CU-MBA-SEM III-International Trade

8.3 SUMMARY  The government of India issues a foreign trade policy for a period of 5 years, which has different ideas that help India in increasing its standing in the market across the world.  The current Legal Framework of Foreign Trade Policy incorporates the provisions relating to the exchange of merchandise. All import and export transactions during the five years shall follow the provisions of FTP.  Central Government has notified Overseas Trade Policy under the authority of the Foreign Trade (Development & Regulation) Act 1992 to make India as an important player in the international trade market. Indian government as per the power conferred upon it reserves the right to make any amendment to any policy of FTP periodically and this policy supports both manufacturing and service sectors of trade.  The Export Promotion Councils have been established under the Indian Companies Act 1956, as non-governmental organizations. The Government of India, through the Ministries of Commerce and Industries, has established an integrated structure for servicing and promoting exports.  This Act provides information, guidance, and assistance to International exporters. These are firms that are specialized in a particular product or a group of products with their main objective being promotion of exports.  Indian merchandise exports schemes are major export promotion schemes by our country implemented by the Ministry of Commerce and Industry.  Duty Exemption Scheme: FTP allows exporters to import certain goods or products necessary for the manufacturing of goods and products to be exported.  Duty Free Import Authorization: Importers are permitted to import duty free shipments, and this exempts them for paying the basic custom duties.  Advance Authorization: According to the standard norms of duty free importing of goods the producing export goods will also be duty-free and only a minimum value addition charge of 15% is added.  EPCG Scheme: Criteria for exemption of custom duty while importing Capital Goods are in the stages of pre-production, post-production or production of goods. However, from the 13th of October 2017 vide notification, imported capital goods produce goods that needs to be exported get full exemption from Integrated Tax and Compensation Cess.  The Indian government has introduced the Foreign Trade Policy to make India a key player in the International trade market. Foreign Trade Policy is encouraged throughout the country. 8.4 KEYWORDS Subsidiaries: A company controlled by a holding company. CU IDOL SELF LEARNING MATERIAL (SLM) 101

Diversification: The process of allocating capital in a way that reduces the exposure to any one particular asset or risk. Foreign Direct Investment: This can be defined as a venture made by an organization or individual in one country into doing business in another country. FDI is introduced when an investor establishes global business operations or acquires global business assets in an overseas company. Advance Authorization: It is a scheme where the import of inputs will be allowed to be made duty free (wastage allowance included) if incorporated physically in a product to be exported. An export obligation is usually set as a condition for issuing Advance Authorization. Duty Drawback: It is the refund of customs duties, taxes and fees paid on imported items that are matched with subsequently exported or destroyed items. 8.5 LEARNING ACTIVITY Explore the policy provisions of current Foreign Trade Policy of India 2015 – 2020. 1. Suggest measures for boosting exports from India? ………………………………………………………………………………………………… ………………………………………………………………………………………………… 2. Discuss major exports from India. ………………………………………………………………………………………………… ………………………………………………………………………………………………… 8.6 UNIT END QUESTIONS A. Descriptive Short Questions 1. Compare global trade and domestic trade. 2. Explain the ideas of trade. 3. Explain the changes in factor supply and technology and trade? Quote an example. 4. Explain export promotion in India. 5. Discuss the Legal framework for foreign trade in India. Long Questions 1. Write about the implementation of economic reforms in India during 1990s. CU IDOL SELF LEARNING MATERIAL (SLM) 102

2. Describe foreign investments in India. Also explain why India should receive foreign investments. 3. Explain with an example India’s trade in service. 4. Highlight key points from recent economic survey of India. 5. Discuss prominent features of foreign trade in India. B. Multiple Choice Questions 1. International trade is between _____________. a) Trade happening between countries b) Trade happening between regions c) Trade happening between provinces d) Both (b) and (c) 2. What is the difference between International trade and domestic trade? a) Both have different management policies b) Immobility of factors c) Trade limits d) All of these 3. International Trade among countries is best if cost ratios of products are: a) Undetermined b) Decreasing c) Equal d) Different 4. Select the correct answer using the codes given below: 1. Differences in cost rations in the two trading countries 2. Terms of trade 3. Size of the country Options: a) 2 and 3 only b) 1 and 2 only c) 1 and 3 only d) 1, 2, and 3 5. A reason why countries conduct global trade is because: a) Some countries prefer to producing one thing b) Funds are not equally circulated to all the trading countries c) Trade increases opportunities to collect profits d) Interest rates vary in the trading countries Answers: CU IDOL SELF LEARNING MATERIAL (SLM) 103

1-(a), 2-(d), 3-(d), 4-(d), 5-(b) 8.7 REFERENCES Textbooks  Balassa, B., (1989). 'Outward Orientation', in H. Chenery and T.N. Srinivasan (eds.): Handbook of Development Economics, Vol. I, Amsterdam: Elsevier Science Publishers.  Arvis, Jean-François et. al . 2007. Connecting to Compete, Trade Logistics in the Global Economy, The Logistics Performance Index and Its Indicators. Reference Books  Banerjee, R., Sinha Roy, S. (2014). Human Capital, Technological Progress and Trade: What Explains India’s Long Run Growth. Journal of Asian Economics, 30  Bhagwati, J. (1982). Directly Unproductive, Profit-seeking (DUP) Activities. Journal of Political Economy, 90(5): 988-1002.  Elisa Gamberoni and Richard Newfarmer, “Trade Protection: Incipient but Worrisome Trends,” Trade Notes, International Trade Department, Washington, D.C: The World Bank. March 2, 2009.  The UN Millennium Project, Task Force on Trade, Trade for Development. 2005. London, England: Earthscan. Websites  https://www.tutorialspoint.com/  https://en.wikipedia.org/  https://carnegieendowment.org/ CU IDOL SELF LEARNING MATERIAL (SLM) 104

UNIT 9: INTERNATIONAL TRADE REGULATION STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 International Trade Regulation 9.2.1 History and Evolution of the WTO 9.2.2 The Major Functions Of WTO 9.2.3 Important Agreements 9.3.3 Dispute Settlement System of the WTO 9.3 Summary 9.4 Keywords 9.5 Learning Activity 9.6 Unit End Questions 9.7 References 9.0 LEARNING OBJECTIVES After studying this unit, student will be able to:  Explain WTO history and evolution.  Explain important agreements.  Explain Dispute settlement system of WTO. 9.1 INTRODUCTION During the 1990s, India’s trade policy regime was complex with various categories of import licenses, importers, and methods of importing. The regime’s details were contained in 19 Appendixes and spanned more than 200 pages. In the year 1990, the Import and Export Policy was replaced by the Export and Import (EXIM) Policy and it came to effect from the 1st of April 1992. To make the content simple for importers and exporters the content was reduced to about 20 pages. The new EXIM Policy listed a negative list of imported goods that are subjected to licensing where most consumer goods came under the topic of import licensing. CU IDOL SELF LEARNING MATERIAL (SLM) 105

