their agents advertise their schedules
and destinations.
Refrigerated trailers and containers are recommended for products shipped in
large volumes with transit and storage lives of 1 week or more. After transit, there
must be enough remaining product life for marketing. Carriers using trailers and
containers may offer door-to-door service, which reduces handling, exposure,
damage, and theft of the products.
Air cargo containers also can be used to provide door-to-door service. Products
transported by air are generally high in value, highly perishable, but shipped in
lower volumes, Freight costs, are higher by air, but transit time is reduce d
considerably.
Many products are shipped in unrefrigerated air containers or on air cargo
pallets. This requires close coordination at the origin and destination airports to
protect the products when flights are delayed. Cold storage facilities are needed at
airports to ensure product quality. Refrigerated air containers, insulated blankets,
or gel pack refrigerants should be used when possible.
Products that can be shipped in refrigerated trailers and van containers are
sometimes shipped by air to take advantage of brief market opportunities, such as
the beginning of a season when prices are high and supply is limited. Often an
importer who is first to receive a certain product is able to build goodwill and
increase sales throughout the season.
19.3.9.2 Available Equipment
The following transportation equipment is available:
1. Air Cargo Containers—For air and highway transport.
2. Air Cargo Pallets With Netting—For air and highway transport.
3. Highway Trailers—For highway transport only,
4. Piggyback Trailers—For rail, highway, and roll-on/roll-off ocean transport.
5. Containers--For rail, highway, and lift-on/lift-off ocean transport.
6. Breakbulk Reefer Vessels—Handling palletized loads in refrigerated holds.
7. Bulk Vessels—Handling dry and liquid products in holds.
8. Railroad Boxcars—Handling palletized or individual shipping containers.
19.3.10 Refrigeration and Ventilation SYSTEMS
The following systems are available:
1. Mechanical—Diesel-generated electric power is used over the road and
aboard ocean vessels. Van containers are plugged into electrical power at
depots and aboard ships.
2. Cryogenic—Liquid or gaseous nitrogen or carbon dioxide, which is released
into cargoes of frozen food and occasionally chilled food under controlled
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conditions. Some products, such as leafy gree n vegetables, are not

compatible with carbon dioxide refrigeration.
3. Dry Ice—Solid blocks of carbon dioxide in special trays or compartments are
used in air cargo containers, pallet containers, and within individual shipping
containers of frozen product. Shippers must check with airlines prior to using
dry ice, as it is considered a hazardous material. If permitted, the containers
and accompanying documents must be properly marked to show the amount
of dry ice used. Some products, such as leafy green vegetables, are not
compatible with dry ice. Direct contact with dry ice will injure fresh products.
4. Wet Ice—Ice is used within individual shipping containers or on top of a load
of containers, either as a supplement or instead of mechanical refrigeration.
Many airlines refuse to handle shipping containers with wet ice due to the
risk of expensive damage from leaking containers. Airlines that do permit wet
ice require that it be placed in sealed polyethylene bags inside a leak proof
container with a moisture absorbent pad. Top-ice is used for certain fresh
products to supplement mechanical refrigeration and help maintain a high
humidity. Most refrigeration units on trailers and containers cannot control
relative humidity and actually remove moisture from products as a natural
part of the cooling process.
Top-ice on loads should be applied in rows instead of a solid mass, especially
in bottom air delivery equipment. Air circulation should not be blocked. The
thermostat on top-iced loads should be set at 2° C (35°F) to prevent freezing of the
ice into a solid mass which would block air circulation. Products that can be top-
iced also can be package-iced, provided the correct packaging materials are used,
5. Gel Refrigerant—Frozen containers of chemical eutectic gel are used to
maintain temperature within shipping containers. This is the refrigeration
system preferred by most airlines.
6. Ventilation, Ethylene Scrubbing, Humidity Control —Fresh air exchange in
the refrigeration system or vents in dry or insulated containers can be used
to protect products from a buildup of heat, moisture, carbon dioxide, or
ethylene. Leafy green vegetables are sensitive to carbon dioxide, while many
product are sensitive to ethylene.
In lieu of ventilation, potassium permanganate pads can be installed m the
trailer or container at the refrigeration unit 1o absorb ethylene. These ethylene
scrubbers also can be placed inside individual shipping containers.
Moisture absorbents and kraft paper liners are used to control condensation
on products during transportation through different climates. Some refrigeration
units are capable of maintaining humidity at optimum levels.
7. Multitemperature - A mechanical or cryogenic system provides two or three
temperature conditions in separate compartments of a trai ler or container
which can be used to carry loads of frozen, chilled, and dry products in one
vehicle. Advance planning is required when loading multitemperature
trailers. The conditions provided by three compartment trailers may include -
189
18°C (0°F), 0°C (32°F), 10°C (50°F), or ambient temperature for products not
requiring refrigeration.
The frozen compartment is usually located at the front of the trailer closest to
the refrigeration unit. Movable bulkheads are placed between the compartments.
Separate evaporators or ventilation between compartments provide temperature
control for the nonfrozen products. Side doors are needed to access the forward
compartments when the trailers are inspected at ports of entry or used to make
multiple deliveries on a single run.
8. Modified or Controlled Atmosphere--Nitrogen and some carbon dioxide gas is
added to pallet bags, or to the cargo compartment of refrigerated van
containers, displacing oxygen. This reduces product decay, respiration, and
ripening of certain products. Controlled-atmosphere systems monitor and
replenish the nitrogen scrub carbon dioxide, and adjust the level of oxygen
according to specific product requirements. This allows products to be
shipped at a higher level of maturity-Controlled atmosphere also allows for
longer transit times enabling shippers to use less costly land and sea
transport instead of air transport for highly perishable products and to allow
the transport of riper fruit. Products shown to benefit include apples,
asparagus, avocados, bananas, cherries, kiwifruit, mangoes, pears, and
strawberries.
Modified or controlled atmospheres of reduced oxygen, and elevated nitrogen
and carbon dioxide, are provided to specially equipped containers of certain fruits,
vegetables, meat, and seafood after loading is completed. The atmospheres are
tailored for each commodity. Three controlled atmosphere systems are available:
gas injection, membrane air separation, and pressure swing absorption. Ethylene
scrubbers can be added to these systems.
For modified and controlled-atmosphere gas injection systems, containers are
equipped with channels at the doorway. A plastic curtain is sealed in the channels
to reduce air leakage. Gas ports in the side of the container are used for the
injection of the desired atmosphere and discharge of the existing air. In the case of
controlled atmosphere, an electronic controller, a scrubber for absorbing excess
carbon dioxide, and an air exchange port to allow in more oxygen are provided.
Trailers are generally considered too leaky, and transit times too short to
benefit from modified or controlled atmospheres. Instead, shippers may use a gas
injection system of modified atmosphere, which is applied either to pallet loads
enclosed by a plastic bag or applied to individual modi fied-atmosphere shipping
containers. The pallet application is primarily used for strawberries. The packaging
application has been used for tomatoes and broccoli.
The above systems are proprietary and, applied under a service agreement,
available at select ports and shipping points around the world. In the case of
container loads, the service applicators must check the container for excessive air
leakage prior to the application and correct major problems.
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The membrane air separation system is either built into the refrigeration unit
or clipped on to it. The pressure swing absorption system is installed separately in
the container in addition to the refrigeration unit. These systems generate nitrogen,
reduce oxygen, and add or remove carbon dioxide as needed . These systems can be
programmed by the shipper and are able to overcome some air leakage. Membrane
air separation is also available to service individual holds in refrigerated vessels or a
number of porthole containers in the hold of a vessel.
Research continues to be conducted on using controlled atmosphere systems
to reduce or eliminate insect infestations. Warning labels must be applied to
containers and vessel holds with controlled atmospheres to caution employees that
the atmosphere will not support human life. The cargo area must be ventilated
properly before personnel can enter to unload the cargo.
19.3.11 Equipment Features
Long-distance transportation through tropical and frigid climates requires
rugged, well-designed equipment to withstand the transit environment and protect
the products. Desirable features in refrigerated trailers and containers include:
1. Adequate refrigeration capacity to hold frozen food at extreme ambient
temperatures;
2. Adequate air circulation for uniform product temperature an d high relative
humidity throughout the load;
3. A solid return air bulkhead at the front of the trailer to ensure air circulation
throughout the load;
4. Vertical ribs on side walls and the rear door to assist in air circulation;
5. Adequate insulation and provisi ons for heating in areas with extreme cold
weather;
6. Deep floor grooves or channels to provide an adequate cross-sectional area for
air circulation under loads placed directly on the floor;
7. Supply-air temperature sensing of the operation of the refrigeration unit to
reduce product chilling and freezing injury;
8. Provisions for ventilation to prevent ethylene or carbon dioxide buildup;
9. Provisions for application of controlled or modified atmospheres; and
9. Adequate suspension to reduce the amount of shock and vibration transferred
to the shipping containers and the products inside.
The capacities and dimensions of air cargo containers, air cargo pallets,
refrigerated trailers, and refrigerated van containers vary among carriers due to
differences in equipment design and manufacture. Sample specifications are
provided at the end of this section.
Carriers should be consulted for specifications, availability, and rates well in
advance of shipping. Many carriers provide valuable assistance and information on
loading and operating their equipment.
191
Room for air circulation must be provided in transport equipment loaded with
agricultural products. The nature of the product, packaging type, and loading
method affect air circulation, as well as the total weight and volume occupied by
the load.
Maximum cargo weights are limited by carriers to comply with restrictions on
particular transport and handling equipment, or limits enforced by Government
agencies to protect roads and bridges. Due to light product density or load li mits,
many loads do not use the maximum rated-weight capacity of the transport
equipment.
Most carriers check their transport equipment before delivery to the shipper
for loading. Good equipment condition is critical to maintaining product quality.
The shipper also should check the equipment to ensure it is in good working order
and meets the needs of the product. Carriers provide guidance on checking and
operating the refrigeration systems.
All transportation equipment should be checked for:
1. Cleanliness—The load compartment should be regularly steam cleaned.
2. Damage— Walls, floors, doors, and ceilings should be in good condition,
3. Temperature Control— Refrigerated units should have been calibrated
recently and capable of supplying continuous air circulation for uniform
product temperatures.
Shippers should insist on clean equipment. A load of products can be ruined by:
1. Odors from previous shipments;
2. Toxic chemical residues;
3. Insects nesting in the equipment;
4. Decaying remains of agricultural products; and
5. Debris blocking drain openings or air circulation along the floor.
Shippers should insist on well-maintained equipment and check for the following:
1. Damage to walls, ceilings, or floors, which can let in the outside heat, cold,
moisture, dirt, and insects;
2. Operation and condition of doors, ventilation openings, and seals; and
3. Provisions for load locking and bracing.
For refrigerated trailers and containers, the following additional checks are important:
1. With the doors closed, the cargo area should be checked from inside for
light-door gaskets must seal. A smoke generator also can be used to detect
leaks.
2. The refrigeration unit should cycle from high to low speed when the desired
temperature is reached and then back to high speed.
3. The location of the sensing element that controls the discharge air
temperature must be located. If it measures return air temperature, the
thermostat will have to be set higher to avoid a chilling injury or freezing
injury to the products.
192
4. A solid return air bulkhead should be installed at the front of the trailer.
5. A heating device should be available for transportation in areas with extreme
cold weather.
6. Equipment with a top air delivery system must have a fabric air chute or
metal ceiling plenum in good condition.
Products requiring refrigeration should be thoroughly precooled prior to loading
into transportation equipment. Product temperatures should be taken with an
electronic probe thermometer and recorded on the bill of lading for future reference.
The load compartment in the equipment also should be precooled to the
recommended transport or storage temperature for the product. Ideally, the loading area
should be enclosed and refrigerated, with dock seals at the trailer or container doors.
Proper loading practices are critical to maintaining temperature and relative
humidity, protecting the products from impact and vibration forces in transit, and
preventing insects from entering the load. Special care must be taken when
shipping mixed loads--the products must be compatible.
19.3.11.1 Loading Methods
Basic loading methods include:
1. Bulkloading, by machine or hand, of unpackaged commodities;
2. Hand loading individual boxes with or without pallets; and
3. Unit loading of palletized or slipsheet loads of boxes with pallet jacks or
forklifts.
Mixed Loads
Many products are often transported in mixed loads or stored with other
products. They must be compatible in terms of:
1. Recommended temperature and relative humidity;
2. Production and sensitivity to ethylene; and
3. Production and absorption of odors.
Groups of fresh products suitable for transportation and storage together have
been identified. Products sensitive to chilling, freezing, moisture loss, ethylene, and
odors are listed. Many products are subject to chilling injury when transported or
stored at lower than recommended temperatures. This damage often becomes
apparent after the products warm up. Products injured may show pitting,
disco1oration, water-soaked areas, decay, and failure to ripen.
Many products are recommended to be transported or stored at temperatures
only 1°C to 3°C (2°F to 61F) above their freezing points. Thermostats on some
trailers and van containers are set 1C to 3C (2F to 6F) higher than the
recommended temperature of 0C (32F) for chilled products. Most tropical
products that freeze are first damaged by chilling injury.
Most products need to be transported and stored at a high relative humidity.
Some products are more susceptible to in moisture loss than others. Moisture loss
results in wilting and shriveling. To reduce moisture loss, products must be
193
adequately precooled before transit. Some products also ate waxed, film-wrapped,
package-iced, or top-iced Relative humidity during transit and storage must be
maintained as much as possible.
Never transport or store fruits and vegetables that produce a lot of ethylene
with products that are sensitive to it. Ethylene can cause premature ripening of
some products and will ruin others, such as plants and cut flowers. Cucumbers
and celery turn yellow, while lettuce will turn brown, in the presence of ethylene.
Potassium permanganate pads can be used to absorb ethylene during transit and
storage.
Never transport or store/odorous products with products that will absorb the
odors. Never load fruit, vegetables, or other food products with nonfood products
that provide any risk of contamination through transfer of toxic chemical residues.
Similar-sized shipping containers should be loaded together in mixed loads for
increased stability. Heavier shipping containers of products should be loaded first
and distributed evenly, across the floor of the trailer or container. Lighter shipping
containers can then be placed against or on top of the heavier products.
Load lock bars, load gates, and pocket placed in a vertical position can be used
to separate and secure stacks of different-sized shipping containers. To facilitate
inspection of mixed loads at ports of entry, a representative sample of each
commodity should be available near the door. This can minimize the unloading of
cargo for examination.
The longer the transit time, the higher the risks in transporting mixed loads of
agricultural products. Therefore, it is essential that guidelines be followed closely to
maintain quality in distant markets.
Providing for Air Circulation
Inadequate provisions for air circulation will ruin a load, even in well -designed
transportation equipment. When possible, boxes should be kept off shallow floors
and away from flat sidewalls by using pallets, racks, and damage. Room for air
circulation must be provided under, around, and through the load to protect the
products from:
1. Heat gain from the outside air during hot weather;
2. Heat generated by the produce through respiration;
3. Ethylene produced by certain products;
4. Heat loss to the outside air during extreme c old weather; and
5. Chilling injury or freezing injury during operation of the refrigeration unit.
Temperature Monitoring and Recording
Shippers should follow the carrier's recommendations on loading and setting
the temperature of the equipment's load compartment to avoid chilling or freezing
injury to fresh products. Discharge air may be colder than the set-point
temperature if the refrigeration system operates on return -air temperature sensing.
The temperature should be clearly marked on the bill of lading . Drivers and shipper
194
should check product temperatures with a pulp thermometer and record the
temperatures during the loading process.
Many carriers advise setting the thermostat temperature 1°C to 3°C (2°F to
6°F) higher than the recommended temperature of 0°C (32°F) for chilled products.
This depends on the design of the transportation equipment. Newer equipment with
supply-air temperature sensing and good air circulation can be operated closer to
the recommended temperature.
For most tropical fruits, vegetables and plants that have recommended
temperatures in the 10°C to 21°C (50°F to 70°F) range, the thermostat is set at or
near the recommended temperature.
It is now possible to monitor refrigeration unit operating conditions from a
central control room on a ship or by satellite transmission.
Refrigeration units for trailers and containers may have an electronic recorder
which can monitor up to three different points in the load. This data can be
downloaded and analyzed on a computer. Mechanical temperature recorders which
place data on a circular chart also are used.
In addition to trip insurance, all load should have a small portable air-
temperature recorder (supplied by the shipper) placed between packages in the area
where the warmest temperatures occur. Recorder companies recommend placement
on top of the load, near a sidewall, one -third of the way in from the rear doors, and
away from any direct discharge of refrigerated air.
Railcars should have two or three portable recorders. In loads with to p-ice or
humidity above 95 percent, the recorders should be waterproof or enclosed in a
plastic bag. Models are available for frozen food applications.
Shippers and receivers must follow the recorder company's instructions on
documenting the load, starting the recorder, reading the results, and returning it
for calibration and certification. The temperature recorder chart and/or instrument
number should be clearly marked on the bill of lading. These steps are essential for
settling claims over temperature management during transportation.
In the European Union temperature recording is mandatory. It also is
necessary in the case of cold treatment quarantine shipments in which fruit is held
at specific temperatures to kill fruit flies.
Cold Treatment and Pest Control
Shippers should avoid loading at night. Insects attracted by light can enter the
load and cause problems upon inspection at destination. The loading area should
be enclosed to prevent insects from reinfesting treated and packaged products. The
Animal and Plant Health Inspection Service (APHIS) operates a preclearance
program in which product is inspected and certified to be free of injurious insect
pests and plant diseases. Such shipments are marked and sealed to prevent
tampering and infestation.
195
Fumigations for pest control inside loaded transportation equipment are

usually done under APHIS supervision in accordance with the necessary treatment
schedule for a particular product and insect. Cold treatment of certain products
during transportation also is used to kill insects. This involves strict temperature
control throughout the load for up to 2 weeks. APHIS maintains a list of refrigerated
vessels and refrigerated containers certified as capable of maintaining in transit
cold treatment temperatures.
Bracing the Load
Loads should be secured with some of the following materials to prevent
vibration and impact damage in transit :
1. Aluminum or wood load locks;
2. Fiberboard honeycomb fillers;
3. Wood blocking and nailing strips;
4. Inflatable kraft paper air bags;
5. Cargo nets and straps; and
6. Wood load gates constructed of 25 by 102 mm (1 by 4 in) material.
Loading Air Cargo Equipment
Air cargo containers are loaded by hand or with forklifts when using fiberboard
LD-3 container inserts. Polystyrene foam triangul ar inserts, wood blocking, and
fiberboard damage are recommended to brace boxes and provide a level platform on
the sloped surface of LD-3 containers. Refrigerated air cargo containers should be
used when available.
Air cargo pallets are loaded by hand or with forklifts. The loads should be
secured with straps, tape, or cross-stacking of the boxes. A weatherproof or
insulated cover can be placed over the load along with the required cargo netting,
provided the pallet load is protected from sunlight. Loading Trailers and Containers
For refrigerated trailers and containers the following loading practices are
recommended:
1. Precool the trailer or container to the recommended transport or storage
temperature. Turn off the refrigeration unit during loading if the loading area is not
refrigerated; otherwise, the evaporator will frost due to the warm air drawn in by
the unit.
2. Thoroughly precool unit loads, as air circulation to some of the shipping :
containers may be limited. The containers should have openings for cooling and
ventilation of product heat.
3. Avoid loading tightly against flat sidewalls. Use centerline loading for unit loads.
4. Secure unitized loads with damage between the walls and load,
5. Do not block air circulation at the rear door.
6. Secure the rear of both hand-stacked and unitized loads with straps, load gates, or
load lock bars to prevent the load from shifting against the rear doors.
196
Trailers and Containers with Top Air Delivery