India has many regional trade agreements (RTAs) and preferential trade agreements (PTAs) under its kitty and has notified 16 RTAs to the WTO up to date. The greatest number of RTAs were exchanged with neighbouring countries like Nepal, Bhutan, and Sri Lanka. India has a \"look east\" policy where we enter into RTAs with most Asian countries, including Thailand, Japan, Malaysia, and South Korea. Several RTAs have been negotiated between Latin American countries, like Chile and the Southern Common Market (MERCOSUR). Some of the major RTAs are:  South Asian Free Trade Agreement.  India-Korea Comprehensive Economic Partnership Agreement (India – Korea CEPA).  ASEAN-India Comprehensive Economic Co-operation Agreement (ASEAN – India CECA).  India-Japan Comprehensive Economic Partnership Agreement (India – Japan CEPA).  India-Malaysia CECA.  India-Sri Lanka Free Trade Agreement.  India-Singapore CEPA.  Indo-Nepal Treaty of Trade.  India-Bhutan Trade Agreement.  India-Afghanistan Preferential Trading Agreement.  Asia-Pacific Trade Agreement.  India-MERCOSUR PTA.  India-Chile PTA. India has declared four trade agreements recently which includes EU. These RTAs usually contain requirements for services and goods. Commitments on tariff liberalization depends on the negotiating country. Services play a major part in India's RTA policy. 9.2 INTERNATIONAL TRADE REGULATION Trade is regulated between two countries through bilateral treaties. After World War II, when free trade arose as a leading policy, multilateral treaties such as the GATT and World Trade Organization (WTO) became the principal regime for International trade regulation. World trade is as an arrangement or contract for importing and exporting goods between two or more countries that operate from their business in various parts of the world. The following are the five elements that make International trades happen  The contract for the sale of items. CU IDOL SELF LEARNING MATERIAL (SLM) 106

 The contract for carriage of items.  The contract for the insurance of the items.  The consent from the authorities to fulfil legal formalities for importing and exporting.  The payment mode that was agreed by the buyer and the seller. Nations source the services and products they lack in their country by importing or if they do not have in adequate quantities. International politics makes it possible for achieving, maintaining peace and promotion between International export and import trading partners or countries. 9.2.1 History and Evolution of the WTO The WTO was the successor to the General Agreement on Tariffs and Trade (GATT), which is an international organization in charge of all import and export supervision and resolving issues of global trade. The WTO deals with many things like the rules of trade between countries, negotiates and implements new trade agreements, and takes responsibility of policing member nation’s adherence to the WTO agreements, which are duly signed by most majority of the world’s trading nations and approved in their governments. The WTO is also responsible for the reviewing of the National trade policies and supervise trade policies through observation in International economic policy making. This WHO with 150 members is headquartered in Geneva, Switzerland and constitutes 95% of the total world trade. A ministerial conference meets every 2 years and governs WHO and it consists of a general council, that implements the conference’s policy decisions and is responsible for the day-to-day running and a director-general, who is selected by the ministerial conference. 9.2.2 The Major Functions of WTO  To facilitate and provide the framework to implement the aims of the multilateral Trade Agreements for implementation, administration and operation  To provide negotiations forum that concern multilateral trade relations  To manage the settling of clashes by considering the procedures and rules  To run the mechanism of trade review  To achieve higher success in international making of the policy, IMF and IBRD and make more agencies cooperate The global trade is impossible without WTO as it maintains peace and resolves clashes that rise within the participating nations and everyone needs to follow protocols. CU IDOL SELF LEARNING MATERIAL (SLM) 107

9.3.3 Essential agreements by WTO To conduct International trade in services, goods and intellectual property, WTO sets rules for all governments to follow inside the multilateral framework. There is transparency in the actions and rights of members are respected.  GATT 1994 The General Agreement on Tariffs and Trade (GATT) was introduced in 1948 and was the first of its kind in multilateral free trade agreement that happened between 23 nations. The members grew to 128 nations till the year 1995, and this agreement was replaced by the WTO. The main objective of GATT was to remove all non-tariff and tariff barriers for the ease of trade across borders. The GATT had three main provisions. i. All members must be treated equally when tariffs are considered, and they are stopped only if local producers are harmed in the process. ii. There are a few restrictions on trade and the exceptions are as follows: a. When there is a surplus in the government owned agricultural products b. When foreign exchange reserves are low it protects the payments c. To protect the new and young industries d. To protect and restrict trade of national security, copyrights, patents and morals of public iii. This was announced in in the year 1965 encouraging middle-class countries trade associations with the developed countries. Assets of GATT It encouraged global trade: Decreased tariffs made nations trade freely with one another and more nations joined this agreement and benefitted from it. No war zone: GATT encouraged greater trading and world peace among nations and announced the setting up of the European Union which prevented war between supporters of this agreement. Communication was improved: When nations reduced the clashes and war among members, they communicated better with each other. Common man learnt new foreign languages so they could sell their goods or products in the overseas market easily. Drawbacks of GATT Competition with domestic industries increases: Because of low tariffs the local marketplace is destroyed, and unemployment is increased. Governments are able to manipulate industries for their advantage and bring down smaller countries. Rich country that can afford to spend lots of CU IDOL SELF LEARNING MATERIAL (SLM) 108

money in subsidies, make them fit for global competition. For example, in the year 1973 in the Nixon Administration, the U.S. dollar of gold standard was reduced when compared to any other international currency in order to make U.S. exports profitable. Risks are more in the local home industries: After 1980, the trading in the world changed and trading services were allowed to grow in more than one country and ability. As an example, financial services had emerged as a winner and got globalized. International direct investment turned out to be very important and during the 2008 financial crisis U.S. central banks struggled to provide liquidity for credit that was frozen in the market. Governments surrender their control to global agreement: Nations lost their right to rule its people and they had to change come local laws to profit from International trade. India allowed several companies to produce generic versions of medical drugs without having to pay license fee and this helped the people of India to afford any type of medicines. Sometimes this was also a cause of conflicts between GATT countries.  Agreement on Agriculture (AOA): This is considered as an international treaty of the World Trade Organization (WTO). The enabled slow decrease of world trade distortions on subsidies.  Market Access: Tariff started reducing from 1995 from all NTBs at an average of 36 per cent and in 6 years for most advanced countries and UDCs were reduced with 24 per cent and 10 years for still developing countries.  Export Subsidies: For export subsidies 36 per cent in budgetary terms and 21 per cent in volume has been reduced during the six years. On the other side the developing countries have a reduced target from of 24 and 14 per cent respectively for a duration of 10 years.  Domestic Support: Subsidies are divided into two parts, on the basis of distortion. Trade of permissible level that has distorted subsidies are reduced. Here are a few exemptions i. Green Box: All government service programmes subsidies with minimally trade distorting are placed in this box and no reduction commitments were promised. ii. Blue Box: Subsidies who have continuation on subject and there is a limit on production are placed in this box. iii. White Box: Subsidy practices in developing nations for example agricultural input subsidies, and investment subsides are available to low-income farmers and where diversification is encouraged and there is a check for growing illegal narcotic produce. Agreement on Sanitary and Phyto-Sanitary (SPS) Measures CU IDOL SELF LEARNING MATERIAL (SLM) 109

This deals with all standard measure to protect animals, humans, and plants from risks related to animals, plants, and food stuffs in global trade market. Risks from the entry to the spread of pests, spreading of diseases and disease-causing organisms and or diseases carrying organisms. The main aim of this agreement is to provide contracting parties a right and authority to apply for anti-dumping measures. Only after deep investigations, ADA allows countries who are members to apply for anti-dumping measures on an independent basis. The anti-dumping investigation determines whether:  The product imported is dumped.  The product has injured the domestic industry.  The product has any link amid dumped imports and any domestic injury. If the investigation is approved, then the government can levy anti-dumping duty for all the imported products of any country or group of countries. Agreement on Technical Barriers to Trade (TBT) This ensures there is no issues in trading and there are no problems with the standards, technical regulations, and testing certification. It makes is mandatory for products to follow global agreed standards and also protects matters concerning animals, human, or plant life or well-being of nature. There are many aspects of technical regulations for a product like product characteristics, processing and terminology, production characteristics, symbols, packaging, and labelling. The TBT encourages nations to follow these global standards. It recognizes right of member countries to adopt these procedures  Requirements of national security.  Avoidance of false practices.  Safety of animals, humans, plant life and the wellness of nature. Agreement on Trade-related Investment Measures (TRIMs) This Agreement deals with rules that apply to the local regulations of an industrial policy while applying to global investors. From the year 1995, GATT’s agreement on TRIMs required to be eliminated or notified within a changeover period of two years for all developed countries, for a period of five years for all developing countries and for a period of seven years for the least developed countries or nations. CU IDOL SELF LEARNING MATERIAL (SLM) 110