For refrigerated trailers and containers with air delivered to the top of the load
by chutes or ceiling ducts, these additional practices are necessary to maintain
product quality:
1. Hand-stacked loads should be evenly spaced, with lengthwise air flow
channels created on every other layer, to ventilate product heat (respiration).
2. Header stacks must be provided at the front bulkhead of the trailer or
container in hand-stacked loads to connect all the lengthwise channels and
allow the air to return to the evaporator.
3. Loads of frozen food or non-respiring products can be loaded solidly without
air channels in the middle of the load.
4. Fiberboard boxes must be strong enough to counter the reduced stacking
strength due to the boxes being offset to provide airflow channels.
5. Pallets should be used with hand-stacked loads to provide adequate air
circulation in equipment with flat or shallow grooved floors.
6. The load should not block the ceiling air chute or plenum.
Trailers and Containers with Bottom Air Delivery
For refrigerated trailers and containers with air delive red to the bottom of the
load through the floor channels, these additional practices are necessary to
maintain product quality:
Hand-stacked and unit loads of boxes should have bottom-to-top ventilation
slots that align in the stacks. Otherwise, small vertical air flow channels are needed
between boxes as a result of the slight bulge in the box sides.
At least 13 mm (5 in) of space should be provided at the ceiling for return -air
circulation.
The load should cover most of the floor surface to force more air through the
load. Pieces of fiberboard can be used to cover any remaining floor space next to
unit loads or stacks of boxes. Only the floor area next to the doorway should be
open to permit return air flow.
Intransit Procedures
During transportation of refrigerated loads in trailers and containers, the
carrier should check the operation of the refrigeration unit and temperature of the
load compartment regularly.
Receiving Procedures
Before completely unloading a shipment for storage, receivers usually chec k
the load to determine if it meets specifications for quality, grade, and packaging.
The receiver also will note whether the load was adequately braced and the correct
temperature was maintained.
197
Product temperatures in sample shipping containers throughout the load

should be taken and recorded, using an electronic probe thermometer. The air-
temperature recorder should be read, if one was placed in the load. Shippers and
carriers should be notified of any problems with the product, packaging, loading
method, or transportation equipment, so corrective action can be taken.
If there is a problem with the load, the receiver, carrier, or shipper can request
an inspection by a licensed inspector. Unresolved disputes over product quality or
payment can be referred to arbitration or other legal avenues.
Unloaded products need to be protected from direct sun, condensation,
ethylene, and contamination. Products needing refrigeration or protection from hot
or cold temperatures should be placed in the recommended storage conditions as
soon as possible. Otherwise, the efforts of growers, shippers, and carriers to
maintain product quality will have been in vain.
Air Circulation and Sanitation in Storage
Uniform air circulation in the storage room at the proper temperature and
relative humidity is important to remove product heat that occurs from respiration,
and from outside heat that enters through door openings and building surfaces.
Doors to refrigerated storage areas should be protected with plastic strip curtains to
reduce heat gain during operations. Warm air will quickly reduce relative humidity
in the cold storage area.
To maintain temperature and relative humidity, the storage room refrigeration
system should have a large evaporator surface area, an adequate numbe r of fans,
and a humidifier. Temperature control should be by an electronic thermostat. The
system must be carefully balanced to avoid free moisture or excessive air flow.
Electric forklifts and pallet jacks should be used with horticultural products to
reduce ethylene. Periodic sanitation of the storage room walls, ceilings, floor, and
refrigeration units is necessary to reduce decay organisms and odors. Carbon filters
can be used to absorb odors and volatile gases, while potassium permanganate
pads and air exchange can reduce ethylene.
 Types of packs, Packing, Packing methods for fresh produce
Standardization, Unit loads, Pallets, Slipsheets, Labeling and branding,
Temperature, humidity, and other environmental controls, Precooling factors,
Precooling methods, Precautionary measures, Transportation, Selection
factors, Available equipment, Refrigeration aw ventilation systems, Equipment
features, Loading method
1. Make a list of packages available in exporting different varieties of
commodities and point out the benefits of these packages.
2. How can exporters create labeling?
198
19.6 SUMMARY
This chapter explains Effective packaging and labeling and Widely used
packaging materials include Stacking, Packing methods, Types of packs, Packing
fresh fruits and vegetables, Packing methods for fresh produce include Packing
meat, poultry, and seafood products Standardization, Unit loads, Unit loads may
include some of the following features, Pallets, Slipsheets, Labeling and branding,
Temperature, humidity, and other environmental controls, Precooling factors,
Precooling methods, Precautionary measures, Transportation, Selection factors,
Available equipment, Refrigeration aw ventilation systems, Equipment features,
Loading methods
1. What are the items exporters have to keep in their mind while they evolve a
labeling for their products?
19.9 ASSIGNMENTS
1. Give an account of different modes of transportation and type of equipment
used in transmitting goods.
Edition, 1994.
Third Edition 2013.
1995.
4. Dr. P. Subba rAo, International Business, (text and cases, Third Edition,
1. Give an account of different modes of transportation and type of equipment
used in transmitting goods
19.12 KEY WORDS
 Effective packaging and labeling , Pallets, Slipsheets,

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LESSON -20
PRESHIPMENT INSPECTION
20.1 INTRODUCTION
Noting that Ministers on 20 September 1986 agreed that the Uruguay Round
of Multilateral Trade Negotiations shall aim to "bring about further liberalization
and expansion of world trade", "strengthen the role of GATT" and "increase the
responsiveness of the GATT system to the evolving international economic
environment".
20.2 OBJECTIVES
 To know the Procedure in Preshipment Inspection
 To study the WTO guidelines
20.3 CONTENTS
20.3.1 Article:1 Coverage - Definitions
20.3.2 Article 2: Obligations of User Members
20.3.2.1 Non-discrimination
20.3.2.2 Governmental Requirements
20.3.2.3 Site of Inspection
20.3.2.4 Standards
20.3.2.5 Transparency
20.3.2.6 Protection of Confidential Business Information
20.3.2.7 Conflicts of Interest
20.3.2.8 Delays
20.3.2.9 Price Verification
20.3.2.10 Appeals Procedures
20.3.2.11 Derogation
20.3.3 Article 3: Obligations of Exporter Members
20.3.3.3 Technical Assistance
20.3.4 Article 4: Independent Review Procedures
20.3.5 Article 5: Notification
20.3.6 Article 6: Review
20.3.7 Article 7: Consultation
20.3.8 Article 8: Dispute Settlement
20.3.9 Article 9 Final Provisions
Noting that a number of developing country Members have recourse to
preshipment inspection. Recognizing the need of developing countries to do so for is
long and in so far as it is necessary to verify the quality, quantity or price of
imported goods. Mindful that such programmes must be carried out without giving
rise to unnecessary delays or un equal treatment. Noting that this inspection is by
definition carried out on the territory of exporter Members. Recognizing the need to
establish an agreed international framework of rights and obligations ©f both user
Members and exporter Members. Recognizing that the principles and obligations of
GATT 1994 apply to those activities of preshipment inspection entities that are
mandated by governments that are Members of the WTO. Recognizing that it is
200
desirable to provide transparency of the operation of preshipment inspection

entities and of laws and regulations relating to preshipment inspection. Desiring to
provide for the speedy, effective and equitable resolution of disputes between
exporters and preshipment inspection entities arising under this Agreement;
Hereby agree as follows
20.3.1 Article: 1 Coverage - Definitions
1. This Agreement shall apply to all preshipment inspection activities carried
out on the territory of Members, whether such activities are contracted or
mandated by the government, or any government body, of a Member.
2. The term "user Member" means a Member of which the government or any
government body contracts for or mandates the use of preshipment
inspection activities.
3. Preshipment inspection activities are all activities relating to the verification
of the quality, the quantity, the price, including currency exchange rate and
financial terms, and/or the customs classification, of goods to be exported to
the territory of the user Member.
4. The term "preshipment inspection entity" is any entity contracted or
mandated by a Member to carry out preshipment inspection activities.
20.3.2 Article 2: Obligations of User Members
liprl
1. User Members shall ensure that preshipment inspection activities are
carried out in a non-discriminatory manner, and that the procedures and
criteria employed in the conduct of these activities are objective and are
applied on an equal basis to all exporters affected by such activities. They
shall ensure uniform performance of inspection by all the inspectors of the
preshipment inspection entities contracted or mandated by them.
20.3.2.2 Governmental Requirements
1. User Members shall ensure that in the course of preshipment inspection
activities relating to their laws, regulations and requirements, the provisions
of paragraph 4 of Article III of GATT 1994 are respected to the extent that
these are relevant.
20.3.2.3 Site of Inspection
1. User Members shall ensure that all preshipment inspection activities,
including the issuance of a Clean Report of Findings or a note of non-
issuance, are performed in the customs territory from which the goods are
exported or, if the inspection cannot be carried out in that customs territory
given the complex nature of the products involved, or if both parties agree,
in the customs territory in which the goods are manufactured.
20.3.2.4 Standards
1. User Members shall ensure that quantity and quality inspections are
performed in accordance with the standards defined by the seller and the
buyer in the purchase agreement and that, in the absence of such
standards, relevant international standards apply.
201
1. User Members shall ensure that preshipment inspection activities are
conducted in a transparent manner.
2. User Members shall ensure that, when in itially contacted by exporters,
preshipment inspection entities provide to the exporters a list of all the
information which is necessary for the exporters to comply with inspection
requirements. The preshipment inspection entities shall provide the actual
information when so requested by exporters. This information shall include a
reference to the laws and regulations of user Members relating to
preshipment inspection activities, and shall also include the procedures and
criteria used for inspection and for price and currency exchange-rate
verification purposes, the exporters' rights vis-a-vis the inspection entities,
and the appeals procedures set up under paragraph 21. Additional
procedural requirements or changes in existing procedures shall not be
applied to a shipment unless the exporter concerned is informed of these
changes at the time the inspection date is arranged. However, in emergency
situations of the types addressed by Articles XX and XXI of GATT 1994, such
additional requirements or changes may be applied to a shipment before the
exporter has been informed. This assistance shall not, however, relieve
exporters from their obligations in respect of compliance with the import
regulations of the user Members.
3. User Members shall ensure that the information referred to in paragraph 6 is
made available to exporters in a convenient manner, and that the
preshipment inspection offices maintained by preshipment inspection entities
serve as information points where this information is available.
4. User Members shall publish promptly all applicable laws and regulations
relating to preshipment inspection activities in such a manner as to .enable
other governments and traders to become acquainted with them.
20.3.2.6 Protection of Confidential Busine ss Information
1. User Members shall ensure that preshipment inspection entities treat all
information received in the course of the preshipment inspection as business
confidential to the extent that such information is not already published,
generally available to third parties, on otherwise in the public domain. User
members shall ensure the preshipment inspection entities maintain
procedures to this end.
2. User members shall provide information to Members on request on the
measures they are taking to give effect to paragraph 9. The provisions of this
paragraph shall not require any Member to disclose confidential Information
the disclosure of which would jeopardize the effectiveness of the preshipment
inspection programmes or would prejudice the legitimate commercial interest
of particular enterprises, public or private.
3. User members shall ensure that preshipment Inspection entitles do not
divulge confidential business information to any third party, except that
preshipment inspection entities may share this information with the
202
government entities that have contracted or mandated them. User Members

shall ensure that confidential business information which they receive from
preshipment inspection entities contracted or mandated by them is adequately
safeguarded. Preshipment inspection entities shall share confidential business
information with the governments contracting or mandating them only to the
extent that such information is customarily required for letters of credit or
other forms of payment or for customs, import licensing or exchange control
purposes.
4. User Members shall ensure that preshipment inspects, entities do not
request exporters to provide information regarding:
a) Manufacturing data related to patented, licensed or undisclosed
processes, or to processes for which a patent is pending;
b) Unpublished technical data other than data necessary to demonstrate
compliance with technical regulations or standards;
c) Internal pricing, including manufacturing costs;
d) Profit levels;
e) The terms of contracts between exporters and their suppliers unless it is
not otherwise possible for the entity to conduct the inspection in
question. In such cases, the entity shall only request the information
necessary for this purpose.
5. The information referred to in paragraph 12, which preshipment inspection
entities shall not otherwise request, may be released voluntarily by the
exporter to illustrate a specific case.
20.3.2.7 Conflicts of Interest
10. 13. User Members shall ensure that preshipment inspection entities,
bearing in mind also the provisions on protection of confidential business
information in paragraphs 9 through 13, maintain procedures to avoid
conflicts of interest:
1. between preshipment inspection entities and any related entities of the
preshipment inspection entities in question, including any entities in which
the latter have a financial or commercial interest or any entities which have a
financial interest in the preshipment in spec Jon entities in question, and
whose shipments the preshipment inspection entities are to inspect;
a) between preshipment inspection entities and any other entities,
including other entities subject to preshipment inspection, with the
exception of the government entities contracting or mandating the
inspections;
b) with divisions of preshipment inspection entities engaged in activities
other than those required to carry out the inspection process.
20.3.2.8 Delays
1. User Members shall ensure that preshipment inspection entities avoid
unreasonable delays in inspection of shipments. User Members shall ensure
that, once a preshipment inspection entity and an exporter agree on an
inspection date, the preshipment inspection entity conducts the inspection on
203
that date unless it is rescheduled on a mutually agreed basis between the

exporter and the preshipment inspection entity, or the preshipment inspection
entity is prevented from doing so by the exporter or by force mqjeure.
2. User Members shall ensure that, following receipt of the final documents and
completion of the inspection, preshipment inspection en tities, within five
working days, either issue a Clean Report of Findings or provide a detailed
written explanation specifying the reasons for non -issuance. User Members
shall ensure that, in the latter case, preshipment inspection entities give
exporters the opportunity to present their views in writing and, if exporters so"
request, arrange for re-inspection at the earliest mutually convenient date.
3. User Members shall ensure that, whenever so requested by the exporters,
preshipment inspection entities undertake, prior to the date of physical
inspection, a preliminary verification of price and, where applicable, of
currency exchange rate, on the basis of the contract between exporter and
importer, the pro forma invoice and, where applicable, the appl ication for
import authorization. User Members shall ensure that a price or currency
exchange rate that has been accepted by a preshipment inspection entity on
the basis of such preliminary verification is not withdrawn, providing the
goods conform to the import documentation and/or import licence. They shall
ensure that, after a preliminary verification has taken place, preshipment
inspection entities immediately inform exporters in writing either of their
acceptance or of their detailed reasons for non -acceptance of the price and/or
currency exchange rate.
4. User Members shall ensure that, in order to avoid delays in payment,
preshipment inspection entities send to exporters or to designated
representatives of the exporters a Clean Report of Findings as expe ditiously as
possible.
5. User Members shall ensure that, in the event of a clerical error in the Clean
Report of Findings, preshipment inspection entities correct the error and
forward the corrected information to the appropriate parties as expeditiously
as possible.
20.3.2.9 Price Verification
1. User Members shall ensure that, in order to prevent over and under-invoicing
and fraud, preshipment inspection entities conduct price verification
according to the following guidelines:
a) preshipment inspection entities shall only reject a contract price agreed
between an exporter and an importer if they can demonstrate that their'
findings of an unsatisfactory price are based on a verification process
which is in conformity with the criteria set out in subparagraphs (b)
through (e);
b) the preshipment inspection entity shall base its price comparison for the
verification of the export price on the price (s) of identical or similar goods
offered for export from the same country of exportation at or about the
same time, under competitive and comparable conditions of sale, in
204
conformity with customary commercial practices and net of any applicable

standard discounts. Such comparison shall be based on the following:
i) only prices providing a valid basis of comparison shall be used, ' taking
into account the relevant economic factors pertaining to the country of
importation and a country or countries used for price comparison;
ii) the preshipment inspection entity shall not rely upon the price of goods
offered for export to different countries of importation to arbitrarily
impose the lowest price upon the shipment;
iii) the preshipment inspection entity shall take into account the specific
elements listed in subparagraph (c);
iv) at any stage in the process described above, the preshipment
inspection entity shall provide the exporter with an opportunity to
explain the price;
c) when conducting price verification, preshipment inspection entities shall
make appropriate allowances for the terms of the sales contract and
generally applicable adjusting factors pertaining to the transaction; these
factors shall include but not be limited to the commercial level and
quantity of the sale, delivery periods and conditions, price escalation
clauses, quality specifications, special design features, special shipping or
packing specifications, order size, spot sales, seasonal influences, licence
or other intellectual property fees, and services rendered as part of the -
contract if these are not customarily invoiced separately; they shal l also
include certain elements relating to the exporter's price, such as the
contractual relationship between the exporter and importer;
d) the verification of transportation charges shall relate only to the agreed
price of the mode of transport in the country of exportation as indicated in
the sales contract;
e) the following shall not be used for price verification purposes:
i) the selling price in the country of importation of goods produced in
such country;
ii) the price of goods for export from a country other than the country of
exportation;
iii) the cost of production;
iv) arbitrary or fictitious prices or values.
20.3.2.10 Appeals Procedures
1. User Members shall ensure that preshipment inspection entities establish
procedures to receive, consider and render decisions concerning grievances
raised by exporters, and that Uifuniia.Ll^B concerning such procedures is
made available to exporters in accordance with the provisions of paragraphs 6
and 7. User Members shall ensure that the procedures are developed and
maintained in accordance with the following guidelines:
205
a) preshipment inspection entities shall designate one or more officials who

shall be available during normal business hours in each city or port in
which they maintain a preshipment inspection administrative office to
receive, consider and render decisions on exporters' appeals or
grievances;
b) exporters shall provide in writing to the designated official(s) the facts
concerning the specific transaction in question, the nature of the
grievance and a suggested solution;
c) the designated official(s) shall afford sympathetic consideration to
exporters' grievances and shall render a decision as soon as possible
after receipt of the documentation referred to in subparagraph (b).
20.3.2.11 Derogation
1. By derogation to the provisions of Article 2, user Members shall provide that,
with the exception of part shipments, shipments whose value is less than a
minimum value applicable to such shipments as defined by the user Member
shall not be inspected, except in exceptional circumstances. This minimum
value shall form part of the information furnished to exporters under the
provisions of paragraph 6.
20.3.3 Article 3: Obligations of Exporter Members
1. Exporter Members shall ensure that their laws and regulations relating to
preshipment inspection activities are applied in a non -discriminatory manner.
1. Exporter Members shall publish promptly all applicable laws and regulations
relating to preshipment inspection activities in such a manner as to enable
other governments and traders to become acquainted with them.
20.3.3.3 Technical Assistance
1. Exporter Members shall offer to provide to user Members, if requested,
technical assistance directed towards the achievement of the objectives of this
Agreement on mutually agreed terms.
20.3.4 Article 4: Independent Review Procedures
1. Members shall encourage preshipment inspection entities and exporters mutually
to resolve their disputes. However, two working days after submission of the
grievance in accordance with the provisions of paragraph 21 of Article 2, either
party may refer the dispute to independent review. Members shall take such
reasonable measures as may be available to them to ensure that the following
procedures are established and maintained to this end:
a. these procedures shall be administered by an independent entity
constituted jointly by an organization representing preshipment
inspection entities and an organization representing exporters for the
purposes of this Agreement;
b. the independent entity referred to in subparagraph (a) shall establish a
list of experts as follows:
206
i) a section of members nominated by an organization representing

preshipment inspection entities;
ii) a section of members nominated by an organization representing
exporters;
iii) a section of independent trade experts, nominated by the
independent entity referred to in subparagraph (a).
iv) The geographical distribution of the experts on this list shall be such
as to enable any disputes raised under these procedures to be dealt
with expeditiously. This list shall be drawn up within two months of
the entry into force of the WTO Agreement and shall be updated
annually. The list shall be publicly available. It shall be notified to the
Secretariat and circulated to all Members;
c. an exporter or preshipment inspection entity wishing to raise a dispute
shall contact the independent entity referred to in subparagraph (a) and
request the formation of a panel. The independent entity shall be
responsible for establishing a panel. This panel shall consist of three
members. The members of the panel shall be chosen so as to avoid
unnecessary costs and delays. The first member shall be chosen from
section (i) of the above list by the preshipment inspection entity concerned ,
provided that this member is not affiliated to that entity. The second
member shall be chosen from section (ii) of the above list by the exporter
concerned, provided that this member is not affiliated to that exporter. The
third member shall be chosen from section (iii) of the above list by the
independent entity referred to in subparagraph (a). No objections shall be
made to any independent trade expert drawn from section (iii) of the above
list;
d. the independent trade expert drawn from section (iii) of the above list shall
serve as the chairman of the panel. The independent trade expert shall take
the necessary decisions to ensure an expeditious settlement of the dispute
by the panel, for instance, whether the facts of the case require the
panelists to meet and, if so, where such a meeting shall take place, taking
into account the site of the inspection in question;
e. if the parties to the dispute so agree, one independent trade expert could be
selected from section (iii) of the above list by the inde pendent entity referred
to in subparagraph (a) to review the dispute in question. This expert shall
take the necessary decisions to ensure an expeditious settlement of the
dispute, for instance taking into account the site of the inspection in
question;
f. the object of the review shall be to establish whether, in the course of the
inspection in dispute, the parties to the dispute have complied with the
provisions of this Agreement. The procedures shall be expeditious and
provide the opportunity for both parties to present their views in person or
in writing;
207
g. decisions by a three-member panel shall be taken by majority vote. The

decision on the dispute shall be rendered within eight working days of the
request for independent review and be communicated to the parties to the
dispute. This time-limit could be extended upon agreement by the parties to
the dispute. The panel or independent trade expert shall apportion the
costs, based on the merits of the case;
h. the decision of the panel shall be binding upon the preshipment inspection
entity and the exporter which are parties to the dispute.
20.3.5 Article 5: Notification
Members shall submit to the Secretariat copies of the laws and regulations by
which they put this Agreement into force, as well as copi es of any other laws and
regulations relating to preshipment inspection, when the WTO Agreement enters
into force with respect to the Member concerned. No changes in the laws and
regulations relating to preshipment inspection shall be enforced before such
changes have been officially published. They shall be notified to the Secretariat
immediately after their publication. The Secretariat shall inform the Members of the
availability of this information.
20.3.6 Article 6: Review
At the end of the second year from the date of entry into force of the WTO
Agreement and every three years thereafter, the Ministerial Conference shall review
the provisions, implementation and operation of this Agreement, taking into
account the objectives thereof and experience gaine d in its operation. As a result of
such review, the Ministerial Conference may amend the provisions of the
Agreement.
20.3.7 Article 7: Consultation
Members shall consult with other Members upon request with respect to any
matter affecting the operation of this Agreement. In such cases, the provisions of
Article XXII of GATT 1994, as elaborated and applied by the Dispute Settlement
Understanding, are applicable to this Agreement.
20.3.8 Article 8: Dispute Settlement
Any disputes among Members regarding the operation of this Agreement shall
be subject to the provisions of Article XXIII of GATT 1994, as elaborated and
applied by the Dispute Settlement Understanding.
20.3.9 Article 9 Final Provisions
1. Members shall take the necessary measures for the implementation of the
present Agreement.
2. Members shall ensure that their laws and regulations shall not be contrary to
the provisions of this Agreement.
Non-discrimination, Governmental Requirements, Site of Inspection,
Standards, Transparency, Protection of Confidential Business Information,
Conflicts of Interest, Delays, Price Verification, Appeals Procedures, Derogation
208

1. What are the provisions made in the WTO guidelines for shipment inspection
products?
20.6 SUMMARY
In this chapter Article: 1 Coverage – Definitions, Article 2: Obligations of User
Members, Non-discrimination, Governmental Requirements, Site of Inspection,
Conflicts of Interest, Delays, Price Verification, Appeals Procedures, Derogation,
Article 3: obligations of Exporter Members, Non -discrimination, transparency,
Technical Assistance, Article 4: Independent Review Procedures, Article 5 :
Notification, Article 6: Review, Article 7: Consultation, Article 8: Dispute Settlement,
Article 9 Final Provisions.
1. Critically evaluate the Articles of Pre-shipment Inspection.
Himalaya public house), 2013
20.9 ASSIGNMENTS
1. How these provisions would help for importing the products in good
condition?
1. International journal of management and business.
2. International journal of management administration.
3. International business and management.
Third Edition 2013.
1995.
1. How Pre-shipment Inspection provisions would help for importing the
products in good condition?
20.12 KEY WORDS
 Non-discrimination, Governmental Requirements, Site of Inspection,
Conflicts of Interest, Delays, Price Verification, Appeals Procedures,
Derogation, Article 3: obligations of Exporter Members

209
LESSON - 21
PROBLEMS IN MAINTAINING QUALITY OF EXPORTS

21.1 INTRODUCTION
This overall increase in population and in the urban population in particular,
poses great challenges to food systems. Intensification of agriculture and animal
husbandly; more efficient food handling, processing and distribution systems;
introduction of newer technologies including appropriate application of
biotechnology will all have to be exploited to increase food availability to meet the
needs of growing populations.
21.2 OBJECTIVES
 To Understand the Problems in maintaining quality of its productivity.
 To know the action taken by the countries in this issues
21.3 CONTENTS
21.3.1. Food quality and safety control and food security
21.3.2. Food quality and safety control and food trade
21.3.3. Improving food quality and safety makes economic sense
21.3.4. Weed for action by developing countries
21.3.1 Food Quality and Safety Control and Food Security
In 2020, the world population will most likely reach 7.6 billion, an increase of
31% over the mid-1996 population of 8 billion. Approximately 98% of the projec ted
: population growth over this period will take place in developing countries. It has
also been estimated that between the years 1995 and 2020 the developing world's
urban population will double, reaching 3.4 billion. Some of these practices and
technologies may also pose potential problems of food safety and nutritional quality
and call for special attention in order to ensure consumer protection.
Rapid urbanisation has led urban services to be stretched beyond their limits,
resulting in inadequate supplies of potable water, sewage disposal and other
necessary services. This scenario further stresses food distribution systems as
greatly increased quantities of food must be transported from rural to urban
locations in an environment that is not conducive to hygiene and sanitation. The
issue of street foods merits special attention. Recent growth in this sector has been
phenomenal with important economic and nutritional implications in the urban
'context. Street foods are readily accessible and affordable to urban populations, ;
and they provide the energy and nutrient needs of large segments of workers and
their families in the cities. Clean and nutritious street foods have a positive impact
on food security; low quality and unsafe street foods can have a n egative impact.
National and local authorities should take cognisance of the potential of this
informal sector to improve food security. In many cases, facilities and training need
to be provided for hygienic handling of street foods to assure their safety and
quality.
210
It is often said that the poor will consume "anything" to mitigate their hunger.
This may or may not be true. To the extent that this phenomenon exists, it only
indicates the trade-off which people may face in difficult situations. On the one
hand, survival may depend mainly on access to a minimum quantity of food. On
the other hand, consumption of food which does not meet minimum safety
standards, can also jeopardize survival. Governments must take the necessary
steps through national food security policies, systems and programmes to ensure
that food quality and safety considerations form an integral part of their food
security system. At present many countries lack comprehensive national food
quality and safety regulations. In weighing the gains against the cost' of
comprehensive food quality and safety standards, countries may conclude that
given their social and economic level of development, the cost of certain standards
are high relative to the gains, especially if these higher costs have to be borne by
the poor themselves. Nevertheless, some developing country with FAO technical
assistance, have adopted and implemented comprehensive national food quality
and safety standards based on the international recommended Codex Alimentarius
Commission standards, guidelines and codes of practice. These countries have
immediately benefited from high levels of investment in the food sector, better
acceptance by consumers of higher quality and safer domestically produced raw
and processed foods, and greatly improved access to foreign market for their food
exports. Meeting these Codex-based standards has also increased efficiency in food
production, processing and distribution, promoted a lower cost domestic supply of
good quality and safe foods, reduced food loss problems and greatly increased
export earnings.
The essence of all national food laws in industrialised and developing countries
alike, is based on the following basic provision, which may be worded differently
but has similar intent: "Any person who sells to the prejudice of the purchaser any
food which is not of the nature or is not of the substance, or is not of the quality of
the food demanded by the purchaser, shall be guilty of an offence …… "Such
legislation establishes the will of the gove rnments to protect their populations from
unsafe and adulterated foods. This is achieved through appropriate food control
measures based on well- defined food regulations covering quality and safety of food
and its honest presentation to the consumer. Any steps taken by governments, to
strengthen these activities would significantly help in meeting food security needs
and their commitments at the WFS.
In all countries the food industry bears the responsibility of meeting food
quality and safety regulatory requirements. The food industry encompasses the
activities of small-scale farmers and artisanal fisheries, through medium to large -
scale producers; food storage; processing; wholesale and retail marketing. Food
chains can be as short as from the home garde n to the family table or thousands of
kilometers long with many intermediaries. Food preservation, processing and
packaging systems can be minimal or highly sophisticated, but assuring food
quality and safety in all situations should be a constant. Industry must play its role
211
in assuring food quality and safety through the application of quality assurance
and risk-based food safety systems utilising current scientific knowledge. The
implementation of such controls throughout production, handling, processing and
marketing leads to improved food quality and safety, increased competitiveness;
and, reduction in cost of production and wastage. Through national food control
systems, governments should provide a supporting infrastructure and assume an
advisory and regulatory role.
21.3.2 Food Quality and Safety Control and Food Trade
The value of the world food trade in 1997 was about $ 458 billion, and is
increasing every year, thanks to the expanding world economy, liberalisation in
food trade, growing consumer demand and developments in food science,
technology, transport and communication sectors.
Scientific developments have also arrived a better understanding of the
nutritional qualities of foods and their health implications. This has led consumers
to become more discriminating in food matters and to demand protection from
inferior quality and unsafe foods. Consumers expect that domestic and imported
foods will meet basic quality and safety standards and requirements related to food
hygiene, labelling and certification, use of food additives, limits for pesticide
residues etc.
Access by developing countries to food export markets in general, and of the
industrialised world in particular, will depend on their capacity to meet the
regulatory requirements of importing countries. For most developing countries,
agriculture lies at the centre of their economies and food exports are a major source
of foreign exchange and income generation for rural and urban workers in
agriculture and agro-industrial sectors. The long-term solution for developing
countries to sustain a demand for their products in world markets lies in building
up the trust and confidence of importers in the quality and safety of their food
supply systems. This requires improvement within national food control systems
and within industry food quality and safety programmes. Such efforts will greatly
help in increasing the relatively small share of developing countries in the
international food trade.
To have a better understanding of current food quality and safety problems in
international food exports from developing countries, it is useful to look at the
import detentions by the United States Food and Drug Administration (US FDA)-the
only agency which makes such data public through a monthly import de tentions
list. US FDA regulates all foods in '.he US other than meat and poultry products.
The data from FDA detention lists for the period July 1996 to June 1997 for
imported food from different regions of the world is given in Table 1. The majority of
detentions and rejections of foods from developing countries are not related to
highly technical or sophisticated requirements. At the top of the list stand food
hygiene problems represented by contamination of food with insects and rodent
filth. Microbiological contamination comes next, followed by failure to comply with
212
US low acid canned food registration requirements, and then labelling. Over 50% of
at rejections are attributable to lack of basic food hygiene, and failure to meet
labelling requirements. Dealing with these is well within the means of most
developing countries and would go a long way in promoting export trade.
Origin Reason Latin America
for contravention Africa and the Europe Asia Total
Caribbean
Food Additives 2 (0.7%) 57 (1.5%) 69 (8%) 426 (7.4%) 554 (0%)
Pesticide residues 0 (0.0) 821 (21.1%) 20 (1.7%) 23 (0.4%) 864 (7.7%)
Heavy Metals 1 (0.3%) 426 (10.9%) 26 (2.2%) 84 (1.5%) 537 (4.8%)
Mould 19 (6.3%) 475 (12.2%) 27 (2.3%) 49 (0.8%) 570 (1%)
Microbiological 125 (41.3%) 246 (6.3%) 159 (13.4%) 895 (15%) 1425 (12.8%)
contamination
Decomposition 9 (3.0%) 206 (3%) 7 (0.6%) 068 (11.5%) 890 (8.0%)
Filth 54 (17.8%) 1253 (32.2%) 175 (14.8%) 2037 (32%) 3519 (31.5%)
Low Acid Canned 4 (1.3%) 142 (3.6%) 425 (39%) 829 (14.3%) 1400 (12.5%)
Food
Labelling 38 (12.5%) 201 (2%) 237 (20.0%) 622 (10.8%) 1098 (9.8%)
Other 51 (16.8%) 68 (1.7%) 39 (3.3%) 151 (2.6%) 309 (2.8%)
Totals 303 (100%) 3895 (100%) 1184 (100%) 5784 (100%) 11166 (100%)
The international trading environment has changed considerably in the light of
agreements reached under the auspices of GATT, and the subsequent
establishment of the World Trade Organization (WTO). Two Agreements are of
particular interest as they introduce a measure of discipline in international trade
and are extremely relevant to food safety and quality issues. These are:
1. Agreement on Application of Sanitary and Phytosanitary Measures (SPS).
2. Agreement on Technical Barriers to Trade (TBT).
The SPS Agreement relates to protection of human, animal and plant health
and life. The Agreement covers all relevant laws, decrees, regulations; testing,
inspection certification and approval procedures; packaging and labelling
requirements directly related to food safety. Nations are asked to apply only those
measures that are based on scientific principles, and only to the extent necessary
and not constituting a disguised restriction on international trade. The Agreement
encourages use of international standards where they exist and identifies the Codex
Alimentarius Commission (CAC) food standards, guidelines and other
recommendations as consistent with the provisions of SPS. Where a WTO member
considers chat a higher level of sanitary protection than afforded by Codex is '
necessary, it will have to produce scientific evidence based on valid risk assessment
techniques.
The TBT Agreement also recognises international standards where they exist.
It requires that technical regulations on traditional quality factors, fraudulent
practices, packaging, labelling e tc. (other than standards covered by SPS) imposed
by countries will not be more restrictive on imported products than they are on
213
products produced domestically. Technical measures applied should not create

unnecessary hurdles in international trade, have a legitimate purpose are the cost
of their implementation should be proportional to the purpose of the measure. If the
proposed measure is considered to violate the provisions of any of the two
Agreements, it can be challenged and brought before the WTO di spute settlement
mechanism.
The recognition of international food standards in international food trade is
an important element of the WTO Agreements. This provides a level playing field to
developing countries. Prior to these Agreements developing exporti ng countries had
to abide by the regulations of importing countries. Now the situation is somewhat
different. Firstly, the trading nations should apply international standards, and
seer- idly, in case of a dispute, countries can use the WTO dispute settlin g
mechanism where scientific evidence will be the main determining factor in settling
SPS or TBT food regulatory disputes. It would therefore be in the interest of
exporting countries to insist on acceptance and use of international standards.
Objective 4.1 of the WFS Plan of Action reads "To meet the challenges of and
utilise the opportunities arising from the international trade framework established
in recent global and regional trade negotiations " and asks the international
community to "continue to assist countries to adjust their institutions and
standards both for internal and external trade, to food safety and sanitary
requirements". The Committee may consider possible follow-up in the light of
information given in the paper,
21.3.3 Improving Food Quality and Safety Makes Economic Sense
More than 800 million people, many of them children, are today hungry and
malnourished with serious impact on growth and learning capacity of children and
the ability of adults to lead fully productive lives. Moreover, most of these people are
to be found in those parts of the world where such food as they have is often
contaminated or adulterated, thus reducing its nutritional quality and inflicting
severe harm to their nutritional well -being and to their household economies.
Food-borne diseases are a worldwide problem of great magnitude, both in
terms of human suffering and economic costs. The task of estimating with any,
accuracy the occurrence of food-borne diseases, globally is truly formidable as in
most countries it is poorly recorded. It is estimated that almost 70% of the
approximate 1.5 billion episodes of diarrhoea that occur in the world annually are
directly caused by biological or chemical contamination in foods. Even when such
diseases are not fatal, they severely increase the effects of poor diet owing to
reduced intake, nutrient losses and mal -absorption, which may lead to mental
retardation and physical disabilities.
There is no evidence that evaluated food additives or pesticides used in
accordance with international recommendations have been the cause of any harm
to humans. There is, however, a risk that the inappropriate use of such chemicals
can cause health problems. Plant toxins have also been implicated in food safety
214
problems. An example is Lathyrus Sativus adulteration in certain food grains which

has led to food-borne disease outbreaks. Other outbreaks have involved
contaminants like lead, mercury, cadmium; admixture of mustard seeds with
argemone seeds; adulteration of olive oil with miner 1 oil. Marine-biotoxins have
also been implicated in several poisoning episodes. Mould growth by -products
called mycotoxins are ubiquitous. Some are powerful carcinogens and can also
cause other health problems to humans and animals. There are several record ed
cases of mycotoxin contamination having led to serious disease outbreaks.
Estimation of the economic consequences of unsafe or contaminated food is
complex. It involves consideration of the value of crops and animal products spoiled
or destroyed as a result of such contamination, value of rejections / detentions in
the export trade, medical treatment costs, loss of output or earnings resulting from
morbidity, disability or premature death. It is the last of these economic
consequences that is the most difficult to measure, but on a global basis it is
probably the single largest element in the entire cost of unsafe food. In addition, the
death or disability of the wage-earner may have disastrous consequences for the
quality of life of survivors.
Some studies have been carried out to assess the total costs incurred by
society as a consequence of food-borne illnesses. A 1977 study shows the total
annual loss attributable to Saimonellosis in the Federal Republic of Germany to be
DM 240 million 6, of which 45% represented losses due to human food-borne
disease, and the major part of the rest accounting for infections in cattle and
poultry. A 1937 study in USA estimating Saimonellosis medical costs and
productivity losses gives a figure of US $1.4 bil lion as total costs. The same USA
study gives a total loss figure of US$ 256 million from Listeriosis illnesses and
deaths. In USA alone, costs for loss in productivity due to seven specific pathogens
have been estimated- to range between US$ 6.5 billion to U8$ 13.3 billion annually.
Analysis of the economic impact of a Staphylococcus aureus outbreak in India,
showed that 41 % of the total cost of the outbreak was borne by the affected
persons which included loss of wages or productivity loss and other expe nses. On
the basis " of the percentage of per capita income, the economic burden on affected
people in India was higher than in the case of a similar outbreak in USA.
Food supply systems in developing countries are often fragmented involving a
multitude of middlemen. This exposes it to various types of fraudulent practices.
These may include simple adulteration of food with something of lesser value or no
value at all, or mislabeling the product with the intent of misleading the consumer.
Besides the public health impact due to the reduction in the nutrient content of
food or food contamination, the consumer is defrauded. Considering that in
developing countries, people spend almost 50% of their earnings on food, arid
among lower-income households this .figure may rise to above 70% , the impact of
such fraudulent practices can be quite devastating.
215
Food is a good indicator of the state of the environment in which it is

produced. Monitoring of environmental contaminants in food therefore not only
assists in ensuring food safety but can also give early warnings about the state of
the environment, such as level of heavy metal contamination to enable appropriate
action for maintaining its productivity.
21.3.4 Weed For Action by Developing Countries
Almost all countries have a food control system, howsoever poorly developed,
to protect their populations against unsafe, adulterated, or otherwise poor quality
food. This also implies that food legislation exists indicating governmental policy
towards consumer protection. Why then do large sections of the populations in
many developing countries still suffer from the ravages of unsafe, unhygienic or
adulterated food, and severe losses in food export trade take place -annually-due to
food not meeting the basic requiremen ts of quality and safety? There are several
causes for this unsatisfactory situation, which need attention at the level of the
food industry and the government. Some of these are listed below:
1. Food systems are complex. In the case of developing countries, they are also
highly fragmented and predominated by small producers. This has its own socio -
economic advantages. However, as large quantities of food pass through a
multitude of food handlers and middlemen extending the food production,
processing, storage and distribution, chain, control is more difficult and there is a
greater risk of exposing food to contamination or adulteration. Lack of resources
and infrastructure for post-harvest handling, processing and storage leads to severe
diminishing of quality and avoidable contamination and food losses.
2. Interaction and cooperation between industry and government on food
control matters is often lacking. The basic responsibility of industry is to produce
and market good quality and safe food that is honestly presented. It is the duty' of
the government to ensure compliance by industry to national food quality and
safety requirements.
3. National food control systems suffer from serious inadequacies, including:
a) They -are not based on modern scientific and management concepts using
compliance policies, risk assessment, HACCP, transparency, and broad -
based involvement of industry, trade and consumers.
b) Insufficient involvement of scientific expertise from the academia,
industry, consumers to strengthen the scientific basis for food control
decision making processes.
c) Lack of suitable facilities such as laboratories.
d) Lack of resources such trained inspectorate and laboratory staff, funding.
e) Inflexibility of the system making it difficult to cope with developments in food
science and technology, changing consumer demands, and newer
requirements of trade and industry. Institutional obstacles to reforms can be
formidable and can create disincentives for development of industry causing
serious damage to national economy.
f) Lack of coherence among different governmental activities concerning
agriculture, food, trade, industry and health. Lack of coordination to achieve
optimal results.
216

 Rapid urbanisation
 Improving food quality
 The international recommended Codex Alimentarius Commission standards
 cognizance
 national food laws
 Food and Drug Administration (US FDA)-
 Agreement on Application of Sanitary and Phytosanitary Measures (SPS).
 Agreement on Technical Barriers to Trade (TBT).
1. Give an account of various problems in maintaining quality of exports.
21.6 SUMMARY
This chapter explained Food quality and safety control and food security, Food
quality and safety control and food trade , Improving food quality and safety makes
economic sense, weed for action by developing countries.
1. What action has to be taken by the developing countries to enhance the quality of
exports?
1. Robert A. Mundell, International Economics, 1968, Macmillan & co, New York.
2. Jagdish Bhagawathi, International trade & Economic expansion. The American
economics review, dec.1958.
21.9 ASSIGNMENTS
1. What actions taken by the developed countries to enhance the quality of exports?
1. Peter B. Kenen, The International Economy, Third Edition, CAMBRIDGE EDITION,
1994.
2. Francis Cherunilam, International trade and export management, Himalaya Third
Edition 2013.
3. M.C. Vaish & Sudama Singh, International Economics sixth Edition, reprint 1995.
4. Dr. P. Subba Rao, International business, (text and cases, Third Edition, Himalaya
public house), 2013.
1. What is the difference between developed countries and developing countries to
enhance the quality of exports?
21.12 KEY WORDS
1. Rapid urbanisation ,Improving food quality ,The international recommended
Codex Alimentarius Commission standards, cognizance, national food laws ,
Food and Drug Administration (FDA)Agreement on Application of Sanitary and
Phytosanitary Measures (SPS), Agreement on Technical Barriers to Trade (TBT).