An additional extension is upgraded for developing and least developed nations. These safeguard agreements which forbids them the usage of ‘grey-area measures’ and requires them to be notified and eliminated within a certain period of time. Agreement on Textiles and Clothing This eliminates the multi-fibre arrangement (MFA) after a transition period of ten years. This was terminated from January 1, 2005. General Agreement on Trade in Services (GATS) This is a multilateral, lawfully enforceable agreement that was introduced at first in the services trade. Many changes are taking place to include important public services. Agreement on Trade-Related Intellectual Property Rights (TRIPs) This Agreement sets enforceable international rules on copyrights, patents, and trademarks, to restrict access to life-saving medicines, and also allows the patenting of any animal or plant or, seeds, providing opportunities for bio-piracy and bio-diversity. Agreement on Government Procurement (GPA) The Agreement limits the purchases by the government like domestic content or any public development necessities. The objective of the GPA is to open government procurement markets mutually among its parties. The GPA comprises of two parts: the text of the Agreement and parties market access schedules of commitments. 9.3.4 Dispute Settlement System of the WTO Even the best International agreement is worthless if even one of the signatories fails to comply with the predefined obligations. WTO in the year 1995 has established the present system of dispute settlement during the Uruguay Round of Multilateral Trade Negotiations highlights the importance of compliance to Members and their commitments under the WTO Agreement. Settling such disputes in a structured and timely manner is very important and it helps to prevent the harmful effects of conflicts of International trade. The Dispute Settlement Understanding The understanding on rules and procedures governing the settlement of disputes which are referred to as the Dispute Settlement Understanding (DSU). The DSU, constitutes Annex 2 of the CU IDOL SELF LEARNING MATERIAL (SLM) 111

WTO Agreement, which sets out the procedures and rules that define today’s dispute settlement system. This is the result of the progress of rules, practices and procedures that are developed over almost half a century under the GATT 1947.  Functions, Objectives and Key Features of the Dispute Settlement System i. Providing Security and Predictability to the Multilateral Trading System WTO dispute settlement system provides safety and predictability to the multilateral trading system (Article 3.2 of the DSU). WTO as we know is trading of services and goods between associates and this trading is done by economic private operators and is not between states. When these market participants have long term dealings, they need steadiness and predictability in the laws governed by the country, guideline and regulations that they need for applying to their business activity. DSU focuses on providing fast, well-organized, reliable and rule-oriented system to end clashes. This was by abiding to the rules of the dispute settlement system in the trading system which are protected and predictable. If a member reports non-compliance with the WTO Agreement, then the system assures and provides a quick solution by an autonomous ruling which is promptly implemented, and the default member has to face the consequences. ii. Preserving the Rights and Obligations of WTO Members When a member is inconsistent with the responsibilities laid by in the WTO Agreement, a dispute arises, and that member can appeal to the trials and provisions of the dispute and challenge that measure. In case the dispute is not resolved the procedure is inspected by an autonomous body (includes a panel and the Appellate Body). Reimbursement and suspension of obligations are options available only as secondary and brief responses to a breach of the WTO Agreement (Article 3.7 of the DSU). Therefore, in case of any disputes the WTO Members have a right to challenge the WTO Agreement (Article 3.2 of the DSU). The decisions of the DSB panels, the Appellate Body, and arbitrations reflect and apply correctly the rights and obligations of the WTO Agreement (Articles 3.2 and 19.2 of the DSU). 9.3 SUMMARY  WTO sets rules for all governments to follow inside the multilateral framework and it monitors the guideless set for global trade. The WTO deals with many things like the rules of trade between countries, negotiates and implements new trade agreements, and it takes CU IDOL SELF LEARNING MATERIAL (SLM) 112

responsibility of policing member nation’s adherence to the WTO agreements, which are duly signed most majority of the world’s trading nations and approved in their governments.  The WTO tasks are responsible for the development of import and export trade between nations through the formation of impartial and unbiased competition, tariffs that are low, and reduces other trade barriers. The WTO agrees to basic agreements (total number 18), and numerous decisions, agreements, interpretations and documents regulating the trading.  The General Agreement on Tariffs and Trade (GATT) was introduced in 1948 and was the first of its kind multilateral free trade agreement that happened between 23 nations. The members grew to 128 nations till the year 1995, and this agreement was replaced by the WTO. The main objective of this GATT was to remove all non-tariff and tariff barriers for the ease of trade across borders.  The main objective being creating global trading rules and mechanisms of intervention to discuss the trade disputes.  The foundation of the WTO is to set up guidelines prepared by proper legal, procedural, and terminological issues of negotiations which are time consuming and very difficult. Once this form of document is prepared and agreed by the members, then they need to comply by it.  Technical regulations are managed by Governments or by legislative organizations of different countries. The focus is on consumer protection like safety, healthcare, hygiene, and protection from scams or any regulatory objectives. 9.4 KEYWORDS International Monetary Fund: This is an organization consisting of 190 countries, working towards to substitute the international financial collaboration, secure stability, facilitate the import and export trade, maintain the economic growth, promote employment and reduce the world poverty. International Bank for Reconstruction and Development: This is administered by the World Bank and it offers monetary policies and products advice to nations with an objective to reduce poverty and encourage the development of the country. Intellectual Property Rights: These are the rights given to persons over the creations of their minds. They give the maker a special right to use their creation and it is time bound. European Union: A political and economic union of 27 member states and its status is defined by the Treaty of European Union and the Treaty on the Functioning of the European Union. Multi-fibre Arrangement: The Multi-Fibre Arrangement is administered by the world trade in textiles and garments from the year 1974 till the year 1994, by imposing quotas on the quantity the developing nations could export from developed nations. CU IDOL SELF LEARNING MATERIAL (SLM) 113

9.5 LEARNING ACTIVITY 1. Study India’s International trade agreements and discuss its impact on different sectors of economy. …………………………………………………………………………………………………. …………………………………………………………………………………………………. 2. Discuss international Trade agreements with US and its impact on Economy. …………………………………………………………………………………………………. …………………………………………………………………………………………………. 9.6 UNIT END QUESTIONS A. Descriptive Short Questions 1. Discuss importance of WTO in Global Trade? 2. Explain dispute settlement system in WTO. 3. Explain the objectives of the General Agreement on services Trade. 4. Explain Agreement on Trade Related Intellectual Property Rights. 5. Explain evolution of WTO. Long Questions 1. Explain India’s regional trade agreements? 2. Explain General Agreement on Tariffs and Trade (GATT). 3. Explain major functions of WTO. 4. Explain Agreement on Agriculture. 5. Explain Agreement on Sanitary and Phyto-Sanitary. B. Multiple Choice Questions 1. The WTO created in 1995 as a replacement to the ______________. a) GATT b) AOA c) TRIPs d) None of these 2. __________ became the main regime for regulating International trade. a) World Trade Organization b) International monetary Fund c) United Nations CU IDOL SELF LEARNING MATERIAL (SLM) 114