217
LESSON - 22
EXPORT REGULATORY DOCUMENTS

22.1 INTRODUCTION
Once the goods have been physically loaded on board the ship, the exporter
should arrange to obtain his payment for the exports made by submitting re levant
documents. The submission of the relevant set of documents to the bank and the
process of obtaining payment consequently is called "negotiating the documents'
through the bank.
22.2 OBJECTIVES
 To know the various export documents
 To know the banking procedures
22.3 CONTENTS
22.3.1. Bill of lading
22.3.2. Commercial Invoice
22.3.3. Certificate of Origin
22.3.4. Marine Insurance Policy
22.3.5. Negotiation
22.3.6. Airway Bill (AWB)
22.3.6.1. Certificate of Weight
22.3.6.2. Delivery Order/Dock Receipt
22.3.7. Phytosanitary Certification
A complete set of documents normally submitted for the purpose of negotiation
is called a negotiable set of documents, which will usually consist of the following.
1. Commercial invoice together with the packing slip if nee ded, and the draft
(bill of exchange].
2. Certificate of Origin
3. GR-1 form-duplicate
4. Marine Insurance Policy in duplicate
5. Letter of Credit in original.
6. Bills of lading three negotiable copies and as many non -negotiable copies, as
required.
22.3.1 Bill of lading
The bill of lading is one of the most important documents in the entire process of
exporting. It is a negotiable document. It is important because it carries with it the
legal title to the goods shipped on board the vessel indicated therein. Beside s, it is a
receipt given by the shipping company for the goods loaded on a particular ship.
A bill of lading would contain a broad description of the goods, the quantity of
goods, the total number of packages, gross and net weight, the port of shipment,
the port of discharge, the name of the ship, and the amount of freight paid. The
significant details of a bill of lading are the number, the date of the bill of lading
and freight paid. The date on the bill of lading is highly significant, for it is taken as
the date of the shipment of goods and should therefore be within the validity date
given in the documentary letter of credit.
218
A clean bill of lading is one in which no adverse entry about the apparent
condition of goods has been made. When an adverse comment does appear on it,
the bill of lading is termed as a claused bill of lading. The remarks on the mate
receipt issued by the Master of the vessel about the apparent condition of goods at
the time they were received on board the vessel, usually find a place on the bill of
lading as well, thus making it a claused bill of lading.
A claused bill of lading is normally not accepted by the foreign buyer. Unless
the letter of credit specifically permits the acceptance of such a bill, the exporter
should endeavour to negotiate documents with a clean bill of lading, for otherwise
the buyer has the right to refuse acceptance of goods because they do not conform
to the conditions of the letter of credit. A bill of lading is transferable when a
suitable endorsement for this purpose is made on it. It is therefore essential that
the exporter should take due care while preparing it. The three most widely used
endorsements are:
(i) To order and endorsed in blank, since it is endorsed in blank, any
individual who gains possessing of it can get delivery.
(ii) Endorsed to the order of ...when it is endorsed to the order of a person,
bank or a company, only the party indicated in the endorsement can get delivery of
goods. The endorse can further re-endorse the bill of lading in favour of another
party, who can then take delivery of goods. If the bill of lading is made out in the
name of the buyer or the foreign bank opening the credit as a consignee, either the
buyer or the foreign bank, as the case may be, can take delivery of the goods.
A bill of lading issued after the goods are loaded on the vessels is called an 'on
board bill of lading'. Negotiating banks usually accept only an 'on board' bill of
lading for the purpose of negotiation. A buyer usually asks, for a full set of 'clean
shipped' or 'on board' bill of lading as part of the negotiable documents required by
him. The letter of credit would specify what constitutes the full set of bill of lading.
22.3.2 Commercial Invoice
A commercial invoice is a document prepared by the exporter giving details of
the goods shipped, their brief description, the shipping marks, the unit and total
f.o.b., c& f. or c.i.f. value as the case may be, depending on the (L.C.) contract, the
number and date of the bill of lading as well as the name of the ship carrying the
cargo. The description of the cargo mentioned in the invoice should be on the same
lines as found in the letter of credit. It is essential that the invoice is made out in
the name of buyer or the consignee mentioned in the letter of credit.
22.3.3 Certificate of Origin
Sometimes import regulations of a foreign country may require that all import
consignments should be accompanied by a certificate of origin which states the
country in which products under export were origin ally produced / manufactured.
This is advisable, for it is quite likely that the goods produced in a particular
country attract preferential tariff rates in the foreign market at the time of
importation. Or it may be that goods produced in a particular cou ntry are banned
for import in the foreign market. The certificate of origin helps the buyer in
adhering to the import regulations of the country.
219
Some of the foreign markets may accept the certificate or origin issued by a
Chamber of Commerce of an exporti ng country. Others, especially countries in the
Middle East and the Gulf, require these certificates to be legalised by their own
respective consulates. An exporter submits a copy of the commercial invoice to the
Chamber of Commerce, together with the nomi nal fee prescribed by the Chamber.
On the basis of this, the Chamber issues a certificate of origin. Where the
Consulate requires legalisation, the certificate of origin issued by the Chamber of
Commerce is submitted to the Consulate of the concerned forei gn country, which
makes its endorsement on the certificate.
Special certificates of origin are applicable for availing of concessions under
Generalised System of Preferences as well as under Common Wealth Preferences. »
Under Generalised System of Preferen ces, the certificate of origin in the specified
form usually in triplicate is obtained from any one of the following agencies.
1) Export Inspection Council and its agencies
2) Chief Controller of Imports and Exports
The Central Silk Board, The Coir Board, The All India Handicrafts Board and
the Textile Committee are also authorised to issue certificates of origin for the
products under their purview.
The concessions under Common Wealth Preferences, the certificates of origin have
to be submitted in special forms obtainable from the High Commission of the country
concerned. The form is also known as 'combined certificate of origin and value'.
22.3.4 Marine Insurance Policy
Where the contracts will the foreign buyer is on c.i. (cost and insurance) or
c.i.f. (cost insurance and freight) basis, the responsibility for taking insurance cover
against all risks of damage to or loss of goods during the sea voyage is that of the
exporter. On an application received from him describing the goods and mentioning
the name of the ship on which the goods are loaded as well as the value of the )
goods for which the insurance is required, the insurance company issues a policy
in the name of the exporter and endorsed in blank. The premium charged by the
insurance company would depend on the total value for which the goods are
insured, the type of ship as also its age, and the port of discharge of the cargo as
evidenced in the bill of lading. The premium rate when goods are loaded on deck of
the ship is higher than when they are l oaded in the hold of the ship. This is
understandable, for the risks involved and the chances of damage to the cargo are
more when these are loaded on deck of the ship. The insurance policy issued by the
insurance company should carry the name of the vesse l, and the description of
goods, corresponding to those found in the bill of lading. It comes into effect only
after the date of the bill of lading.
Marine Insurance is a specialised sublet as it covers many types of risks. The
insurance cover, too, differs from material to material and also depends upon the
risks involved. Suffice it is to say that the exporter should consult the insurer
before taking out a suitable policy.
220
22.3.5 Negotiation
A complete set of negotiable documents is presented to the negotiating bank
through which the documentary letter of credit has been advised. Where the
exporter has complied with all the terms and conditions of the letter of credit while
submitting his documents to the negotiating bank, the documents are deemed to be
clean. The letter of credit opened by the buyer through his bank (the opening bank)
authorises drawing a bill of exchange against which payment will be made by the
opening bank on behalf of the buyer, provided the terms and conditions specified in
the letter of credit are complied with. A Bill of Exchange is a draft drawn by the
negotiating bank on the opening bank or the buyer as the case may be, and is an
instrument of payment which is negotiable. The drafts drawn are of two types.
1) Sight Draft
2) Usance Draft
If the letter of credit stipulates payment at sight, the exporter draws a sight
draft on the buyer or his bank. When the exporter draws sight drafts, he expects
the buyer to arrange for payment immediately on presentation of the draft. Until
payment for the draft is made, shipping documents will not be handed over to the
buyer to enable him to clear the goods.
When the exporter has offered credit term s of payment, the negotiating bank
of the exporter usually draws a usance draft. It is drawn for payment after a
specified period. The buyer on whom the draft is drawn retires the draft after 30
days, 60 days or 90 days as agreed between him and at the exporter at the time of
concluding the contract. The letter of credit opened by the buyer will clearly specify
the credit period which has been agreed upon the would mention that the draft
should be drawn for 30, 60 or 90 days, as the case may be.
For a credit period beyond 180 days, the exporter has to obtain the prior
permission of the exchange control authorities in India.
The bill of exchange drawn should correspond to the conditions stipulated in
the letter of credit.
The letter of credit would further specify the details of the dispatch of
documents. The negotiating bank of the exporter would accordingl y mail the
complete set of documents, usually, a set of documents is transmitted to the
banker of the buyer specified in the letter of credit by the first available air mail,
followed by a second set by the next available air mail, so as to ensure that eve n if
the first set is lost, the buyer or his bank may take possession of the goods on the
basis of the second copy. The exporter's banker completes the process of
negotiation with the dispatch of documents.
Besides the negotiation of the documents, the banker is to perform other
formalities. As part of the negotiable set of documents, the exporter has submitted
the duplicate copy of the GR-1 form. After negotiations are complete, and payment
is physically received by the bank, the duplicate copy of the GR-1 form is sent to
the RBI after due checks.
221
To enable the exporter to claim incentives applicable for exports, a certificate

known as Form 1 or "Bank Certificate' is required.
The Form 1 bank certificate describe the produce exported, its value, the
details of the invoice, the bill of lading against which the export was made, the rate
of conversion for the exchange used, etc. In the case of c.i.f. contracts, the bank
certificate specifies the f.o.b. value, freight and insurance under separate headings
as evidenced in the bill of lading, insurance policy and invoice. The bank certificate
also indicates the GR-1 form number against which the export was made. The
original copy of the bank certificate is furnished to the exporter and the duplicate
copy is sent to the JCCI & E of the area. A third copy may be kept for its official
records.
22.3.6 Airway Bill (AWB)
The airway bill, a non-negotiable instrument, serves as a receipt for the
shipper. Issued by the airline or consolidator, the AWB indicates that the carrier
has accepted the listed goods and obligates itself to carry the consignment to the
airport of destination, in accordance, with the conditions listed on back of the
original bill. In addition, the AWB serves as documentary evidence of the conclusion
of the contract of carriage, freight bills, certificates of insurance, the customs
declaration. The waybill is a guide to carrier's staff in handling, dispatching and
delivering of the shipments. The carrier will not carry any part of the consignment
until it receives the entire shipment and the exporter issues the AWB. As stated on
the back, the carriers reserve the right to move the shipment in any way they can.
This means they can transfer it to other carriers and/or even truck it if they feel it
is in everyone's best interest, Keep in mind that the AWB is non -negotiable and it
cannot be used as a collection instrument. Shipments against a draft should be
consigned to a local bank fin the city where the consignee is located) and the
consignee's name and address shown as a party to be notified. Even though the
AWB's have a space for insurance, it is best to check with the carrier to make sure
that they offer the coverage: since, some carriers do not.
22.3.6.1 Certificate of Weight
Foreign buyers occasionally require this document for control purposes.
Exporters can use a certified copy of the Packing List to fill this request. An export
inspection company can certify the Packing List.
22.3.6.2 Delivery Order/Dock Receipt
This document contains the same in formation as the short-form inter-modal
bill of lading, and is sent to the carrier, which in turn acknowledges the shipper's
booking of space for the cargo described in the document.
22.3.7 Phytosanitary Certification
Most countries require that a phytosan itary certificate accompany shipments
of raw fruits, vegetables, and plants. The document certifies the product to be free
from quarantine pests and significantly free from injurious pests, which would
222
damage crops. In addition, treatments such as fumigati on or cold storage, required

by the importing country, or which are necessary to meet pest free standards, are
supervised by the certifying official and documented on the certificate. Exporters,
packers or shippers, and other parties involved in the transaction may request
phytosanitary certificates. As a matter of convenience and efficiency, phytosanitary
inspections are usually carried out at shipping point, often as the product is being
graded and packed. It is the responsibility of the exporter to ensure that an English
copy of the import permit (if required) is furnished to the certifying official so that
she may ensure that conditions are met. In addition, the inspector must have the
destination, name and address of the foreign consignee, manifest of the load, etc.
Without this required information, the inspection cannot be performed and the
certificate will not be issued. Phytosanitary certificates are provided through the
USDA's Animal Plant Health Inspection Service (APHIS) and similar state agencies.
The state and federal certificates serve the same purpose and the choice is a matter
of preference for the parties involved. The phytosanitary inspection is unrelated to
quality, grades, and classifications.
 Export Inspection Council and its agencies
 Chief Controller of Imports and Exports
 Sight Draft
 Usance Draft
 negotiable document
 legalised
 Chamber of Commerce
 Consulate requires legalisation
1. Evaluate the banking procedures involve in obtaining loans.
2. Define the concepts of the following:
(a) Bill of lading
(b) Marine Insurance Policy
22.6 SUMMARY
This chapter explains Bill of lading, Commercial Invoice, Certificate of Origin,
Marine Insurance Policy, Negotiation, Airway Bill (AWB), Certificate of Weight,
Delivery Order/Dock Receipt, Phytosanitary Certification.
Define the concepts of the following:
(a) Certificate of Origin
(b) Commercial Invoice
(c) Phytosanitary certification
223

1. Robert A. Mundell, International Economics, 1968, Macmillan & co, New
york.
22.9 ASSIGNMENTS
1. Evaluate the banking procedures involve in obtaining loans.
Edition, 1994.
Third Edition 2013.
1995.
4. Dr. p. subba rao, International business, (text and cases, Third Edition,
1. Evaluate the licensing procedures involve in exporting?
22.12 KEY WORDS
 Export Inspection, Chief Controller, negotiable document, Bill of lading,
Invoice, Insurance, Negotiation, Airway Bill, Phytosanitary
 Order/Dock Receipt.

224
LESSON – 23
EXPORT LICENSING PROCEDURE, CSR & SUSTAINABILITY-POLICY,

PROCESS & PROCEDURE
23.1 INTRODUCTION
The Export of certain goods is regulate d by license. Goods of the description
specified in Schedule I of the Export (Control) Order made under the Import and
Exports (control) Act 1947, may be exported only under, and in accordance with, a
license granted by the Central Government.
23.2 OBJECTIVES
 To understand the export licensing procedure order made under the import and
exports (control) act 1947.
23.3 CONTENTS
23.3.1. Quota Licensing
23.3.2. Newcomers Licensing
23.3.3. Canalised Exports
23.3.3.1. Open General License
23.3.3.2. Limited Free Licensing
23.3.4. Free Licensing
23.3.4.1. Ad Hoc Licensing
23.3.4.2. Pre -Ban commitment
23.3.4.3 Application Forms
23.3.4.4. Deficient applications
23.3.4.5. Amendments & Alteration to License
23.3.5. Report of Samples of Indian Origin & their Re -import
23.3.6. Jurisdiction
23.3.7. Recognition to New Exporters & Transfer of Quotas
23.3.8. Application TQR
23.3.9 Permission for Utilisation of Quota License
23.3.9.1. Issue of Fresh Quota Certificates
23.3.9.2. Advance License Scheme
23.3.10 CSR & sustainabi lity-policy, process & procedure
23.3. 10.1 Objective
23.3.10.2. Planning
23.3.10.3. Assessment of Need/ Baseline Survey
23.3.10.4. Institutional Mechanism & CSR Process
23.3.10.5. Budgetary Allocation
23.3.10.6. Strategic Planning, Monitoring and Evaluation
23.3.10.7. Implementation Agency/ Evaluation Agency
23.3.10.8. Key Performance Indicators for MOU Evaluation
The export licensing procedure announced by the Government in described in
the following paragraphs. Categories of Exporters
225
For the purpose of licensing, exporters are divided into the following two broad
categories:
i) Established Exporters i.e., those who have exports of a particular commodity
in the prescribed basic period, as admitted by the licensing authority. The
basic period varies from commodity to commodity.
ii) New comers, i.e.,. those who have no exports in the prescribed basic period but
possess sufficient experience in the particular field, either as exporters outside
the basic period or as dealers in the internal trade of the commodity concerned.
23.3.1 Quota Licensing
i) Commodities, the export of which is allowed on a quota basic to established
exporters, have been mentioned in the Import Export Policy. Where an
exporter desires to secure an export quota of any such commodity, he is
required to prove his exports of that commodity during any one year or part of
a year selected by him from out of the specified period called the basic period,
prescribed for such commodity.
ii) An exporter is free to select, from out of the prescribed basi c period, his own
best year or part of a year, as the case may be. The licensing authority in
support of the basic period exports may accept the following evidence.
a) Bill of lading
b) Certificate from the Manifest Clearance Department of the Customs when
the bill of lading is not available.
c) Certified- copies of Land Customs Appendices in the case of export by rail
or road.
d) Export invoices and
e) Postal receipts in the case of export by post. (Where original postal receipts
are sent by banks for collection purposes to foreign customers, certificates
from the banks concerned are accepted as valid evidence).
iii) The quota of an exporter is generally calculated on the basic of his basic
exports, subject to adjustments in a few cases. Promoted by considerations of
equity, e.g. fixation of minimum and / or maximum limits for export quotas.
Sometimes, a limited quantity of a commodity is released for export. In such
cases, the quota of each individual exporter is worked out on a pro rata basis,
calculations being based upon the percentage that the total of the established
exports bears to the total quantity released for export.
iv) In most cases, the percentage fixed for calculating the value of the quantity to
be allowed and to be exported is announced. The quota of the individual
exporter is then wor.ced out by applying the percentage to his basic exports.
v) In certain cases, when the number of established exporters is very large as
compared to ceiling available for export, quotas are granted at a flat rate.
vi) In cases where quotas remain under-utilised or unutilised, the item is
considered for being allowed to other exporters, subject to such conditions as
are deemed necessary.
vii) Applications for the export of items, which are licens rble against quotas,
should be made in the prescribed form, h should be accompanied by shipping
bills, quota slips granted by the licensing authority, and /or such other
226
documents as are required to be furnished in terms of the relevant trade

notice or are considered necessary by the applicant.
23.3.2 Newcomers Licensing
Ordinarily, an effort is made to provide for newcomers into the export trade
unless the quantity allowed for export is small, in proportion to the established
exporter quotas already in existence. Only such business concerns as have
previous experience of handling the commodity, financial standing etc., are eligible
to apply for newcomer licenses. Normally, applicants are required to prove their
standing in the internal trade of the commodity during a specific period. The
conditions which a person must fulfils, and the manner in which he should prove
his experience is announced as and when applications are invited. Certificates of
chartered accountants, who are not partners directors or employees of the
applicant firm or its associates, certifying purchases or sales are accepted in
evidences. Sometimes receipts of sales tax paid are called for as evidence. In
addition, a newcomer applicant may be required to prove to the licensing authority
his ability to enter into the export trade by producing the sales contracts already
concluded by him with overseas buyers.
Applications for export by newcomers should be made in the prescribed form,
which should be accompanied by shipping bills and/or such other documents as
are required to be furnished in terms of the relevant trade notice or as are
considered necessary by the applicant.
23.3.3 Canalised Exports
Certain items of exports are exported through a canalised agency i.e., the STC
or other recognised agency / organisation. For these items, exports will be allowed
only through canalising agencies. The quantum up to which export may be
permitted in respect of these items and the government decides other details
pertaining thereto from time to time. The operations of the canalising agencies in
this regard are, therefore, subject to such directions as may be given to them by the
government.
23.3.3.1 Open General License
Items covered by an Open General License may, as long as it is valid, be
exported freely without any licensing formalities to all destinations permitted
therein. These items use to be amended in every EXIM Policy as per the
requirements of the economy.
23.3.3.2 Limited Free Licensing
Where the export of a commodity is regulated within a set ceiling, or when
there is no established pattern of trade, exports will be allowed on "first-come, first-
served" basis. The following principles and procedures will be applicable in such
cases:
i) A public notice/trade notice shall be issued, announcing the policy and
indicating the licensing offices to which the available ceiling has been allocated
for the purposes.
227
ii) Unless otherwise indicated in the public notice/trade notice, applications will
be received 15 days after the date of its issue.
iii) All applications made in Form AX, complete respect, received on the prescribed
date between 10.30 a.m. and 1 p.m. shall have the same priority. Such
applications should be accompanied by evidence to the effect that the Indian
exporter applicant has accepted the offer of the overseas buyer to purchase the
commodity and the quantity applied for, subject only to the grant of a license
in his favour.
iv) As a rule, the licensing authorities shall record, in writing, the reasons for the
rejection of applications.
v) Each exporter shall be allowed to submit one application per day supported by
one contract from one foreign buyer only. With each export application, the
exporter should file a declaration that he has not submitted any export
application for the same commodity to any other licensing authority during the
same licensing period. The licensing authorities will allocate the quota strictly
on a prorate basis, subject to the conditions stipulated in sub paragraph (vi).
vi) An eligible applicant will be allowed a quota not exceeding 10 per cent of the
available ceiling per day allocated to the office concerned. If some quantity of
the ceiling is left over after the disposal of the applications received on the first
day, the balance will be carried over to the next day for fresh applications; this
process will be repeated until the ceiling has been reached.
vii) Exports will be allowed by issuing an e xport license with a validity period of 45
days from the date of issue.
viii) Shipment shall be made of the quantity covered by the contract against which
the license has been issued within the period of its validity. No extension of
time shall be granted except in the following circumstances.
a) The licensing authority, which issued the license, is satisfied, within 7 days
of its issue, that no ship is available for carrying the consignment(s) within
the said period of 45 days; or
b) Within the period of the validity of the license, the licensing authority at the
port, to which the consignment might have been carried, is satisfied that
there has been delay in the arrival of the ship within the initial period of
validity.
c) In either event, an extension of up to 15 days only shall be available for
effecting the shipments. No second extension will be granted, i.e., the
license will lapse automatically thereafter.
ix) After the shipment is effected but with a period of 7 days of the shipment, each
license holder shall intimate to the licensing authority, which issued the license
particulars of the shipment(s), actually effected. Also, in case the license is not
utilised at all or only partly utilised, the license holder shall report the position to
the licensing authority within 7 days of the date of shipment or the date of expiry of
the license as the case may be. Any failure to do so will result in refusal to grant an
export license for the items allowed under limited ceiling for further exports in terms
228
of clause 5(q) of the Export (Control) order, 1977, as amended from time to time, for
the licensing period.
x) Any quantity allocated against the earlier license which lapses for the above
reasons shall be available again to the licensing office concerned for
reallocation the same manner as laid down above.
23.3.4 Free Licensing
Whereas item is allowed free for exported but is not covered by an Open
General License, the intending exporters are required to secure licensing
endorsements on the connected shipping bills from the licensing authority.
Application should be made in the prescribed form.
23.3.4.1 Ad Hoc Licensing
i) In order to develop new markets and encourage home based
industries in producing new export products, requests for exports in small
quantities are sometimes considered on an ad-hoc basis, even if the indigenous
production of such items is somewhat limited. Ad hoc licensing is, at time,
made use of to enable an industry or unit to clear accumulated stocks and
maintain continuous production.
ii) Application for the export of such items should be made in the prescribed form
and accompanied by shipping bills and/or such other documents as are
required to be furnished in terms of the relevant trade notice or are considered
necessary by the applicant.
23.3.4.2 Pre-Ban commitment
Unless otherwise provided, the following types of pre -ban (including pre-
control) commitments may ordinarily be honoured for export control purposes:
i) Where, against a specific export order, an irrevocable letter of credit in favour
of the exporter/exporting firm has been opened by the foreign buyer, covering
100 per cent of the f.o.b. value of the prior to the date of ban/control.
ii) Where advance payment has been received, provided that:
a) The advance payment has been received against a specific export order arid
covers 100 per cent of the f.o.b. value of th4e consignment; and
b) Such advance payment has been received through an authorised dealer in
foreign exchange on or prior to the date of the ban.
Notwithstanding the above, the government may, for sufficient reasons, treat
any other claims not covered by the above provi sions as a pre-bank commitment.
Copies of pre-bank commitment / export contracts (or pre-control
commitments/contracts) should be sent by the person concerned to the regional
licensing authority along with documentary evidence relied upon in support of suc h
commitments/contracts having been made. These documents should be sent to the
licensing authority by Registered Post (Acknowledgement Due) within a period of 15
days from the date of the public/trade notice or notification announcing the
imposition of the ban on the export of a commodity, or the date on which such
commodity is placed under export control as the case may be. Cognisance will be
229
taken only of cases where these documents have been filed in time. The submission
of such evidence shall not, however, confer any right on a person to the grant of
any export license or permission to export.
Note
A contract is deemed to be concluded after an offer has been made and
accepted by the second party. It should be specific as to the mutually accepted
terms and contents, i.e., it is binding on both, with reference to its enforceability.
Where such evidence is in the nature of a telegraphic/telex message detailing
the offer or the acceptance of the contract in its materials particulars, the evidence
relied upon the substantiating the pre -ban commitment/export contract (or pre-
control commitment/contract) should include the (confirmatory) post copy of the
said message sent immediately after its despatch, together with the connected
envelope bearing the stamp of the post office.
23.3.4.3 Application Forms
Applications for export licenses or licensing endorsements on shipping bills
should be made on prescribed forms along with relevant documents. These forms
are given in the Hand Book of Import Export Procedures. The applicants may use
their own typed/cyclostyled or printed forms.
Persons Authorised to Sign Application
Every application for an export license or for a licensing endorsement on the
shipping bill should be signed by applicant himself or by a person duly / legally
authorised by the applicant to do so. The position or nature of such legal authority
held by the person signing the application / document form should be clearly given
therein, along with the official stamp of his status. Otherwise, such application /
document or form will receive no consideration by the licensing authority. This
requirement applies equally to the applications made to canalising agencies.
23.3.4.4 Deficient applications
Applications will be summarily rejected if are not:
i) In the prescribed form
ii) Accompanied by necessary export documents
iii) Accompanied by the necessary particulars setting out the authority of the
person signing it; or
iv) Received before the last date prescribed
Applications are expected to complete all the columns in the application form
truly and properly. They may take the help of the counter Assistance System to
make sure that all these requirements are met.
23.3.4.5 Amendments & Alteration to License
No change shall be made or effected by the license or any other person m the
description of the goods or the name of the consignor or the consignee and in the
terms and conditions of the license. Any unauthorised change would render the
license null and void, besides exposing the offender to the risk of being penali sed.
230
Applications for amendments and alterations should be submitted to the authority,

which issued the license.
23.3.5 Report of Samples of Indian Origin & their Re -import
The import (control) order, 1955, and the Customs Act, 1962, permit, subject
to certain conditions and the observance of certain formalities, are import of
samples sent or taken to foreign countries by Indian businessmen for the purpose
of getting the buyer’s approval. With a view to avoiding any difficulty which the
Indian businessmen may have to face at the time of re-import, the prospective
exporters should contact the customs / import trade control authorities before
comporting the samples to foreign countries and ensure that the various conditions
laid down are fulfilled.
23.3.6 Jurisdiction
Unless otherwise stated, applications for the export of items which are not
normally allowed, or whose export is allowed on merits, should be addressed to the
Chief Controller of Imports and Exports, New Delhi. Applications for the export of
all other controlled items should be addressed to one of the regional licensing
authorities, depending on the port from which export is to be made. In respect of
commodities for which export ceilings have been fixed and one or more specified
licensing authorities deal with them, the intending exporter may apply for export to
any one of such licensing authorities. With each export application in such cases,
the exporter should file a declaration to the effect that he has not made an export
application for the same commodity to any other licensing authority (in the same
licensing period).
23.3.7 Recognition to New Exporters & Transfer of Quotas
An established exporter may be :
a. An individual
b. A partnership concern
c. A Karta of a Hindu Undivided Family in respect of the family business.
d. A limited company ; or
e. Any association or body of individuals
Licenses are granted in the name of the business belonging to the established
exporter. Where there is any change in the ownership, constitution or name of the
business, the established exporter will not be eligible for the grant of licenses, for he
ceases to be an established exporter. However, in public interest and for the
continuity of business, the licensing authority may recognize new established
exporters in respect of any business in accordance with the provisions made in the
following paragraphs.
i) Where there is a change in the ownership or constitution of an established
exporter's business. Without any change in the name of the business, and the
new owner or the reconstituted concern, as the case may be, acquires, the
quota of the original concern, as a whole, the quota belonging to the original
concern will be deemed to have been transferred to the new concern. The new
231
concern may obtain export licenses on the basis of such quota, if otherwise
admissible. In such cases, no application for TGR need be made; but
intimation about the change should be sent, in the prescribed form, to the
licensing authority within 90 days of the date of change. The constitution of the
new concern should also be mentioned in the usual manner in the next
application for an export license, indicating therein the nature of the change
and the date from which it has taken place. Where the intimation about the
change is sent after the expiry of 90 days, the quota entitlement of the
applicant will be liable to as cut of 25 per cent in the first licensing period after
the change. The licensing authority may, however, condone the delay if it is
satisfied that the delay was due to circumstances beyond the control of the
applicant.
ii) Where there is a change in the name of the established exporter's business,
without any change in the ownership or constitution of the business, no
application for TGR need be made. The established exporter should produce
his quota certificate before the licensing authority for the necessary change
therein, together with an affidavit about the change of name and affirming that
he will not claim any license further in the old name. Where a private limited
company becomes a public limited company or vice versa, it should report the
fact to the licensing authority.
iii) Where there is a change in the name of the established exporter's business as
well as a change in the ownership or constitution of the business, the new
concern cannot claim export licenses on the basis of the quota of the original
concern without obtaining a TQR in its favour. The application of a TQR should
be made to the licensing authority.
iv) Where there is any change in the ownership or constitution of an established
exporter's business and, as a result of such change, a part of the quota of the
original concern is required to be separated or the quota of the original concern
in required to be divided, the application for such separation of the quota or for
its division, as the case may be, should be made to the concerned licensing
authority. If the quota to be separated in sought to be transferred in favour of
any person, the transferee, too, should made an application for the TQR to the
licensing authority. In such made cases, the new owner or the reconstituted
concern(s) cannot claim export licenses on the basis of the quota standing in
the name of the original concern without obtaining a TQR.
v) Where an established exporter is a limited company and the company is
amalgamated with another company, the application for a TQR in favour of the
new company should be made, td the licensing authority, supported by an
order of the competent court or other evidence of amalgamation.
23.3.8 Application TQR
The application for the TQR should be made by the head office of the applicant
concern, covering all its branches, and such application should be made to the
licensing authority in whose jurisdiction the head office is situated.
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The application made in terms of the two paragraphs above should be

accompanied by the following documents:
i) In the event of the death of any person, a death certificate should be
produced.
ii) In the event of relinquishment of rights by any person in favour of another, an
affidavit of relinquishment should be produced.
iii) If the transfer of quota in favour of any legal heir or heirs is claimed on the
basis of a will the application should also be supported by the said will and
the probate thereof, or an affidavit of consent by all the other legal heirs.
iv) Partnership deed of the outgoing concerns.
v) If the business has been sold, the deed of transfer, duly registered with
Registrar of Document, should be produced; if the firm is. dissolved, a deed of
dissolution should be produced.
vi) Partnership deed of the incoming concern, if it is a partnership concern.
vii) Where a common basic year is required to be selected for the calculation
should be supported by an affidavit to the effect that the parties will select a
common basic year for the establishment of quotas in respect of the same or
similar items on the basis of the business done by the outgoing concern; and
viii) Any other document on which the applicant may rely in support of his
application.
Affidavit to be produced by applicants with their application for
transfer/division of quotas, wherever laid down, should be sworn before a First
Class Magistrate or a Notary Public.
i) Subject to the provisions of sub-paragraph below, an established exporter is
not allowed to transfer his business to which a quota is attached except as a
whole.
ii) If an established exporter has two or more branches, each having a separate
quota in respect thereof, it will be open to such established exporter to
transfer the business of any branch with the entire quota belonging to that
branch.
In the following cases, export licenses may be claimed only against quotas
calculated on the "common basic year" in respect of the same or similar items
on the basis of the business done by the outgoing concern:
i) Where a quota is divided and transferred in part to several persons separately,
the persons in whose favour the quota is sought to be transferred have to select
a common basic year. However, where a person acquires a quota in respect of
any item transferred in this favour and he already holds a quota in respect of
the same item by virtue of a business done separately, it shall be open to him
to claim licenses on the combined value of the two quota certificates even if the
quota certificates are in different basic years. This will also apply in the case of
amalgamation of two limited companies.
ii) Incases falling under para (2) above, the transferor and the transferee will be
required to selected the common basic year for the same or similar items.
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iii) The provisions of this paragraph will also apply to cases where the parties have
been exempted from making an application for a TQR.
Where an application for a TQR is required to be made in terms of these
provisions, such application should be made so as to reach the licensing authority
concerned, complete in all respects, within a period of 90 days from the date of
change in the ownership, constitution or name of business, etc., as the case may
be. The licensing authority may, however, in deserving cases, condone the delay in
making the application if such authority is satisfied that the delay was caused by
circumstances beyond the control the applicant. If the applicant is not in a position
to make an application complete in all respects within the prescribed period of 90
days due to formalities to be observed in getting the deed of transfer of business
registered with the Registrar of Documents, he may apply by producing an attested
copy of the transfer deed with evidence to show that the original deed has been
deposited for registration and should furnish an undertaking to the effect that the
original deed has been deposited for registration and should furnish an
undertaking to the effect that the originals deed, duly registered, will be provided by
him within a period of 15 days from the date of registration.
Where an application for as TQR, complete in all respects, i.e., accompanied by
documents specified above, is received by the licensing authority concerned within
a period of 90 days from the date of the ownership, constitution or name of the
business, as the case may be, or where the delay in the receipt of the application is
condensed by the licensing authority, as indicated above, the transferee will be
eligible for the transfer of the quota from the licensing period during which the
change occurred. In other cases, the TQR will be effective from the licensing period
during which the application for it is made, complete in all respects. In the case of a
deficient application, the TQR will be valid from the licensing period during which
the documents are produced.
Where an applicant is unable to produce the original document specified
above, he may submit photostat/certified/attested copies thereof in support of his
application for a TQR. The applican t may submit photostat/certified/attested
copies thereof and the original documents subsequently to show that the
photostat/certified/attested copies are correct. The benefit of the TQR may, in such
a case, be given from the date on which the photostat/c ertified/attested copies of
the documents in question were received, if the TQR is otherwise admissible from
such date.
The licensing authorities will expeditiously dispose of application for TQRs. If
an application for a TQR complete in all respects is not disposed of within a period
of one month, the licensing authority will issue an interim reply to the applicant. If
an applicant does not receive an interim reply even with this limit, he may bring the
matter to the notice of the Public Relations Officer. In the Export Trade Control
Office concerned; or fix up an interview with the officer concerned through the
Enquiry Officer in order to know the reasons for the delay in the disposal of his
application.
Where an established exporter has duly made an appli cation for a license, but
there is a change in the ownership or constitution or name of the business before
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the license is granted, the license will be granted on such application, if there
otherwise admissible, to the new owner or owners or newly constitution firm, etc.,
after their having been recognised/ as established exporters, provided that the
validity of the TQR covers the period of the application in question. The licensing
authority may also consider the grant of licenses in favour of the new o wner(s) of
the business of the reconstituted concern, etc., against other pending claims of the
old owner(s) of the business, if otherwise admissible provided that the agreement
between the parties or the affidavit or relinquishment specifically contains a
provision to this effect.
If the licensing authority is satisfied that the approval of the recognition and
grant of quota is lively to be delayed on account of circumstances beyond the
control of the applicant, it will be open to it to grant licenses to the applicant in
anticipation of the approval, if the applications are otherwise in order.
In the following cases, the quota of the established exporter will lapse:
i) If the established exporter is an individual and is declared insolvent; and
ii) If the established exporter is a limited company which is wound up without
any arrangement having been made for the transfer of its business.
In the following cases, no change in the ownership of the business will be held
to have taken place for the purpose of the rules:
i) Change of directors or shareholders in public or private limited company.
ii) Changes in the Hindu undivided family by birth, death or otherwise except the
death or retirement of the karta; and
iii) Change in the address of an established exporter's business.
Any case, which is not strictly covered by any of the above paragraphs, will be
decided on analogous principles.
In cases where any application for a TQR is not required to be made under the
foregoing provisions, the application for a license should be acc ompanied by a
declaration if the form prescribed.
Where the new established exporters have been exempted from making
applications for TQRs, the export licenses will be issued to them in the normal
course, if otherwise admissible. They will, however, be required to state in their
applications for licenses the changes occurring in the business and the dates from
which such have taken place. If in such cases, any objection or granted received
from any person at any time against the licenses claimed or grante d, the licensing
authority will examine such objection and call for such evidence from both the
parties as may be deemed necessary. If as a result of the examination, the licensing
authority finds that the established exporter is not entitled to the whole or a part of
the quota on the basis of which he has been claiming licenses without obtaining a
sanction for the TQR, the quota of the established exporter will be reduced
accordingly and the parties found guilty of misrepresentation or contravention of
these rules will be liable to panel action under the imports and exports (control) act
and the orders issued there under. In such cases, the value/quantity of the excess
licenses already obtained by the party will also be adjusted against the future
quotas of the party in respect of any item(s).
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If the objection is made to the licensing authority within three months from
the date of the change in the constitution or ownership or name of the established
exporter's business, and the objector is found to be entitled either to the whole or a
part of the quota, such quota will be transferred in his favour, if he is otherwise
eligible. The licensing authority may also condone the delay was caused by
circumstances beyond the control of the objection.
It will be open to the licensing authority to reject the application for a TQR:
i)
If die application or the documents accompanying the application are -
defective.
ii) If the licensing authority decides that the recognition and grant of quota is
not in public interest or for the continuity of any business,
iii) If the licensing authority decides that the transfer/division of quota is
sought with an intention to defeat the transferor's creditors; and
iv) For any other reasons to be recorded.
The licensing authority may, after giving a reasons opportunity to be heard to
the persons who have been grated through inadvertence or mistake or due to any
fraud or misrepresentation.
23.3.9 Permission for Utilisation of Quota License
Where an export license has been granted to an established exporter, and after
the grant of the license but before its utilisation, there is a change in the ownership
or constitution or name of the established e xporter's business. The new owner of
the business, or the reconstituted concern, etc., as the case may be, cannot utilise
the reconstituted concern, etc., as the case may be, cannot utilise the license in
question without obtaining the written permission of the licensing authority which
granted the license, or of any other persons empowered in this behalf by such
authority in terms of sub clause 4(2) of the Export (control) order, 1977. In such
cases, an application for the necessary permission of the autho rity should be
supported by an affidavit by the applicant, sworn before a First Class magistrate or
Notary Public. To the effect that he is the rightful successor of the business for
which the license in question was descended that, in the event o f any mis-
statement subsequently detected he will be liable to all actions and consequences
arising there from.
23.3.9.1 Issue of Fresh Quota Certificates
i) In the event of a change in the ownership or constitution a business without
any change in the name of the business, where the new owner or the
reconstituted concern, as the case may be, is not required to apply for a TQR.
The quota certificates standing in the name of the original concern will be
endorsed by the licensing authority, indicating therein the nature of the
change and the date from which the change has taken place.
ii) If the name of the business changes, the licensing authority will amend the
quota certificate by changing the name of the established exporter’s business
appearing thereon. An endorsement will also be made on the quota certificate,
indicating the data from which the change has taken place.
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iii) Where a quota has been divided the quota certificates and their counterfoil
standing in the name of the dissolved concern will be cancelled and fresh
quota certificates will be issued in the name of the succeeding parties
according to the share of the quota transferred to the name. A suitable
endorsement, giving the number and date of the order under which the
division/transfer has been allowed by the Export Trade Control Authority, will
also be made on the old and fresh quota certificates and their counterfoils.
iv) The persons concerned should produce the quota certificates before the
licensing authority, which issued the same for necessary endorsement /
amendment as indicated above immediately after the change has occurred. In
cases where the new owner or the reconstituted concern Is required to apply
for a TQR, the quota certification should immediately be produced before the
licensing authority for necessary endorsement / amendment but, in any case,
not later than 30 days, after the new owner of the reconstituted concern, as
the case may be, has been recognised as an established exporter.
23.3.9.2 Advance License Scheme
An advance licence is granted for the import of inputs without payment of
basic customs duty. Such licences shall be issued in accordance with the policy
and procedure in force on the date of issue of the licence and shall be subject to the
fulfillment of a time-bound export obligation, and value addition as maybe
specified. Advance licences maybe either value based or quantity based. As per the
latest amendments to the EXIM Policy, the facility of Back to Back Inland Letter of
Credit has been introduced, to enable an Advance Licence holder to source his
inputs from domestic suppliers. Value Based Advance License
Under a value based advance licence, any of the inputs specified in the licence
maybe imported within the total CIF value indicated for those inputs, except inputs
specified as sensitive items. Under a value based advance licence, both the quantity
and the FOB value of the exports to be achieved shall be specified. It shall be
obligatory on the part of the licence holder to achieve both the quantity and FOB
value of the exports specified in the licence. Amendments to the Advance License
Scheme
The Advance License Scheme has been expanded and liberalized with the
amendments made to the EXIM Policy, announced on 31 st March 1995.
23.3.10 CSR & Sustainability-Policy, Process & Procedure
1. Department of Public Enterprises (DPE), Government of India on
09.04.2010 issued guidelines on corporate social responsibilities. These guidelines
were adopted by STC and implemented in organization. Further, DPE revised the
guidelines on CSR & Sustainability effective from 01.04.2013. The clause 1.3.4 of
the above guidelines stipulates that each CPSE to formulate its own policy, process
and procedure to implement DPE guidelines in the organization. The clause 1.11.4
of the DPE guidelines states that these guidelines will stand modified by the
provisions of the new Companies Act and updated SEBI Guidelines as and when
these are in place and made enforceable. Therefore, STC adopts DPE guidelines as
modified by the Company’s Act 2013 and notified on 30.08.2013.
237
2. In compliance with the DPE guidelines on CSR & Sustainability, among