d) None of these 3. WTO provides the framework for the_____________ of the multilateral Trade Agreements. a) Implementation b) Administration c) Operation d) All of these 4. GATT stands for _______________. a) The General Agreement on Tariffs and Trade b) The General Agreement on Trust and Trade c) The General Agreement on Transport and Trade d) The General Agreement on Transport and Travel 5. AOA stands for _______________, a) Agreement on Agriculture b) Agreement on Art c) Agreement on Aerospace d) None of these Answers: 1-(a), 2-(a), 3-(d), 4-(a), 5-(a) 9.7 REFERENCES Textbooks  Bhagwati, J., and Robert Hudec, eds. 1996. Fair Trade and Harmonization: Prerequisites for Free Trade? Cambridge, Mass.: MIT Press.  Gulati, Ashok. 1999. “Agriculture and the New Trade Agenda in the WTO 2000 Negotiations: Interests and Options for India.” Delhi: Institute for Economic Growth. Reference Books  Hertel, T. W., and W. Martin. 2001. “Liberalizing Agriculture and Manufactures in a Millenium Round: Implications for Developing Countries.” In Bernard Hoekman and W. Martin, eds., Developing Countries and the WTO. Oxford, U.K.: Blackwell.  Mattoo, Aaditya, and M. Olarreaga. 2000. “Liberalizing Mode 4 under the GATS: A Proposed Solution.” Policy Research Working Paper 2373. World Bank, Policy Research Department, Washington, D.C.  Mattoo, Aaditya, and L. Schuknecht. 2000. “Trade Policies for Electronic Commerce.” Policy Research Working Paper 2380. World Bank, Policy Research Department, Washington, D.C.  Mattoo, Aaditya, and A. Subramanian. 1998. “Regulatory Autonomy and Multilateral Disciplines”. CU IDOL SELF LEARNING MATERIAL (SLM) 115

Websites  https://www.businessmanagementideas.com/  https://www.wto.org/english/  https://www.thebalance.com/ CU IDOL SELF LEARNING MATERIAL (SLM) 116

UNIT 10: FINANCE AND INTERNATIONAL TRADE STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 Finance and International Trade 10.3 Trade Finance 10.3.1 Understanding Payment Mechanism 10.3.2 Documentation in International Trade 10.3.3 Financing Techniques 10.3.4 Export Promotion Schemes 10.3.5 Export and Import Finance 10.4 Summary 10.5 Keywords 10.6 Learning Activity 10.7 Unit End Questions 10.8 References 10.0 LEARNING OBJECTIVES After studying this unit, student will be able to:  Explain Financing of International Trade.  Describe Payment mechanism.  Explain Documentation in International Trade.  Explain Financing Techniques. 10.1 INTRODUCTION Finance related trading activities have certain distinct features which are different from the usual customer related work done by organizations. The organizations offering the products must look out for sellers of their products as they provide raw materials for self-production and related CU IDOL SELF LEARNING MATERIAL (SLM) 117

services. One such example can be of Purchase and Procuring section of Trident Company whose work is to examine if each supplying company is capable of producing goods as per required specifics of production and timely delivery, in order to continue working with the organization in its current processes as well as enable operational measures to make the product competitive. The changes made should be affordable and specific to its payment modes. In order to understand the techniques of Exim finance, firstly the understanding of the relations of the exporting and importing companies must be established. There are three categories of relations namely unidentifiable and not known, unidentifiably recognized and identifiable. Let us take an example, an importing company who has not done business with Trident company was known as unidentifiable and not known. When coming to such cases, both the parties should come into a contract in detail, specifying the necessities and requirements of the contractual order. Here, the company is required to provide protective cover with regards to importing company making partial payments regarding the same. Any company importing with the organization in the past will not be treated as unidentifiably recognized. In such cases, both the parties will be entering in an agreement with specifications with reference to shipping or service provided may not give clarity while defining the same. An importing unit of an organization based in other country would become an identifiable which is also termed as trading between firms. This happens as both the firms are part of the same MNC, commonly practiced method would be to have business between the two without any payment terms mentioned. It is not applicable in all cases. However, in best of cases, it may be in the benefit of the organization so as to provide protection against any governmental or inter country disruptions in order to finish the trading entries. 10.2 FINANCE AND INTERNATIONAL TRADE For a transaction to take place, there should be importing company buying from different nation as well as exporting company selling products, there is no forex available. Whereas the settlement can be done with the help of banks involving offsetting debt against the other. A company involved in performing payment related activities via the banks. However, irrespective of the methods which are used, the whole effect will be in terms of reduction of forex in the bank of the domestic country and vice versa. Let us say for example, a client requests his home bank for a draft service, eventually when it receives payment due by the supplying company, the home bank will receive the payment for the same. CU IDOL SELF LEARNING MATERIAL (SLM) 118

In the transaction, home bank will be receiving money in home currency when draft comes for payment at forex level during issuance. The payment mechanism will restock the forex by purchasing from its clients usually the exporting company, laming with respect to banks in different countries, hence there is a possibility of insufficiency of the home currencies in the forex market. 10.3 TRADE FINANCE There are certain finance related tools which the company uses so as to make trading and commerce feasible worldwide. The whole process is called financing through trading. It enables in making process for importing and exporting easier in order to carryout business. It is a wider term as it includes financial offerings available from banking organizations which makes trading possible. Key Points on Trade Finance  Trading in financing includes tools and techniques which organizations use in commercial activities.  It is made easy for importing and exporting companies to carry out transactions in trading.  .Financing through trade will help in reduction of risk when global trading is carried out by the growing needs of the exporting and importing company. Working of Trade Finance The functioning of financing done through introduction of outside party enabled measures to forgo the risks associated with it. It will provide the exporting company with revenues with reference to necessary trading policy on the other hand importing company giving capital to take care of fulfilling trading policy. There are several organizations which take part in various business-related activities are as follows:  Banking organizations  Trading financing organizations  Importing and exporting companies  Insurance companies  Export related credit agency and providing services Trading in finance can be easily differentiated from traditional finance which is also called issuing of credit. Generally, finance can be managed for handling of cash related activities but finance in trading need not be indicative of individual’s inappropriate funds or managing cash. CU IDOL SELF LEARNING MATERIAL (SLM) 119

Whereas trading in finances are used to provide protection against trade related risks which may include fluctuating currencies, unstable political environment, issuance of non-paying or lack of credit in terms of any parties related in the business transaction. Mentioned below are some of the finance tools involved in trading in finance  Giving the procedures for granting money from banks to help imports as well as exports.  Providing letter of granting credit in order to have risk reduction in world trading as buying bank needs to provide certain payment to the selling company for the shipment of products. In this way, the interests of the purchaser will be covered, as the dues will not get settled if not specified in the letters of credit terms and conditions. It is the duty of both parties involved to keep up the contract that they have entered into.  Another method on which organization make the payment is on proportion of bills received which is also known as factor method.  Providing capital based on exports or amount of current worth is given to the people doing exports. Insuring the goods will be applicable when shipment and delivering of products is taking place. It will provide protection to the exporting company if there is non-paying of dues done by purchaser. However, worldwide trading is present for decades, business financing tools are just the next step forward. The increasing use of business finance has led to development of world market. How Trade Financing Reduces Risk Business finance will enable risk reduction in international arena by combining the needs of trading people. Essentially, an exporting person will like the payment to made for the goods sent so that any kind of risks are avoided as the importing person takes the products and does not pay, there is payment risk involved. If both parties agree on terms of paying, the importing person can refuse the shipping of products. The most commonly applied answer to the situation is when the importing company’s banker needs to grant LC to the exporting company’s banker for providing for paying only when export company shows necessary evidence to show that such a shipment happened like for example bills of receiving.LC provides the issuer banker with suitable evidence that the export company which has carried out shipment has adhered to the contractual terms and the realization can be done by the exporting company. CU IDOL SELF LEARNING MATERIAL (SLM) 120