other things STC adopts following commitments:-
i) Corporate Social Responsibility and Sustainability is a company’s
commitment to its stakeholders to conduct business in an ec onomically,
socially and environmentally sustainable manner. Stakeholders include
employees, investors, shareholders, customers, business partners, clients,
civil society groups, Government and non -government organizations, local
communities, environment and society at large.
ii) Corporate Social Responsibility and Sustainability is essentially a way of
conducting business responsibly.
iii) STC will undertake the CSR and Sustainability activities for execution with the
approval of the Competent Authority (Board of Directors/ Board Level Committee
on CSR) as per delegation of power made in this regards by the Board of
Directors. In case, due to exceptional situation/ circumstances, a project is taken
up for execution with the approval of management, ex post facto approval shall
be obtained in the next Board meeting itself as far as possible.
iv) In the eventuality of the Board of Director of STC delegates the authority to
approve the CSR and Sustainability projects/ activities to the Board level
Committee on CSR, the details of all projects undertaken shall be reported to
the Board of Directors in the forthcoming meeting as far as possible.
v) STC will review its CSR and Sustainability policies from time to time keeping
in view organizational concerns. STC will make all efforts to integrate and
align its CSR and Sustainability policies and activities with their business
goals, plans and strategies.
vi) Whenever amendments are made in DPE guidelines on CSR, the same shall
be duly incorporated in STC policy document on the subject. Further, these
guidelines will stand modified by the provisions of the Companies Act-2013
and updated SEBI Guidelines.
vii) The STC CSR-SD Policy shall apply to all CSR and Sustainability initiatives
undertaken by STC’s Corporate Office and/or Branches.
23.3.10.1 Objective
As a responsible corporate citizen, the objective of STC’s CSR SD Policy is to
contribute to inclusive growth and equitable development in society through
enabling CSR projects for empowerment of the marginalized and underprivileged
sections / communities.
23.3.10.2 Planning
Planning and selection of CSR and Sustainability projects/ activities shall be
based on STC CSR & Sustainability Policy. Subject to availability of funds, CSR
project(s) would be designed into short-term, medium-term and long term projects,
by defining the annual target of the activities, funds earmarked and periodicity for
execution.
Priority will be accorded for taking up Projects in the locality/ periphery of the
commercial operations and activities. As per DPE Guide lines, STC will have atleast
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one project in any of the backward Districts identified by the Planning

Commission, Govt. of India. STC will make efforts to undertake CSR initiatives to
benefit the weaker/ marginalized sections of the society. Weaker sections would
include SC, ST, OBC, minorities, women and children, BPL families, old aged and
differently abled persons, etc.
STC will endeavor to select at least one project in each of the two categories of
CSR and Sustainability, subject to availability of funds.
The contributions can be made for natural calamities / disasters etc. as per
DPE guidelines.
The employees of STC should not be the direct beneficiaries of the activities
undertaken with the budget allocated for CSR and Sustainability initiatives in any
given year. However, an exception can be made in case of schools, hospitals,
training institutes and other such infrastructure which is created primarily for
environment protection and/or for the benefit of underprivileged communities,
deprived sections and the society at large, but the facilities of which are availed by
the employees of STC and their families also.
STC may join hands and pool their resources and capabilities to create for
undertaking projects jointly with other CPSEs.
23.3.10.3 Assessment of Need/ Baseline Survey
Before taking up a Project for execution an assessment of the needs of the
intended beneficiaries will be required. The baseline surveys may not be required in
all cases if there is documentary evidence indicating the nee d of beneficiaries.
23.3.10.4 Institutional Mechanism & CSR Process
The Management will nominate one senior officer of the level of General
Manager/ Chief General Manager as “The Nodal Officer for CSR &
Sustainability”.
The Nodal Officer will firm up the CSR annual action plan/ mid-year review
and place it through the Company Secretary before Board Level Committee on CSR
for its consideration. The Nodal Officer will oversee the planning, implementation,
monitoring and evaluation of CSR and Sustainability ac tivities and within the
organization and also outside, i.e. covering internal as well as external
stakeholders.
There will be CSR Cell headed by one CM/DGM and other officers and staff as
per requirement to be assessed by the Nodal Officer. The CSR Cell shall be
responsible for the following:
 Preparation of annual action plan indicating proposals for CSR &
Sustainability Projects / Activities, project location, estimation/budget
allocation of each project / activities, planning & programming, preparation
of annual budget and putting the same for the consideration of below board
level/ Board level Committee on CSR.
 Proposing likely expenses to be incurred on CSR/Sustainability project(s).
 Implementation & Monitoring of CSR-SD Activities/Programmes.
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 Impact Assessment of Completed Activities/Programmes.

 Preparation of progress Report/ special report if any.
 Any other responsibility assigned by the Nodal Officer.
23.6.5 As per DPE guidelines there will be two tier structure of Monitoring, namely :
i) Board Level Committee headed by Independent Director. The Board Level
Committee on CSR comprises of:
1. Independent Director - Chairman
2. Director (Personnel) - Member
3. Director (Finance) - Member
4. The Nodal Officer for CSR - Special Invitee
The Board Level Committee on CSR will meet at least once in every six months
and twice a year.
ii) Below Board Level Committee on CSR will be headed by the Nodal Officer
and other officers nominated by the Management. Head CSR Cell will be the
Member Secretary of this Committee.
The CSR Cell will be exclusively responsible for CSR & Sustainability Policy
and initiatives and will place the proposed project(s) before the Below Board Level
Committee headed by the Nodal Officer. Generally, the Annual Plan for the
ensuing year will be considered by the Board Level Committee on CSR and
Sustainability on the recommendation of Below Board Level Committee on CSR.
Thereafter, the proposal recommended will be put up to the Board level
Committee on CSR after CMD has seen. The power to approve the annual
plan/projects will vest in the Board level Committee on CSR. The status report on
execution/completion of the project(s) will be placed before the Board of Directors
for reporting as deemed fit from time to time.
(i) For the pre-project activities (Baseline Survey/Need Assessment) and post
project activities (Impact Assessment/project evaluation), the Competent Authority
for approving the proposal/incurring expenditure will be Director (P) on the
recommendation of Below Board level Committee within the approved budget.
(ii) For other administrative expenditure including the travel expenditure of
CSR Cell/Monitoring Committee/Outside agency, the Competent Authority will be
as per the Delegation of Power of the organization.
23.3.10.6 Budgetary Allocation
As per the DPE Guidelines on CSR & Sustainability and the provisions of the
Company’s Act 2013 there will be budgetary allocation for CSR and Sustainability
activities / projects for the year with the approval of the Competent Authority.
The Companies Act 2013 enables provisions for creating funds for CSR &
Sustainability. It states that every company having net worth of rupees five
hundred crore or more, or turnover of rupees one thousand crore or more or a net
profit of rupees five crore or more during any financial year shall ensure that the
company spends, in every financial year, at least 2% of the average net profits of
the company made during the three immediately preceding financial years. In an
240
eventuality of negative Net Worth in a particular financial year, it shall not be

mandated to earmark specific funds for CSR and Sustainability activities.
The budget allocated for CSR and Sustainability activities / projects planned
for each financial year is expected to be spent within that year. If due to some
reason, the budget of a year remains unutilized, the same would not lapse. Instead,
it would be carried forward to the next year for expenditure on CSR and
Sustainability activities. However, reasons for not being able to spend the entire
budget on CSR and Sustainability activities as planned for that year will be placed
before the Board. STC will endeavor to spend the unutilized budget of any year
within the next two financial years. As per DPE Guidelines, if the unutilized budget
could not be spent within the next two financial years, the unspent amount would
be transferred to a ‘Sustainability Fund’.
At least 80% of the annual budget earmarked for CSR and Sustainability
activities will be spent on implementation of activities in the project mode. In
exceptional cases, where CSR and Sustainability activities are not implemented in a
project mode, the reasons for doing so would be recorded in writing.
Up to 5% of the annual budget for CSR and Sustainability activities may be
earmarked for Emergency needs, which would include relief work undertaken
during natural calamities, disasters, and contributions towards Prime Minister’s /
Chief Minister’s Relief Funds and/or to the National Disaster Management
Authority. Such contributions would count as valid CSR and Sustainability
activities. In exceptional circumstances, supported by reasons recorded in writing
and approved by the Administrative Ministry, the budgetary allocation under the
provision of Emergency needs can be enhanced by 5% of the budge t allocated for
CSR and Sustainability activities in a particular year.
The expenditure incurred on baseline survey / need assessment study and
evaluation, on capacity building programs such as training, workshops, seminars,
conferences, travels, etc. and on corporate communication strategies for
engagement of all stakeholders, whether internal or external, to implement the CSR
and Sustainability agenda of the company, would be accounted for as CSR and
Sustainability expenditure from the budget allocated for this purpose.
23.3.10.7 Strategic Planning, Monitoring and Evaluation
The Board Level Committee on CSR will oversee the implementation of the CSR
& Sustainability Policies of the company and to report to the Board of Directors to
formulate suitable policies and strategies to take the CSR and Sustainability
agenda of the Company forward in the desired direction through the Nodal Officer.
23.3.10.8 Implementation Agency/ Evaluation Agency
As far as possible, STC will utilize the services of external ag encies for
implementation of Projects requiring specialized knowledge and skills. STC may
take up the implementation of the activity with its manpower and resources if it
feels confident of its organizational capability to execute the projects. In such a case
monitoring is to be done by an external agency even though the staff of STC may be
associated with it. In any case, evaluation must always be assigned to an
independent external agency.
241
The engaging or partnering with external agencies will be based on the

agencies which have experience and expertise to implement the CSR projects. The
Specialized agencies may include Government departments, semi -government, or
non-government organizations (NGOs) etc. Engagement of external agencies /
NGOs will be at the discretion of the STC.
STC may avail the services of the National CSR Hub in seeking guidance on
the implementation of their CSR and Sustainability activities. For this, the company
will have to pay a service charge to the National CSR Hub. The service charge may
be decided between the National CSR Hub and the company. The expenditure
incurred in availing the services of the National CSR Hub for the implementation of
CSR and Sustainability activities would be from CSR budget.
Monitoring will be done periodically. The external agency, if any, engaged for
implementing a project would not be considered for the task of monitoring and evaluation.
In any case, the final evaluation would always be entrusted to an external agency.
23.3.10.9 Key Performance Indicators for MoU Evaluation
DPE guidelines Stipulates following the key performance indicators with
specific weightage to be assigned for MOU target Settings to be adhered to in
implementation of CSR & Sustainability projects:
i) the degree of involvement of the employees and the top management in
internalizing the CSR and Sustainability agenda within the organization;
ii) the degree of success in implementing the CSR and Sustainability projects
they undertake during the year;
iii) the expenditure they incur on these activities (vis-à-vis the annual
budgetary allocation);
iv) the effectiveness of the two-tier organizational structure in the process of
planning, implementing and monitoring the CSR activities;
v) the efforts made and the success achieved in the engagement of ke y
stakeholders through adoption of a good corporate communication strategy;
vi) the adoption of sustainability reporting and disclosure procedures and
practices.
As far as possible, it will be the responsibility of the CSR cell to incorporate
above indicators appropriately with explicit remakes in every stage of the CSR
action plan from concept to commissioning.
As regards promotion of CSR agenda within the organization, the CSR Cell will
sensitize the staff from time to time regarding the CSR and Sustainability policies of
the organization.
In case of any difficulty in interpretation of this policy the matter shall
bereferred to Director (Personnel) for taking a final view.
Quota Licensing, Newcomers Licensing, Canalised Exports, Open General
License, Limited Free Licensing, Free Licensing, Ad Hoc Licensing, Pre-Ban
commitment, Deficient applications,
1. Discuss various types of licensing in export marketing.
242
23.6 SUMMARY
This chapter advocated Quota Licensing, Newcomers Licensing, Canalised
Exports, Open General License, Limited Free Licensing, Free Licensing, Ad Hoc
Licensing, Pre-Ban commitment, Application Forms, Deficient applications,
Amendments & Alteration to License, Report of Samples of Indian Origin & their
Re-import, Jurisdiction , Recognition to New Exporters & Transfer of Quotas,
Application TQR, Permission for Utilisation of Quota License , Issue of Fresh Quota
Certificates, Advance License Scheme. CSR & sustainability-policy, process &
procedure, Objective, Planning, Assessment of Need/ Baseline Survey, Institutional
Mechanism & CSR Process, Budgetary Allocation, Strategic Planning, Monitoring
and Evaluation, Implementation Agency/ Evaluation Agency, Key Performance
Indicators for MOU Evaluation.
1. What are the procedures involved to obtain license?
1. Robert A. Mundell, International Economics, 1968, Macmillan & co, New
york.
23.9 ASSIGNMENTS
1. Evaluate the features of Quota Licensing
Edition, 1994.
Third Edition 2013.
1995.
4. Dr. P. Subba Rao, International business, (text and cases, Third Edition,
1. Give your views about the procedures involve in obtaining various licenses
for exporting the goods and services.
23.12 KEY WORDS
 Quota Licensing, Open General License, Limited Free Licensing, Free
Licensing, Ad Hoc Licensing, Pre-Ban commitment, Advance License ,
Scheme, Application TQR, Issue of Fresh Quota Certificates, New Exporters
& Transfer of Quotas.

243
LESSON - 24
EXPORT AND IMPORT FINANCE AND CREDIT

24.1 INTRODUCTION
Finance is the nerve center of all business activities. In export trade also, n
plays an important role rather difficult one. In export, there are a host of
Governmental, banking and export insurance regulations that one should strictly
adhere to. It requires rather serious attention because any carelessness will mean a
loss of foreign exchange, apart from the other consequences.
24.2 OBJECTIVES
 The objective is to make the reader understand Export and import credit and
finance system in India and Methods of export financing..
24.3 CONTENTS
24.3.1. Short-term sources of finance
24.3.2. Medium and long term sources of finance
24.3.3. Export and import credit and finance system in India
24.3.3.1. Export credit
24.3.3.2. Pre -shipment finance or packing credit
24.3.3.3. Post-shipment credit
24.3.4. Finance for exports on deferred payment terms
24.3.5. Methods of export financing
24.3.5.1. Prudent credit practices
24.3.5.1.1 Cash in advance
24.3.5.1.2. Documentary letters of credit and documentary drafts
24.3.5.1.3. Letters of credit
24.3.5.2. Tips on using a letter of credit
24.3.5.3. Documentary drafts
24.3.5.4. Sight drafts
24.3.5.5. Time drafts and date drafts
24.3.5.5.1. Open account
24.3.5.6. Other payment mechanisms
24.3.5.6.1. Consignment sales
24.3.5.6.2. Counter-trade
24.3.5.7. Foreign currency
24.3.5.8. Payment problems
Export financing starts as soon as the exporter gets an order to export and it
has been accepted by him and ends at points when the goods are cleared and the
amount is received. Financing of exports is specialised busine ss demanding the
operations of institutions that are engaged in it and have special skills in handling
the intricacies of foreign exchange transactions, a network of contracts abroad and
a willingness to assure the risks peculiarly attached to it. It is, therefore, necessary
for the success of export trade that good financing arrangement should be made
available to exporters from the beginning to the end of the export trade.
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In export trade financing, the main difficulty is that the buyer and the seller
are far away and do not know each other. It depends on how the contract between
two parties is made. The contract must define the terms of payments whether the
exporter allows credit or not. The exporter must be careful in allowing credit. But
sometimes providing credit facilities is necessary to get the business, otherwise
there is a fear of losing the valuable foreign exchange for the country and good
buyers abrade. The way out may be to borrow money from a bank or any other
financial institution to finance such credit.
The areas where finance would be essentially needed and arranged, after one
obtains an order are:
a) Procuring raw materials and components to manufacture the product
b) Refinancing facilities so as to get the proceeds of bills after the shipment
c) Availability of funds until the export benefits are realized, and
d) Refinance facilities for long term credits offered for the export of products.
In India, the schemes of export financing available to an exporter are
reasonably liberal. There are many finan cial institutions, including recently set up.
Export Import bank, that undertakes the risks, attached to the export financing.
An exporter needs finances for his pre -shipment and post-shipment
requirements. Mainly pre-shipment requirements are short-term requirements
where period of credit normally does not exceed 180 days. The post-shipment credit
needs may be short term, medium term and long term. A credit extended beyond
180 days and upto 5 years is referred as medium term.
24.3.1 Short-term sources of Finance
The following are the short-term sources of finance in export trade:
1. By Importer: In certain cases the importer finance the exporter by sending the
amount required to meet the pre-shipment credit in advance, which can be
adjusted against the import price of the goods. The importer many insist upon
the letter of credit instead of cash. In either case, the effect is the same; the
importer has financed the transaction.
2. By Exporter: When the exporter puts up his own capital or diverts his business
funds towards export business, and execute the export order without the help of
borrowed funds, it is said that the exporter has financed the exports. The exporter
may either have an open account with the importer, if they are known and their
relations are well maintained or send the documents against payment or against
acceptance after shipping the goods. If documents are against payment, the
exporter gets the payment within a reasonable time and if the documents are
against acceptance, he can discount the acceptance from his banker as soon as
he gets it from the buyer after acceptance. In this way, the exporter finances his
short-term needs himself.
3. This method is most unusual because comparatively few manufacturers and
professional exporters either have their own capital or wish to employ it in this
manner. The reason: behind it is that the rate of interest charged by the bank
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on export credit or fee for negotiating drafts is quite low and no wise man will
invest his own capital in this manner.
4. By the export middleman: The export middleman particularly the export
merchant, or export commission house finances export shipment. For this
purpose, the manufacturers pay a fee for the services rendered by such
middlemen. The fee is usually high. Such middlemen grant credit risks, which
are not ordinarily acceptable to banks. Usually, the middlemen turn around and
refinance their own drafts through a bank.
5. By factors: Factoring houses generally finance the export trade by discounting
the bills of the exporters. They charge discount or commission for their services.
They also undertake the responsibility of any risk in the discounting of bills and
therefore, they offer a good insurance cover for the losses. This method is useful
to those exporters whose working capital i s limited. The factoring houses serve
as a mercantile and banking house which finances manufacturers, exporters,
commission houses and selling agents through the discounting of receivable.
6. By banks: Banks also provide short-term finances to the exporters and render
valuable services in the international trade. The service in financing the export
credit generally offered by a bank are:
i) Bank opens documentary credit account in favour of the exporter at the
request of the importer, issue letter of credit to the exporter. It makes the
payment to the exporter on receiving the documents of the goods imported.
ii) The bank in the exporters country collects the necessary amount from the
importer's bank against letter of credit or against documents of payment on
behalf of the exporter.
iii) The bank generally finances the exporter by discounting the documentary
drafts as accepted by the importer.
iv) Bank also provides pre-shipment credits through loans, cash credits and
overdrafts for exporter's short term needs which are in turn, refinanced by
the RBI in India.
In India, commercial banks finance the most part of exporter's short term
needs.
24.3.2 Medium and long term sources of finance
By medium term finance means, finance for a period exceeding 180 days but
not exceeding 5 years. This type of credit is provided for in the case of durable
consumer goods and light capital goods. The long -term finances are provided for a
period exceeding 5 years and are normally provided for the sale of heavy capital goo
"is, complete plants and turnkey projects.
There are two types of medium and long-term credit widely known as (1)
Buyer's Credit and (2) Suppliers credit.
1. Buyer's Credit: It is a means of financing an export transaction involving capital
goods and equipment of large value or compl ete turnkey projects on long term
credit. A bank or other financial institution extents the credit facility to the buyer
in the supplier's country so that the overseas buyer may be in a position to pay
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cash for the goods imported. The credit facility so extended is guaranteed by the
buyer's bank or often extended to buyer's bank itself for the specific purpose in
view. Two points are important in this connection: (i) If the supplier executes the
contract under the terms of contract of sale, he will get the money, (ii) It involves
no transfer of funds from one country to another. There is as such no financial
involvement for the seller.
2. Supplier's Credit: Under this credit the exporter or supplier offers credit to the
overseas importer against the reciprocal credits from the commercial banks,
which, in turn, get refinance from the EXIM Bank in India.
The sources of medium and long-term finances are:
a) Commercial banks: Commercial banks also provide the medium and long-term
loans but invariably they offer only short-term loans for exports. When
commercial banks extend the short-term and long-term loan facilities to
exporters, they get it finance from the specialized financial institutions as
from EXIM Bank in India.
b) Export Import Bank: in some countries, export import banks have been
established to finance the medium and long-term export credit needs. Such
banks have been set up in US in 1943 and in Japan in 1950. The Indian
Government has also established the Export-Import bank (EXIM Bank) on 1st
January 1982 as a public sector financial institution. It provides medium and
long-term loans for exports directly and indirectly to exporters.
c) International Financial Institutions: Many International banks and
financial institutions have extended long term credit facilities to many countries
especially under developed countries to expand their industrial base so that
those countries may contribute to world trade. Such institutions are World
Bank, International Finance Corporations, Asian Development bank, etc.
d) Private Export Finance Companies: In order to boost the export trade, a number
of private finance companies have spread up in many countries. They offer
medium and long-term loans for export purposes under their own tern and
conditions agreed upon between the two parties of the finance contract.
Thus medium and long-term finances are generally extended by banks and
specialised financial institutions.
24.3.3 Export Credit and Finance System in India
In India, the licensed commercial banks generally extend short-term credit
facilities at pre-shipment and post-shipment stages to the exporters. Banks
generally enjoy certain benefits for advancing loans to exporters. These benefits are:
i) They enjoy an interest subsidy of 1¾ percent or refinance from the Reserve
Bank of India or the Export-Import Bank.
ii) Guarantees are provided by the ECGC, where a substantial part of risk is
covered by the ECGC.
The commercial banks are also authorized to extend medium term and long -
term credit up to Rs. 1 crore and they get refinance from the EXIM Bank of India.
Such loans can be given only to export Indian capital goods or turnkey projects.
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Long-term and medium term loans above Rs. 1 crore are directly provided by the
EXIM bank after conducting appraisal assessing the nature of export, economic
status of buyer and the importing country, the period of repayment and the credit
risks involved. Again the projects' commercial viability, capabilities of Indian
exporter, soundness of importer are also considered.
The EXIM Bank of India directly extends term credit facilities to exporter under
its various schemes and it indirectly provides finances to exporters by refinancing
the bills already discounted by the commercial banks. The term finance is generally
provided to exporters mainly to provide term credit to overseas buyer for the export
of capital goods and consultancy service.
The Reserve bank of India does not contribute directly in financing the export
trade but it formulates different policies, which help the exporters in getting
financial facilities from the commercial banks and financial institutions. It can
direct the banks and EXIM Bank to extend export credits for some particular
purpose or at concessional rates or on liberal terms. The RBI has formulated a
number of policies such as Export Bill Scheme, Rupee Export bill Scheme, Export
Interest Subsidy Scheme, etc.
The ECGC is another institution, which facilitate commercial banks to extend
credits to exporters by providing various types of covers for the risks (caused by any
political or economic reason) involved in export trade. The ECGC also guarantees
credits extended by banks to exporters.
Thus in India, commercial banks have played an important role in financing the
export trade. Other institutions except the EXIM Bank, which provides only term credit
to exporters in specific conditions, do not extend credit directly to exporters.
24.3.3.1 Export Credit
After the shipment is made, exporter sometimes will have to give credit to the
importer for an agreed period and he has to wait for the value till the expiry of the
credit period. Even if, no credit is allowed to importer, the capital of the exporter is
blocked till the documents reach the importer, he makes the payment and the amount
is collected by the exporter's bank. Thus post shipment credit is required by the
exporter during the intervening period between the shipment of goods and the receipt
of payment therefore. Thus in nutshell, an exporter needs credit or financial support at
two states: (a) At pre-shipment stage and (b) At post-shipment stage.
24.3.3.2 Pre-shipment finance or Packing Credit
Pre-shipment finance (Packing Credit) is needed by the exporter for his
working capital requirements between the time of the receipt of order from an
overseas buyer and the time of shipment to arrange for production procurement of
goods. The pre-shipment finance is required for short-term period ranging between
90 days to 180 days. Pre-shipment finance is of particular importance to small -
scale manufacturers and exporters who are short of finance to meet the necessary
expenditure involved in the production of goods for export.
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Pre-shipment credit is normally provided by the commercial banks. The bank

while advancing credit for this purpose, normally take the following factors into
consideration.
a) honesty, integrity and capital of ^e exporter
b) exporter's experience in the trade
c) security or guarantee offered
d) the margin and the rate of interest
e) bank's experiences about the exporter
f) standing of the foreign buyer
The bank generally asks for the security in the following forms:
i) Letter of credit received against the contract.
ii) Confirmed order as evidence of having received an exporter order,
iii) Relevant policy issued by the Export Credit and Guarantee Corporation.
iv) Personal bonds in case the banker knows the party.
If the exporter has to supply the goods to an export house, the manufacturer-
exporter has to supply the goods to an export house. The manufacturer exporter
should have to furnish a letter from the export house containing (a) the obl igation
of supplier, and (b) a certificate of export house that it is not itself claiming the pre -
shipment credit.
Amount of credit and rate of interest: The amount of loan depends upon the
f.o.b. value of goods and incentives thereof such as cash compensatory and duty
drawback etc. and generally conforms to the norm set up by the ECGC under the
Export Production Finance Guarantee Scheme i.e., 50 per cent over and above the
f.o.b. value of goods subject to a maximum of 100 per cent of the domestic cost of
the export product.
Pre-shipment Credit may be in the form of loan. Cash Credit and Over draft
and the amount provided normally covers to following costs:
a) Cost of purchase or production.
b) Cost of packing including special packing for export.
c) Internal transport cost,
d) Port, customs and shipping agent's charges.
e) Cost of special inspection or tests required by the importer.
f) Export duty or tax.
The packing credit period ranges from 90 days to 180 days depending upon
the period, which would enable the manufacture r to produce the goods, or
procuring the goods for export. In case of specified goods (where capital goods are
involved), the period may be extended for a further period of 45 days with the
permission of Reserve Bank of India.
The rate of interest charged at concessional rate for pre-shipment credit is 12
per cent for the normal period (180 days in case of carpets, medium and heavy
industry goods and construction contracts and 90 days for others) and for extended
period the rate would be 14.5% ).
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Revolving Credit: If an exporter is well known to the bank and the bank is fully
satisfied with his past performance, it usually grants revolving pre -shipment credit
in connection with successive deliveries. This implies the automatic grant of the
successive loan as soon as the previous loan is repaid subject to the production of
export documents required. Packing credit is adjusted out of post-shipment credit
sanctioned by the bank.
Pre-shipment credit may be provided under a letter of credit with a red clause
where advance is granted at the instance and therefore, on the responsibility of the
foreign bank establishing the credit.
In case, the goods are to be procured from a manufacturer or supplier, the
bank may open a letter of credit in favour of supplier(s) under what is known "back
to back letter of credit'. Export houses generally apply this procedure. In case of
consignment sales, banks usually establish a post-shipment credit account, which
is adjusted when the goods are sold abroad or the sale proceeds receive d.
24.3.3.3 Post-shipment Credit
Post-shipment finance requirement relates to exporter needs after the goods
are shipped till the actual payment therefore is received. Post-shipment credits are
also made available by the commercial banks against the security of approved
shipping documents tendered against letter of credit or otherwise. It is also
provided at concessional rates.
The banks normally finance the post-shipment credit in one of the following ways:
i) Negotiating the export bills under letter of credit.
ii) Discounting of bills drawn against shipment of goods - is usually done under
limits sanctioned to different customers, on the basis of their credit
worthiness, and
iii) Advancing credit against bills under collection.
Banks usually charge a commission according to the rates prescribed by the
Foreign Exchange Dealers' Association. The rate of interest charged is 12 per cent
up to 120 days and at rates prescribed, by the Reserve bank of India thereafter.
Repayment of loan starts when the payment from abroad is realised in
conformity with the terms of sale. It may take more time when the sale is done on
credit or against documents against acceptance. However, the policy of ECGC
covers against such risks.
Types of Post-shipment Credit: Post-shipment credit may be of three types
1. Short-term: The short-term loans are usually for a period of 6 months and
provided by commercial banks.
2. Medium-term: Loans generally offered for a period beyond 6 months and upto
five years may be termed as medium term loans. Such loan s are also provided
by the commercial banks in collaboration with the Export Import bank. Medium
term finance is provided for in case of durable consumer goods and light capital
goods.
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3. Long-term: Loans for a period beyond five years may be classified as long-term
loans. They are provided in case of export of capital goods and turnkey projects.
Banks enjoy certain benefits for advancing loans to exporters. These benefits are:
a) An interest subsidy of 1 ½ per cent or refinance of credit by the Export Import
bank or the Reserve bank of India.
b) Guarantees for loans advanced are provided by the Export Credit and
Guarantee Corporation. In such case ECGC covers substantial part of the risks
involved.
24.3.4 Finance for Exports on Deferred Payment Terms
Our exchange control regulations stipulate that payment for export should be
received in India within six months from the date of shipment. In the case of
Pakistan and Afghanistan, payment should be received within three months.
Contracts for export goods against payment to be received fully or partly after the
expiry of the stipulated period for the realisation of export proceeds, treated as
deferred payment export contract. Extension of loan term export credit has become
an accepted export market started an therefore provision has been made for the
extension of medium and long term credit to finance the sale of Indian capital goods
related services. Any such contract, in which payment is received after six -month
period, a specific permission should be obtained from Exchange Control
Department. The rate of interest charged for such advances is 9 per cent.
Any loan upto Rs. 1 crore for financing exports of capital goods is decided b;'
the commercial bank which can be refinanced by the Export Import bank, where
the contract exceeds Rs. 1 crore, the EXIM bank conducts export credit appraisal
assessing the nature of export, economic status of buyer and the importing
country, the period of repayment and the credit risks involved. The various criteria
adopted for evaluation of projects are:
a) Whether the project is justified on commercial grounds.
b) Whether the Indian exporter is capable of executing the contract.
c) Whether the foreign buyer can make the payment according to the payment
schedule as proposed, and
d) Whether the project (proposed) is economically viable.
The maximum limit of loan has not been fixed for such credit.
Security for deferred credit could be provided by :
i) Letters of credit
ii) Pronotes executed by government buyers or public sector undertakings
iii) Acceptable bank guarantees
iv) Bills duly accepted by banks
v) Any other security considered adequate.
Thus export credits t pre-shipment and post-shipment stages are provided
mainly by commercial banks. EXIM Bank also finances long term projects requiring
Rs. 1 crore or more.
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24.3.5 Methods of export financing