In LC, the buying banker is supposing to take onus of credit on payment by the selling company. The buying banker will have to enable the honouring of the trading entry. Business Financing will help both the parties in transacting with one another and thus helping in carrying out trading. .Note: Business finance helps customize different finance related answers according to the circumstances where various products can be simultaneously used together for it to go properly. Other Benefits to Trade Finance In terms of reduction of the risk involved in not paying and not receiving of products, business finance has become a creditable technique in organizations for improvement of the effectiveness as well as to bring earnings to the organization. Improves Cash Flow and Efficiency of Operations Business financing is helping organizations to receive finance to enable growth of companies as well as extending monetary benefits in several examples. It is allowing organizations to receive cash in lieu of bills received in the factor method. An LC will help both parties get into trading and help reducing of unpaid goods. This will enable inflows of cash so as to improve trading and thereby help buying banker give the dues to the importing company for the product shipment. Similarly, the business financing enables lesser delaying in paying and shipping allowed between the parties in order to keep business going and plan accordingly. The other way is to use trading of products as security to fund for organization’s development. Increased Revenue and Earnings Business finance takes organizations to show growth in earnings through increasing the growth of organization through trading. Let’s take the example of a US based organization that can get trading agreement with foreign companies which might not be able to do production of the products required for the transaction. Hence, it is with the help of export related finance which ensures various government as well as private players to help the exporting company finish transaction. This may end up in US based organization to get opportunities which will not have given answers that business finance is looking for. Reduce the Risk of Financial Hardship If business finance was non-existent, the organization will be lagging in terms of paying and losing customers or supplying companies which has greater implications for the organizations. In terms of enabling options like amount of loan given, bills received and turning day to day credit, CU IDOL SELF LEARNING MATERIAL (SLM) 121

such methods will help organizations worldwide as well as providing help to the organizations during finance crisis. 10.3.1 Understanding Payment Mechanism Establishing of the worldwide trading techniques which is involving other disciplines like Financial Management, Operations, International Tax and many more. It is the duty of the managing authority to realize the need of being part of the process. With every activity of trade, there is transactional activity as well as returns. Whenever an importing is carried out say in the United States, the supplying company will be given money in the terms of money which he was supposed to be paid. Usually in trading entries are done having dollars as the base currency. In other cases, like European transactions, the European Dollar is used for transactions. Whenever there is exporting carried out from the United States sent to different nation, the exporting company will get his dues from the consumer at the end. While exporting is carried out, there are various types of trading and exporting entries based on natural activity and terms of payment. Advance Payment Whenever a new consumer comes and gives an order to the exporting company, the payment terms must require making paying beforehand in order to implement the invoice. The procedure will continue for some time until there is trust built mutually among the parties and they are knowing one another. Letters of Credit For doing exporting, if the client at the opposite end and knowing that he is not as financially not sound, in such a case there will be insistence of the LC to be issued to the consumer proceeding ahead of shipment of products. In many such cases, extension of credit is done. In cases where high net value of business is involved with regular consumers, exporting companies will be preferring to pay via LC. While doing business with consumer, the exporting company will go for checking his noteworthy credit ratings with the banker to ascertain the authentication and credentials of the clients. As a procedure, big MNC’s nowadays ask for credentials of ratings as per norms. CU IDOL SELF LEARNING MATERIAL (SLM) 122

Bill of Exchange of Documentary Drafts Whenever a relationship is established between both parties as well as consumer credentials are known from past documents, exporting company will take decision to grant extension of giving credit as well as accepting dues based on bills of exchange. The whole procedure is known as Document Drafting. They are categorized into two as Sighting Drafting as well as Timely Drafting. Open or Ongoing Account Whenever large number of trading activities is carried out with exporting and importing company and there is continuous exporting carried out on every day, the exporting company will send goods based on purchasing intent as well as importing company to grant payment on the specific dates prescribed. This is the normal method adapted by MNC’s and large companies as there are sufficiently large sales from different nations while having dealings with many sellers regularly. For such instances, the determination of the yearly sales supplying done by each seller, issuing a PO as well as review of the time schedule of payments. There is a standard paying mechanism for date specific selling as a worldwide feature. There is a payment procedure which is carried out as per trading contracts. Other Types of Trade and Related Payment Mechanisms Apart from the various methods regarding paying techniques which are basic to exporting and importing, various methods on work-based framework on which paying mechanisms are based. Consignment Sale There must be agreement signed between the parties which carry out distribution throughout the world, holding raw materials as well as selling products. In circumstances such as these, the seller will not be owning his goods as the powers of owning will be with the exporting company. In such a case, the seller will be an interlink to sell the goods and receive cash in return from the exporting company and getting paid on basis of commission charged. Wherever there is a contractual agreement, there is no requirement for paying in a particular manner. Counter Trade / Counter Purchase / Barter Trade Similarly, in other cases where trade contracts are known as countering trading agreements, where amount of exporting is connected to purchasing back different materials from importing country. Paying mechanism might have goods and service-related activities. This variation in trading becomes requirement when deals are carried out with other nations that include insufficient money. In such cases different type of world bartering is used, a practice uncommon to use. CU IDOL SELF LEARNING MATERIAL (SLM) 123

10.3.2 Documentation in International Trade For trading carried worldwide, a differentiation in time is present prior to receiving products from the exporting company to the importing company and there is a settlement mechanism for the same. For protection of interests of people involved in trading, the risks involved, and the documentation required. Some of them are given as under. These are listed below:  Bills for exchanging goods  Bills for collection  LC  Originality certification  Inspecting certification  Packaging weigh listing  Consulting bill  Insuring documentation All of them stated above have been described in detail: Bill of Exchange There is a contract between the parties for paying given amount of payment at a given specific dates. Every trading contract will generate its billing for the same. The billing is done by exporting company and sending to importing company. Only when the bills are accepted and return is done to the parties, it becomes legally binding to settle claims as well as billing is the legal proof of the contractual agreement to do settlement, Hence, bills of exchanging goods is a negotiating tool. While exporting will be done with holding the bills till it gets matured, then transferring to different parties through endorsing or by getting the bill discounting done with the banker. The advantages of getting discounted rate are that the exporting company is paid well in advance before the paying due date. Therefore, the exporting company is the holding company, next is the party with whom the bill is made and finally billing at discounted rate with the banker. They are categorized into various kinds which are mentioned below:  Bankers’ Acceptance (Bank Bill) CU IDOL SELF LEARNING MATERIAL (SLM) 124

This type of bills are taken care by the banker. Whenever the exporting company is drawing bills on the importing one, thereby getting acceptance of the importer. The whole process is known as Banker Approval or accepting. The banker is earning fees for Banking Approval as its taking risks on crediting.  Clean Bill As bills of exchange do not have any documentation generation required for trading in world market, it is therefore known as a Clear or clean bills.  Documentary Bill While bills of exchanging is usually have documentation generated through trading transactions is known as documentation bills. These will have commercial invoicing, bills of lading, titling warranties, LC, Originality of products certification, certification of inspecting, packaging weight list, declaration by the exporter, trade contracts and insuring documentation. The warranties of titles are given by the exporting company to importing company, the exporting company self attests the products title as good, thereby the transferring is legally right. Hence, the billings carried out in world trade are bills for documentation.  Sight Bill It is a bill of exchange that can be presented by the holder of the bill to the importer for payment on any day before the maturity date. It is also called a Demand bill.  Usance Bill These bills of exchanges are given to the person holding the bills to the other for providing paying mechanism at the date of maturing. If it is given that the importing company needs to make payment after a given period for example thirty days, the importing company has to pay the amount on the due dates. This bill is known as Time billing or Tenor billing. While calculating purposes of the specific period, it can be done in two ways a. When the time appearing on the invoice is taken as specific period also called postdate time bill. b. When the specific period is based on acceptance date by importing company it will be known as post sighting time bill.  Documents against Acceptance (D/A) Bill Bills of exchange happen only when documentation is realized on accepting the bill. It represents ‘Documents against Acceptance’. When there is a mention that documents CU IDOL SELF LEARNING MATERIAL (SLM) 125

relating to shipping of products, it will be given to the importing company. Can also be known as D/A bills. When the importing company is accepting the bill and sending it to the banker, it performs a quick check on documentation before releasing shipping details to the importing company (such as Lading bills, Originality certificate of products, certificate of inspection, packaging weight listing, exporting declaring, original purchase invoice and Insurance documentation).After completing the documentation, the rightful owning will become of the importing company. The person in possession of the bill is likely to face unpaid risks, as the owning authority of the products has gone to the importing company even before paying done for the products.  Documents against Payment (DIP) Bill When the bills specifically contain details of the products which needed to be given to the importing company only when payment is done for the same, also known as document against payments. There is no risk associated with unpayment. Illustration A time bill is given mentioning the date as 10th of April which was later accepted on 15th of April as well as becoming payable only after 30 days. When can the bill become due for payment if (a)a post-dated usance bill(b)a post sighted time bill(c)if the billing is based upon discounting with banker, who will become the holding person of the bill and who will be providing for paying on the date due? Solution a. The date for issuing the post-dated time bill will be on 10th May(thirty days after the exchange date). b. The due date for the post sighted time bill will be 15TH May(thirty days after the date of exchange). c. The banker will be the holding authority of the bill. Bill of Lading The Bills of Lading is a contractual agreement between the transporting company as well as the exporting company to send the products to the specified person at a mentioned place in a particular country. As far as world trading is concerned, the B/L is a necessary requirement with the characteristics mentioned below:  When transportation of products is done, essential requirement where titling of products is required. CU IDOL SELF LEARNING MATERIAL (SLM) 126

 It will be the receipts of products.  It is a receipt given by organisation doing shipment which has to be shipped to the importing company.  Provides description of the products which have been given for transporting, the port’s name where the goods were transported and port’s name on which they were delivered.  Person who is in possession of the B/L will be given the title of the products. In such times, it will go through the banker to the person who will be taking custody of the products from the shipping company where the products coming from one country to another. Mentioned below are the various categories of B/L  Clean Bill: When the products got by the shipment organisation, are in proper condition, the shipping company has not added noting in the bill. It is called the clean bill of lading.  Foul Bill: When the products are accepted in bad state, the shipping organisation gives the necessary notes on the given note. It is also called the Dirty B/L. The bankers on both sides of transaction to reject it at any time.  On Board Bill Whenever the organisation doing shipment will be issuing a bill only when the products will be put onto the ship. Also known as on boarding.  Received for Shipment Bill: Straight Bill: Otherwise known as the consignment B/L. Here the particular person who will be getting the products delivery. It is un-negotiating as well as non-transferable by endorsing and delivering. Hence, just possessing the bill by some party other than mentioned. The bill states clearly there must be shipment details proof with whoever has to get the products at the end.  Order Bill: When the exporting company will not be in possession of the product title. Hence, the B/L implies that products are delivered to exporting company .The mentioned products title will not get passed to the importing company until the bill is gone through endorsement by the holding person(might be exporting individual, the shipment organisation or the banker depending on the situation).Also called the ordering bills of lading. In this the shipment organisation will be notifying the importing the products have reached the mentioned place. The bills have to show in order to get the custody of goods.  Port-to-Port Bill When the products are taken by multiple modes of transport till, they have reached the importing nation, the carriers will be in charge for safely delivering the products to the given place. The bills given to the carrier first, will be held responsible for transactions by other transport companies. Airway Bill: The bill mentioned is which uses transportation done by air transport as well as it is now negotiating where the titles can’t be transferred. Differentiation as far as bills of exchange as well as bills of lading. The bills of exchange start from the exporting from the importing country. CU IDOL SELF LEARNING MATERIAL (SLM) 127

If the bills get accepted, there is legal obligation towards paying according to the terms mentioned. Whereas bills of lading start from transporting company. This is a documentary evidence given for receiving products. Hence, it will become legally binding for the transporting company till the product reaches the specified destination. Letter of Credit (L/C) A letter of credit is a permission issued by the import banker as acting on behalf of the person importing so that the beneficiary is paid. There is involvement of four types of people involved in the process-person importing, importing banker, exporting person and the exporting banker. The letter of credit shows the net worth of the importing banker over the person by protecting and covering all necessary risks in the process. The various forms of letters of credit are mentioned: i. Clean L/C: The issuer banker has agreed towards paying the exporting individual as per the mentioned terms provided in the letters of credit without giving a mention about the transactions. Hence it is termed as a cleaner letter of credit. ii. Documentary L/C: The issuer banker will be realising dues on the condition of submission of documentary evidence. Hence it is known as documenting letters of credit. iii. Fixed L/C: Letters of credit limitation will come down when the bill is given by the exporting company for paying. It can be known as not rotating letters of credit. Let us take for example A letter of credit was to open for about 1 million rupees, Bills of exchange were for Rs 4 lakhs which was given by the banker to the exporting company, hence the Letters of credit will become Rs 6 Lakhs. iv. Revolving L/C: The letters of credit which re getting renewal after paying the issuer banker. Continuing the illustration of having opening letters of credit to the amount of 1 million rupees, the BOE was for Rs 4 lakhs which the banker gave to the exporting person, the letters of credit are the same as before. This process is called restoring. Freshly opened letters of credit is taken for the entire amount with time period and amount of utilities mentioned. This becomes advantage to the banker as there is no costing incurred on making changes, known as non-rotating letters of credit. v. Confirmed L/C: The issuer banker will promise making payments to the exporting company covered by letters of credit, the exporting company will require his banker to give collateral in order to get back the money. Once the letters of credit get confirmation, is where the advisory banker gives a separate guarantee to provide for paying. vi. Unconfirmed L/C The letters of credit will not have any specifications for collateral by the advisory banker. CU IDOL SELF LEARNING MATERIAL (SLM) 128

vii. Transferable L/C The exporting company tells his bank to endorse payments to different beneficiaries and these specifics are mentioned in the letters of credit. It is also known as transferable letters of credit. viii. Non-Transferable L/C When the exporting company is unable to give benefits to somebody, without mentioning about it, there is assumed to be not transferable. As and when the exporting banker starts issuance of different letters of credit in lieu of new people benefiting. It is called as countervail crediting. ix. Revocable L/C When the issuer banker has got cancellation rights or amending rights at any particular time after issuance, not providing information regarding cancelling, known as revocable letters of credit. There is always a risks associated with cancelling and it is considered not safe, hence used rarely in business. x. Irrevocable L/C When the issuer banker is unable to make changes post issuance, but the person involved wants to introduce the required, will be known as irrevocable letters of credit. In the publication of the International Chambers of Commerce providing for mentioning of letters of credit in the year 1933.There are standard rules and procedures used worldwide. The regulations came into being in July 2007.Hence when the letters of credit were given to be standard, structuring was required to make it transferability and conformity. Soon it gained popularity as methods of time specific financing. Illustration 2 The importing banker will be opening the letters of credit for ten million rupees. The person importing goods has made two bills of exchange one of which is Rs three million while the other is for seven million rupees. What will be the limitations if the bills are given as(a)Nonrotating letters of credit(b)rotating letters of credit? Solution (a) Nonrotating letters of credit: Whenever the exporting person gives BOE for three million rupees and issuer makes the payment, the limitation gets reduction of seven million rupees. So, when the other BOE is shown and gets payment, the limitation becomes nil. (b)Rotating letters of credit-If the exporting person gives the BOE worth three million rupees, the issuer banker is making payments for limitations till ten million rupees. Certificate of Origin of Goods (COO) It is a tool which provides the originity of the products in the given nation. World Trade Organization has provided the rules for the same. Whenever the importing nation bans the importing of products from specified nations. In some cases, the importing nation will impose bans on specified nations. When there is no mentioning in the banning list, the certification of CU IDOL SELF LEARNING MATERIAL (SLM) 129