Exporting tends to be more demanding, financially, than selling.
Consignments are usually larger, lead times are longer and the risks are more
difficult to control.
Negotiating the terms of an export sale is a matter of balancing the risks and
the costs to you and your customer. At the same time, you may need to take into
account the problems of handling payment in foreign currencies. This lesson
focuses on: Negotiating the payment method, choosing the right financing optio n
and Dealing with foreign currencies.
24.3.5.1 Prudent Credit Practices
An experienced exporting firm extends credit cautiously. It evaluates new
customers with care and continuously monitors older accounts, Such a. firm may
wisely decide to decline a customer's request for open account credit if the risk is
too great and propose instead payment on delivery terms through a documentary
sight draft or irrevocable confirmed letter of credit or even payment in advance. On
the other hand, for a fully creditworthy customer, the experienced exporter may
decide to allow a month or two to pay, perhaps even on open account.
Other good credit practices include being aware of any unfavorable changes in
your customers' payment patterns, refraining from going beyond n ormal
commercial terms, and consulting with your international banker n how to cope
with unusual circumstances or in difficult markets. It is always advisable to check
a buyer's credit (even if safest payment methods are employed). A Department of
Commerce International Company Profile (ICP) provides useful information for
credit checks. For a fee, an ICP may be requested on foreign companies in many
countries. It contains financial information on the company and a discussion
regarding its size, capitalization, years in business, and other information such as
citing some U.S. companies that conduct business with the firm. The exporter can
then contact the U.S. companies to find out about their payment experience with
the foreign firm
ICPs are not available in every country, and in these instances, EACs can
provide a list of private credit reporting services. There are several U.S. companies
that compile financial information on foreign firms make it available to their
subscribers. Also, banks credit reports on foreign companies, either through their
own foreign branches or through a correspondent bank.
As being paid in full and on time is of the utmost concern to exporters, the
level of risk in extending credit is a major consideration. There are several ways in
which you can receive payment when selling your products abroad, depending on
how trustworthy you consider the buyer to be. Typically with domestic sales, if the
buyer has good credit, sales are made on open account; if nut, cash in advance is
required. For export sales, these ways are not the only common methods. Listed in
order from most secure for the exporter to the least secure, the basic methods of
payment are:
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i) Cash in advance;
ii) Documentary letter of credit;
iii) Documentary collection or draft;
iv) Open account; and
v) Other payment mechanisms, such as consignment sales
24.3.5.1.1 Cash in Advance
Receiving payment by cash in advance of the shipment might seem ideal. In
this situation, the exporter is relieved of collection problems and has immediate use
of the money. A wire transfer is commonly used and has the advantage of being
almost immediate. Payment by cheque may result in a collection delay of up to six
weeks. Therefore, this method may defeat the original intention of receiving
payment before shipment.
Many exporters accept credit cards in payment for exports of consumer and
other products, generally of a low dollar value, sold directly to the end user.
Domestic and international rules governing credit card transactions sometimes
differ, so U.S. merchants should contact their credit card processor for more
specific information. International credit card transactions are typically done by
telephone or fax. Due to the nature of these methods, exporters should be aware of
fraud. Merchants should determine the validity of transactions and obtain the
proper authorizations.
For the buyer, however, advance payment tends to create cash flow problems,
as well as increase risks. Furthermore, cash in advance is not as common in most
of the world as it is in the United States. Buyers are often concerned that the goods
may not be sent if payment is made in advance. Exporters that insist on this
method of payment as their sole method of doing business may find themselves
losing out to competitors who offer more flexible payment terms.
24.3.5.1.2 Documentary Letters of Credit and Documentary Drafts
Documentary letters of credit or documentary drafts are often used to protect
the interests of both buyer and seller. These two methods require that payment be
made based on the presentation of documents conveying the title and that specific
steps have been taken. Letters of credit and drafts can be paid immediately or at a
later date. Drafts that are paid upon presentation are called sight drafts. Drafts
that are to be paid at a later date, often after the buyer receives the goods, are
called time drafts or date drafts.
Since payment by these two methods is made on the basis of documents, all
terms of payment should be clearly specified in order to avoid confusion and delay.
For example, "net 30 days" should be specified as "30 days from acceptance."
Likewise, the currency of payment should be specified as "US $ 30,000."
International bankers can offer other suggestions.
Banks charge fees - based mainly on a percentage of the amount of payment
for handling letters of credit and smaller amounts for handling drafts. If fees
charged by both the foreign and U.S. banks are to be applied to the buyer's
account, this should be explicitly stated in all quotations and in the letter of cred it.
253
The exporter usually expects the buyer to pay the charges for the letter of
credit, but some buyers may not agree to this added cost. In such cases, the
exporter must either absorb the costs of the letter of credit or risk losing that
potential sale. Letters of credit for smaller amounts can be somewhat expensive
since fees can be high relative to the sale.
24.3.5.1.3 Letters of Credit
A letter of credit adds a bank's promise to pay the exporter to that of the
foreign buyer provided that the exporter has complied with all the terms and
conditions of the letter of credit. The foreign buyer applies for issuance of a letter of
credit from the buyer's bank to the exporter' bank and therefore is called the
applicant; the exporter is called the beneficiary.
Payment under a documentary letter of credit is based on documents, not on
the terms of sale or the physical condition of the goods. The letter of credit specifies
the documents that are required to be presented by the exporter, such as an ocean
bill of lading (original and several copies), consular invoice, draft, and an insurance
policy. The letter of credit also cont; as an expiration date. Before payment, the
bank responsible for making payment, verifies that all document conform to the'
letter of credit requirements. If not, the discrepancy must be resolved before
payment can be made and before the expiration date.
A letter of credit issued by a foreign bank is sometimes confirmed by a U.S.
bank. This confirmation means that the U.S. bank (the confirming bank), adds its
promise to pay to that of the foreign bank (the issuing bank). If a letters of credit is
not confirmed, it is advised through a U.S. bank and thus called an advised letter of
credit. U.S. exporters may wish to confirm letters of credit issu ed by foreign banks
if they are unfamiliar with the foreign banks or concerned about the political or
economic risk associated with the country in which the bank is located. An Export
Assistance Center or international banker can assist exporters in evaluating the
risks to determine what might be appropriate for specific export transactions.
A letter of credit may either be ^revocable and thus, unable to be changed
unless both parties agree; or revocable where either party may unilaterally make
changes. A revocable letter of credit is inadvisable as it carries many risks for the
exporter.
A change made to a letter of credit after it has been issued is called an
amendment. Banks also charge fees for this service. It should be specified in the
amendment if the exporter or the buyer will pay these charges. Every effort should
be made to get the letter of credit right the first time since these changes can be
time-consuming and expensive.
To expedite the receipt of funds, wire transfers may be used. Exporters should
consult with their international bankers about bank charges for such services. A
Typical Letter of Credit Transaction
Here are the typical steps of an irrevocable letter of credit that has been
confirmed by a U.S. bank:
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 After the exporter and buyer agree on the terms of a sale, the buyer arranges
for its bank to open a letter of credit that specifies the documents needed for
payment. The buyer determines which documents will be required.
The buyer's bank issues, or opens, its irrevocable letter of credi t includes all
instructions to the seller relating to the shipment.
1. The buyer's bank sends its irrevocable letter of credit to a U.S. bank and
requests confirmation. The exporter may request that a particular U.S. bank
be the confirming bank, or the foreign bank may select a U.S. correspondent
bank.
2. The U.S. bank prepares a letter of confirmation to forward to the exporter
along with the irrevocable letter of credit.
3. The exporter reviews carefully all conditions in the letter of credit. The
exporter's freight forwarder is contacted to make sure that the shipping date
can be met. If the exporter cannot comply with one or more of the
conditions, the customer is alerted at once.
4. The exporter arranges with the freight forwarder to deliver the goods to the
appropriate port or airport.
5. When the goods are loaded, the freight forwarder completes the necessary
documentation.
6. The exporter (or the freight forwarder) presents the documents, evidencing
full compliance with the letter of credit terms, to the U.S. bank.
7. The bank reviews the documents. If they are in order, the documents are
sent to the buyer's bank for review and then transmitted to the buyer.
8. The buyer (or the buyer's agent) uses the documents to claim the goods.
9. A draft, which accompanies the letter of credit, is paid by the buyer's bank
at the time specified or, if a time draft, may be discounted to the exporter's
bank at an earlier date.
24.3.5.2 Tips on Using a Letter of Credit
1. When preparing quotations for prospective customers, exporters should keep
in mind that banks pay only the amount specified in the letter of credit –
even if higher charges for shipping, insurance, or other factors are incurred
and documented.
2. Upon receiving a letter of credit, the exporter should carefully compare the
letter's terms with the terms of the exporter's pro forma quotation. This step
is extremely important, since the terms must be precisely met or the letter of
credit may be invalid and the exporter may not be paid. If meeting the terms
of the letter of credit is impossible or if any of the information is incorrect or
even misspelled, the exporter should contact the customer immediately and
ask for an amendment to the letter of credit.
3. The exporter must provide documentation showing that the goods were
shipped by the date specified in the letter of credit or the exporter may not
be paid. Exporters should check with their freight forwarders to make sure
that no unusual conditions may arise that would delay shipment.
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4. Documents must be presented by the date specified for the letter of credit to
be paid. Exporters should verify with their international bankers that there
would be sufficient time to present the letter of credit for payment.
5. Exporters may request that the letter of credit specify that partial shipments
and transshipment will be allowed. Specifying what will be allowed can
prevent unforeseen last minute problems.
24.3.5.3 Documentary Drafts
A draft, sometimes also called a bill of exchange, is analogous to a foreign
buyer's check. Like checks used in domestic commerce, drafts carry the risk that
they will be dishonored. However, in international commerce, title does not transfer
to the buyer until he pays the draft, or at least engages a legal undertaking that the
draft will be paid when due.
24.3.5.4 Sight Drafts
A sight draft is used when the exporter wishes to retain title to the shipment
until it reaches its destination and payment is made. Before the shipment can be
released to the buyer, the original ocean bill of lading (the document that evidences
title) must be properly endorsed by the buyer and surrendered to the carrier. It is
important to note that air waybills of lading, on the other hand, do not need to be
presented in order for the buyer to claim the goods. Hence, risk increases when a
sight draft is being used with an air shipment.
In actual practice, the ocean bill of lading is endorsed by the exporter and sent
via the exporter's bank to the buyer's bank. It is accompanied by the sight draft
invoices, and other supporting documents that are speci fied by either the buyer or
the buyer's country (e.g., packing lists, consular invoices, insurance certificates).
The foreign bank notifies the buyer when it has received these documents. As soon
as the draft is paid, the foreign bank turns over the bill of lading thereby enabling
the buyer to obtain the shipment.
There is still some risk when a sight draft is used to control transferring the
title of a shipment. The buyer's ability or willingness to pay might change from the
time the goods are shipped unti l the time the drafts are presented for payment;
there is no bank promise to pay standing behind the buyer's obligation.
Additionally, the policies of the importing country could also change. If the buyer
cannot or will not pay for and claim the goods, returning or disposing of the
products becomes the problem of the exporter.
24.3.5.5 Time Drafts and Date Drafts
A time draft is used when the exporter extends credit to the buyer. The draft
states that payment is due by a specific time after the buyer accepts the time draft
and receives the goods (e.g., 30 days after acceptance). By signing and writing
"accepted" on the draft, the buyer is formally obligated to pay within the stated
time. When this is done the time draft is then called a trade acceptance. It can be
kept by the exporter until maturity or sold to a bank at a discount for immediate
payment.
256
A date draft differs slightly from a time draft in that it specifies a date on which
payment is due, rather than a time period after the draft is accepted. When either a
sight draft or time draft is used, a buyer can delay payment by delaying acceptance
of the draft. A date draft can prevent this delay in payment though it still must be
accepted.
When a bank accepts a draft, it becomes an obligation of the ban k and thus, a
negotiable investment known as a banker's acceptance. A banker's acceptance can
also be sold to a bank at a discount for immediate payment.
24.3.5.5.1 Open Account
In a foreign transaction, an open account can be a convenient method of
payment if the buyer is well established, has a long and favorable payment record,
or has been thoroughly checked for creditworthiness. With an open account, the
exporter simply bills the customer, who is expected to pay under agreed terms at a
future date. Some of the largest firms abroad make purchases only on open
account.
However, there are risks to open account sales. The absence of documents and
banking channels might make it difficult to pursue the legal enforcement of claims.
The exporter might also have to pursue collection abroad, which can be difficult
and costly. Another problem is that receivables may be harder to finance, since
drafts or other evidence of indebtedness are unavailable. There are several ways to
reduce credit risk, through such means as export credit insurance and factoring.
Exporters contemplating a sale on open account terms should thoroughly
examine the political, economic, and commercial risks. They should also consult
with their bankers if financing will be needed for the transaction before issuing a
pro forma invoice to a buyer.
24.3.5.6 Other Payment Mechanisms
24.3.5.6.1 Consignment sales
International consignment sales follow the same basic procedures as in the
United States. The goods are shipped to a foreign distributor who sells them on
behalf of the exporter. The exporter retains title to the goods until they are sold, at
which point payment is sent to the exporter. The exporter has the greatest risk and
least control over the goods with this method. Additionally, recei ving payment may
take quite a while.
It is wise to consider risk insurance with international consignment sales. The
contract should clarify who is responsible for property risk insurance that will cover
the merchandise until it is sold and payment is rece ived. In addition, it may be
necessary to conduct a credit check on the foreign distributor.
24.3.5.6.2 Counter-trade
International counter-trade is a trade practice whereby one party accepts
goods, services, or other instruments of trade in partial or whole payment for its
products. This type of trade fulfills financial, marketing, or public policy objectives
257
of the trading parties. For example, a firm might trade by bartering because it or its
trading partner lacks foreign exchange.
Many U.S. exporters consider counter-trade a necessary cost of doing business
in markets where U.S. exports would otherwise not be sold. One consideration for
smaller firms is that this type of trade may cause cash flow problems. Therefore,
many smaller exporters do not consider this a^ option as they wish to do business
in U.S. dollars.
There are several types of counter-trade, including counter purchase and
barter. Counter purchase is quite common. In this situation, exporters agree to
purchase a quantity of goods from a coun try in exchange for that country's
purchase of the exporter's product. These goods are typically unrelated but have an
equivalent value. Another form of this practice is contractually linked, parallel trade
transactions that each involves a separate financ ial settlement. For example, a
counter-trade contract may provide that the U.S. exporter will be paid in a
convertible currency as long as the U.S. exporter (or another entity designated by
the exporter) agrees to purchase a related quantity of goods from the importing
country.
Barter arrangements in international commerce are not as common, because
the parties' needs for the goods of the other seldom coincide and because valuation
of the goods may be problematic. This type of counter-trade occurs without money
exchanging hands as merchandise is traded directly for other merchandise or
services. Barter might occur by swapping (one good for another) or by switching
(using a chain of buyers and sellers in different markets to barter).
U.S. exporters can take advantage of counter-trade opportunities by trading
through an intermediary with counter-trade expertise, such as an international
broker, an international bank, or an export management company. One drawback
to this type of exporting is that there are often higher transaction costs and greater
risks than with other kinds of export transactions.
The Department of Commerce can advise and assist U.S. exporters on counter-
trade requirements. The Financial Services and Counter-trade Division of ITA's
Office of Finance, monitors counter-trade trends, disseminates information
(including lists of potentially beneficial counter-trade opportunities), and provides
general assistance to enterprises seeking barter and counter-trade opportunities.
24.3.5.7 Foreign Currency
A buyer and a seller who are in different countries rarely use the same
currency. Payment is usually made in either the buyer's or the seller's currency or
in a third mutually agreed-upon currency.
One of the risks associated with foreign trade is the un certainty of the future
exchange rates. The relative value between the two currencies would change
between the time the deal is concluded and the time payment is received. If the
exporter is not properly protected, a devaluation or depreciation of the fo reign
currency could cause the exporter to lose money. For example, if the buyer has
258
agreed to pay 500,000 French francs for a shipment and the franc is valued at 20
cents, the seller would expect to receive US$100,000. If the franc later decreased in
value to be worth 19 US cents, payment under the new rate would be only
US$95,000, a loss of US$5,000 for the seller. On the other hand, if the foreign
currency increases in value the exporter would get a windfall in extra profits.
Nonetheless, most exporters are not interested in speculating on foreign exchange
fluctuations and prefer to avoid risks.
One of the simplest ways for a U.S. exporter to avoid this type of risk is to
quote prices and require payment in U.S. dollars. Then the burden of exchanging
currencies and risk are placed on the buyer. Exporters should also be aware if
there are problems with currency convertibility. Not all currencies are freely or
quickly converted into U.S. dollars. Fortunately, the U.S. dollar is widely accepted
as an international trading currency, and American firms can often secure payment
in dollars.
If the buyer asks to make payment in a foreign currency, the exporter should
consult an international banker before negotiating the sales contract. Banks can
offer advice on the foreign exchange risks that exist with a particular currency.
Some international banks can also help hedge against such a risk, by agreeing to
purchase the foreign currency at a fixed price in dollars, regardless of the
currencies value at the time the customer pays. Banks will normally charge a fee or
discount the transaction for this service. If this mechanism is used, the bank's fee
should be included in the price quotation.
24.3.5.8 Payment Problems
In international trade, problems involving bad de bts are more easily avoided
than rectified after they occur. Credit checks and the other methods that have been
discussed in this chapter can limit the risks. Nonetheless, just as in a company's
domestic business, exporters occasionally encounter problems with buyers who
default on their payment. When these problems occur in international trade,
obtaining payment can be both difficult and expensive. Even when the exporter has
insurance to cover commercial credit risks, a default by a buyer still requires the
time, effort, and cost of the exporter to collect a payment. The exporter must
exercise normal business prudence in exporting and exhaust all reasonable means
of obtaining payment before an insurance claim is honored. Even then there is
often a significant delay before the insurance payment is made.
The simplest (and least costly) solution to a payment problem is to contact and
negotiate with the customer. With patience, understanding, and flexibility, an
exporter can often resolve conflicts to the satisfaction of both sides.
This point is especially true when a simple misunderstanding or technical
problem is to blame and there is no question of bad faith. Even though the exporter
may be required to compromise on certain points - perhaps even on the price of the
committed goods - the company may save a valuable customer and profit in the
long run.
259
However, if negotiations fail and the sum involved is large enough to warrant
the effort, a company should obtain the assistance and advice of its bank, legal
counsel, and other qualified experts. Since arbitration is often faster and less
costly, this step is preferable to legal action if both parties can agree to take their
dispute to an arbitration agency. The International Chamber of Commerce handles
the majority of international arbitration and is usually acceptable to foreign
companies because it is not affiliated with any single country.
 Short-term sources of finance, Medium and long term sources of finance,
Export and import credit and finance system in India, Export credit, Pre -
shipment finance or packing credit, Post-shipment credit, Finance for
exports on deferred payment terms, Methods of export, financing, Prudent
credit practices, Cash in advance.
1. What are the ways and means to generate finance for exports in the nation
as well as in the global market?
2. What are the problems may come up in the process of negotiating the
payment method, choosing the right financing option and “waling with
foreign currencies?
3. Highlight the features of the following methods of export financing.
a) Cash in advance;
b) Documentary letter of credit;
c) Documentary collection or draft;
d) Open account; and
e) Other payment mechanisms, such as consignment sales.
24.6 SUMMARY
This chapter dealt with the detailed study of Short-term sources of finance,
Medium and long term sources of finance, Export and import credit and finance
system in India, Export credit, Pre-shipment finance or packing credit, Post-
shipment credit, Finance for exports on deferred payment terms, Methods of export,
financing, Prudent credit practices, Cash in advance, Documentary letters of
credit and documentary drafts, Letters of credit, Tips on using a letter of credit,
Documentary drafts, Sight drafts, Time drafts and date drafts, Open account,
Other payment mechanisms, consignment sales, Counter-trade, Foreign currency,
Payment problems.
1. What are the problems may come up in the process of negotiating the
payment method, choosing the right financing option and “waling with
foreign currencies?
1. Robert A. Mundell, International Economics, 1968, Macmillan & Co, New York.
260
24.9 ASSIGNMENTS
1. What are the short-term and long-term sources of finance?
2. Describe the concepts of buyer’s credit and supplier’s credit?
3. Explain pre-shipment and post shipment credit. What factors the banks
have to consider offering loans to the exporters?
4. Evaluate the export credit and financing system in India.
Edition, 1994.
2. Francis Cherunilam, International trade and export management, himalaya
Third Edition 2013.
3. M.C.Vaish & Sudama Singh, International Economics, sixth Edition, reprint
1995.
4. Dr. p. subba rao, International business, (text and cases, Third Edition,
himalaya public house), 2013.
1. Describe the concepts of buyer’s credit and supplier’s credit?
2. Explain pre-shipment and post shipment credit. What factors the banks
have to consider offering loans to the exporters?
24.12 KEY WORDS
 Export credit, Pre-shipment finance or packing credit, Post-shipment
credit, Finance for exports on deferred payment terms, Methods of export,
financing, Prudent credit practices, Cash in advance, Documentary letters
of credit and documentary drafts, Letters of credit, Tips on using a letter of
credit, Documentary drafts, Sight drafts, Time drafts and date drafts

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(G) International Business / First Year/ International Business / Lessons:1-24

Master of Business Administration (M.B.A.)

Prof. Dr. M. Nagarajan

Dr. C. Samuthrarajakumar Prof. Dr. S. Rajmohan

THE NATURE OF INTERNATIONAL TRADE

The Classical View

1.3.3 Pure and Monetary Theory of International Trade

1.7 TERMINAL EXERCISE

TERMS OF TRADE AND GAINS FROM INTERNATIONAL TRADE

Pr ice of Import  Volume of Import

2.3.2.3 Single Factoral and Double Factoral Terms of Trade

2.3.3 Determinants of Terms of Trade

2.3.4 Terms of Trade and Economic Development

v) The income elasticity of demand of advanced countries for poor co untries

1. What is mean t by terms of trade?

FREE TRADE VS PROTECTION

2. Utilisation of Economic Resources

3.10 REFERENCE BOOKS

TRADE AND COMMERCIAL POLICY: TARIFFS AND IMPORT QUOTAS

A tariff is a restrictive measure which seeks to control the quantity of import

transferred to producer should be deducted to find the society's net loss in

In conclusion, thus we may follow Kindleberger in saying that tariffs can

INTERNATIONAL TRADE ORGANISATIONS: INTERNATIONAL

employment and real income and to the development of the productive

assisted in the formulation of appropriate monetary, fiscal and exchange policies or

These international authorities went on giving financial help to the country on

4.3.8 Capital Resources

5.8 SUPPLEMENTARY MATERIALS

INTERNATIONAL TRADE ORGANISATION: GENERAL AGREEMENT

Round Year Venue Outcome

Negotiating Groups M ain Issues

2. Dunkel Draft: The Cornerstone of Negotiations

 Unlike the GATT, the WTO's approach is rule-based and time-bound.

7. To settle the trade-related disputes.

The WTO In Action

INTERNATIONAL TRADE ORGANISATION: UNITED NATIONS

7.3.2 Main Functions of UNCTAD

Out of these laudable recommendations of UNCTAD, nothing was, however,

The final resolution of the conference, therefore, stressed that a mutually

however, felt that the institution is becoming progressively marginalised and

RATE OF EXCHANGE AND FOREIGN EXCHANGE CONTROL

1. Fixed, Flexible and Floating Exchange Rates

repercussions of foreign trade endangering economic plans, e xchange control

(ii) Pegging operation

Therefore, the whole economic situation of foreign trade of a cuuntry must be

3. Robert A.Mundell, international economics, 1968, Macmillan & co, Newyork

BALANCE OF TRADE AND BALANCE OF PAYMENTS CURRENT

Balance of payments accounting of any county uses a double entry system of

currency devaluation, i.e., whether exports have increased to a considerable extent

To illustrate the point, a simple hypothetical account of a country's balance of

Services exported 100 Services imported 200

Unliateral receipts 200 Unilateral payments 100

Sub-Total 600 Sub-Total 800

II. Capital Transactions

Loan-term borrowings 200 Long-term lending 80

Short-term borrowings 100 short-term lending 60

Sale of gold / assets 100 Purchase of gold/ assets

Sub – total 400 Sub-total 190

Errors and Omission 10

Grand Total 1000 1000

For analytical purpose again, following Bo Sodersten, we may break the

Roman figures in the bracket indicate rows in Table 1