originity will help in getting products from the nation. In the same way, the importing nation will provide reductions of import duties from certain nations. It is a documentary evidence for eligibility of import duties as it has come from specific country. It is divided into two parts  Whenever a preferred certification is extending benefits on import duties. The nations which are developed uses these to provide duties to growing nations. Let’s say for instance, India has got trading agreements with Singapore which makes certification eligibility criteria in order to get reductions.  In the not preferring certification, there are no import duty benefits, as only giving the origin of place. It becomes for trade agreement to provide mentioning regarding the process of the issuance, the valid time period and the care taken by the issuer nation for issuing those certificates of origins. A treaty was signed between the countries in Latin American world, so as to bring improvement between the nations. India is having FTA with conglomerate of the Latin American countries which contains conditions with reference to the above:  Certificate of origin is applicable for more than one country performing imports.  The basic certificates of origin will be part of documentary evidence given to authorities at customs for imports signing authority.  As far as issuing and controlling is concerned, it is the respective government offices where the signing persons are available. Certificate of Originity will be issued for not more than five complete working days post submission of the request.  The validity is limited to a specific time period of 180 days post its issuing. Inspection Certificate It is a certificate given by an autonomous institution or inspecting organization, providing that products have undergone inspection and product quality, specifics and terms of contract is adhered. Packing List As product availability is in packaged form, the whole list will mention the product details in each one of them. Consular Invoice It is the bill which provides description about the products moved. The exporting company checks for the originality of the bills in front of the consulate of the importing nation which is present in exporting nation. Insurance Document CU IDOL SELF LEARNING MATERIAL (SLM) 130

In order to protect the products from losses or damages from the time of leaving the exporting company’s storehouse till it reaches the importing company’s storehouse, the products should be covered under insurance. The insurance coverage will provide specifications about the values covered, risks involved, the coverage of insurance from the date specified from which it comes into force and form of money used in the documentation. The mentioned specifications with respect to the products covered in the documents should be in conformity to related documentation for instance bills and invoices. 10.3.3 Financing Techniques In order to become successful in the international trade and increase sales against competition, exporting companies will give product offering to increase sales with respect to different paying mechanisms. In order to get payment in full and timely completion of the export sales, the most suitable mechanism will be taken to reduce the risks of payments including the wants of the person buying. It has been described in the Figure 10.1 ,mentioned below in which the five different ways of making payments are shown. It is either beforehand or at time of negotiating, one must look into which is the most appropriate figure suitable for the consumer. Figure 10.1 : Payment Risk Diagram Methods of Payment in International Trade Cash-in-Advance In order to take care of the terms of payment, the exporting company will be able to forego the risks of crediting as the payments for the same have been taken prior to the transferring of title of the products. In world selling, wired transferring and use of cards are the methods in common use for cash available in advance are some of the available alternatives available to the exporting company. During the growth period of the technology, net transferring became similar option for CU IDOL SELF LEARNING MATERIAL (SLM) 131

smaller business dealings. Hence, requesting for paying beforehand supposedly was the less preferred available alternative for the person buying as it managed to make unnecessary inflows of cash. International buying began to get affected as the products were not being delivered as paying in advance was being made. Hence, the exporting companies who insisted on paying through this method as the only means of carrying out work were losing market to people offering good payment terms. Letters of Credit Letter of credit is among the securing tools that are used in worldwide trading. It is a promissory note made in lieu of the person buying, the settlement will be released as per the requirements given in the letters of credit have been met as well as checked through verification of the necessary documentation. It will establish to giving credit related information for paying the banker to provide the necessary services. It provides useful details with regard to the overseas person, which is essentially not easy to get, in order to verify the credit worth with the buying company’s banker abroad. Letters of credit will protect the person if there is non-payment arising due to delay in shipping time of the products. Documentary Collections It is a business entry where the exporting company gives the responsibility of paying for sales to the banker (remitter banker), when the documentation is sent to person’s banker (collection banker),the necessary conditions are satisfied for reimbursement of money once the verification of documents is done. The process starts when the funding is received by the importing company, after which it goes through the bankers involved for documentation verification and finally the amount will be remitted to the account of the exporting company. Documentary collections have drafting done which needs importing company to pay for the face value of the amount mentioned at a given date. It provides information about the documentation necessary for the transferring of the title of the products. The bankers act as intermediaries for the customers, there is no physical verification done as well as there are lesser options in case of non-payment. Documentary collections are lesser in cost when compared to letters of credit. Open Account When the sales of the products take place when the shipment and delivery happen before remittance of payment, in selling worldwide it is carried out within a period of around thirty, sixty and ninety days. Such transactions are called open accounts. It is beneficial options to the importing company as far as costing and inflow of cash is concerned, similarly it can prove to be the riskiest for the exportin company. Due to the intense competition in the markets, the people buying insist exporting company to have an open account as giving credit extension is most CU IDOL SELF LEARNING MATERIAL (SLM) 132

common among buyers as well as sellers situated in another country. There are some exporting companies who are not willing to open account have chances of losing sales to the other competing organizations. They can provide the necessary terms for the account, at the same time during which there is forgoing of risks due to non-payment when more than one trading and finance tools are taken in the book. While offering the terms and conditions, the exporting company will take necessary precautions to safeguard the interests by having coverage through insurance. Consignment In trading terms, it is a variant of the above where the payments are given to the exporting company soon after the sales of goods are done by the distributing company for the consumer. In the trade terms, contract which the distribution company gets, takes care and makes sales to the exporting company who has the title of the products that are selling in the market. It means that exporting procedures are usually risk taking as there is no payment made as the products are available abroad, but they are with agents who are present in that country. It makes the products competitive as it is based on efficient and effective product delivery. Sales on it will help in reduction of the costs of keeping and management of stock. Only way to be successful is to have partnership with reputed and worthy logistical organization. A suitable cover must be in place to have coverage of the products in consignment in progress as well those with the distribution company in order to forego the risks of non-paying. 10.3.4 Export Promotion Schemes  The International Trading Policy contains the export related promotion methods to give boosting to exporting within India with the purpose to strike off the deficiencies related to costing involving providing a better platform. The Commerce ministry along with the Central Government is the decision-making authority with regards to trading in the country. Its head office is in Delhi. The authorized persons are needed for executing the policies laid down by the Central Government.  .Role of the DGFT The Directorate of Trading in India comes under the purview of The Commerce Ministry of the Central Government. It has its regional office situated across the country as well as in the respective states which are necessarily important for different exporting activities, issuing Exim codes, granting of licence and issuing of certificates. Ministry of Commerce is the central controller of the trading activities, issuance of various books, giving notices, notifying, providing government orders, giving answers, amendment of public policy and instructing timely completion of the allocated schemes.  Role of the CBIC CU IDOL SELF LEARNING MATERIAL (SLM) 133

It comes under the purview of the Finance ministry and Revenue Department which comes under the Central Government. It is the primary organization working towards implementation of the different programmes designed by Government of India along with timely implementing as per Trading Policies. Customs authorities have a much more important part in the activities coming under the same purview.  Midterm Export Promotion Schemes i. The semi-annual reviewing process of the EXIM policy from the year 2015 to 2020 was held on December 5,2017 in order to make corrections in the global trading picture as well as to inculcate the necessary changes in the tax slabs along with GST implementation from July 1st, 2017.The updated schemes will be applicable from 5th December 2017 under Commerce ministry of the Central Government. The details regarding the schemes are given below Exports from India Schemes The objectives of the scheme provided which is in the form of Duty-free scripts given to exporting companies for lowering costs and increasing sales. It has been divided into two main categories of Merchandising as well as servicing. a. Merchandise Exports from India Scheme (MEIS) In this particular scheme, the exporting of goods notified with the codes, the listed markets given under Appendix 3B in the Procedural Handbook will get awarded under the scripts, granting them free transferability, these scripts are taken at the export value in forex markets at a specific rewarding rate of around two to five percent. In such scripts, they are used for paying of custom duties for importing of products, paying taxes on local procuring and paying of duty in cases of defaults. The inputs are taken from the importing them under transferability. The schemes are available to units under Special Economic Zones. Exporting the products notification on a Free on Board value given as 25,000Rs per order, delivered by courier company as well as by any post offices situated abroad which uses e- commerce which will be given benefits using values of exporting which should be confined to the amount limited per order, then in such a case the Free on board price will the same as Rs 25,000.The rewarding given under the Central Government schemes makes exporting competitive with world markets such as Europe, USA and Africa. These three nations have been given coverage under the notification. b. Service Exports from India Scheme (SEIS) In order to provide encouragement in the exports of service which are notified in India. The list of these providers of given services in the given Appendix 3E are available for free transferability on the duties scrips at the rate of five percent of the CU IDOL SELF LEARNING MATERIAL (SLM) 134

money given. The rates applicable along with the services are provided in the Appendix. c. Duty Exemption & Remission Schemes The scheme will enable no import duties on inputs for producing the exporting raw materials with certain obligations as inputs replenishing. The scheme include: d. Advance Authorization Scheme For the schemes application, duties are waived off on all raw materials, that are to be included in the exporting good( after wastage allowance)with a value-add portion of 15 percentage. An Advance Authorizing will be given for the raw materials as their inputs so as to get the final products along with the document of self-declaring as per the said rules and regulations. The validity is for a period of one year so as to help in importing, can be extended to eighteen months in order to fulfil the obligations from the issue date. It must be given to the exporting person or company associated with the same. e. Advance Authorization for annual requirement Persons exporting having past records in the last two years will come under the above. It will be given for products given under the norms specified, it will not be available in the case of rules specified below of para4.03(b)(ii) It will not be given with respect to the SION norms, in which the inputs show under Appendix 4-J. In order to get entitled in terms of value of the importing products must not be more than three hundred percent of the value given physically or the value of these products which will become deemed in the last finance year or amount of Rs 1 crore, the higher amongst the three shall be taken. f. Import of Mandatory Spares Importing of spare parts that are needed to be provided with the finished goods will be given no duty up to the limit of ten percentage of the value provided under authorizing. g. Actual User Condition for Advance Authorisation This kind of material being authorized under AA is subjected to the term of the actual user. It will not be applicable even if the obligations are met. But the person holding it will get the option to disposing of goods produced out of the inputs having no duties only when its obligations are completed. h. Re-import of exported goods under Duty Exemption / Remission scheme Products coming under this category can be imported back subject to the same conditions as quoted previously by the Revenue department. The authorized person CU IDOL SELF LEARNING MATERIAL (SLM) 135

will re-inform the regional authorities about the order within a month starting from day of re-importing. Duty Free Import Authorization (DFIA) Scheme Under the scheme, there is allowing of no duty imports for raw materials. Apart from that, importing oil as well as catalyst put to use in making goods or using them in various processes of exporting the goods will be given permission. For importing natural sugar, the above scheme will apply. It is allowed for all importing of raw materials with less value added of as low as twenty percent It will get exemption from paying the base customs duties. It will be given on after export basis for the goods coming under the coverage of notification. The regional authorities will be issuing the authorization for a valid period of one year from the issuance date. There shall be no more clarifications done by respective authorities. With the issuance of the authorization, regional authorities will state the features, qualities, technical and specifics with respect to respective raw materials as importing. Schemes for Exports of Gems and Jewellery Exporting of precious gems and ornaments will attract duty free imports apart from Tax integration and Compensating duty which comes under the sections3(7) as well as 3(9) for manufacturing of exporting goods, under tariffs acts. They will be allowing to do exporting done in cutting, polishing of stones which are cut and uncut, value wise precious as well as semi-precious for reimporting done under government procedures. In such cases, the re-exporting company will get the duties back as mentioned in regulations. The re-importing of precious items like gems and jewels. The exporting is given go-ahead even for rejected items under para 4.91of the Procedural manual. Exporting and importing of precious stones and jewels are done on an order basis, based on the rules and regulations of the procedural handbook. Export promotion of capital goods (EPCG) Scheme CU IDOL SELF LEARNING MATERIAL (SLM) 136

Main purpose of the scheme is to help in the importing of bulk products for production of good quality products along with services attached to improve and make Indian production competitive.  Zero duty EPCG scheme Whenever there is importing done of huge products with no customs duties are given for the production of products and their services to improve the exporting competitive nature within India. Importing under the scheme will get subjected to exporting restrictions equal to about duties which have been levied in the past few years. Simultaneously, the authority holder will get huge products from various sources with respect to the given provision of the para 5.07.It will allow independent production of these goods at twenty-five percentage lesser than obligations for the exports. The importing of these products is notified by the CBIT as well as custom authorities in the above. The validity of importing is for time period of one and half years starting from the issuance date of authorizing. Revalidating is not allowed. In cases where the tariff is payable in terms of cash on the importing, the application of taxing and the tariffs will not be considered for computing the amount in hand savings of the amount not utilized. Importing of such goods are limited in case of importing specific items permitted only after the head committees approval. When the products are supposed to come under the purview of authorizing requirement for exporting will be allowed issuing the exporting authority provided by Exim bank. Facilitation Committee at DGFT Headquarters.  Post Export EPCG Duty Credit Scrip Scheme The facility is given to exporting company which is intending to carry out importing of huge products on the basis of complete settlement of the expenses on cash basis while opting the above. The base duties are liable to be paid and will be reimbursed by way of transferring the scrips. Each organization listed will have the capital of at least eighty-five percentage mentioned. Whereas an annual averaging charge remains the same. The duties shall be reimbursed as proportion of the order fulfilment. The rules for utilizing the said scrip which comes under the Chap 3,will apply only after exporting is carried out on the same. The rules and regulations of the act will apply in consistency with mentioned conditions. CU IDOL SELF LEARNING MATERIAL (SLM) 137

EOU/EHTP/STP & BTP Schemes The exporting companies which are carrying out producing of the products and their service, can have units under the umbrella of the schemes mentioned above, where the procuring, assembling, making, producing, redoing, research and development, software technology usage, Argo based industries and many such units can come up. The exception to the above are the trading companies. The main purpose is to have forex revenues, attracting business opportunities for exports and jobs creation. The established firm can be exporting any kind of products or service barring those not allowed. There can be exporting of gold ornaments and semi-finished jewels. The jewels have specification of not more than eight carats up to limitation of twenty-two will be allowed. It can be simple or having stud done in it. The importing and production as well as getting them from storehouses of Directories of Treasury and Accounts, holding exhibitions throughout the country where all the products including ones with huge investments are allowed. Once the products which come under the goods and services tax, will be paying the taxes as well as tariffs. The refunding of the taxes once submitted will be given to the person supplying with respect to the terms and conditions specifically mentioned under the guidelines. These units will get the products coming under the Schedule Fourth of the Excise Act of 1944,for non-paying of duties. Products put to use as seconds having no time limitation either having or not having to pay duties. Each established production factory should fetch some earnings. Apart from that, where high valuations are performed, the provisions of Appendices 6 Sub section B are applied. The revenues are clubbed in five yearly blocks started commencing of producing of the goods. If the organization is unable to reach the required earnings as governmental restrictions are applied, in such cases the five yearly blocks can be liable to be extended. Moreover, when the units are not able to reach the targets in unfavourable conditions, any other factor impacting its running, the blocks can be liable for extension up to one or more years depending on the cases. In order to set up the production unit, the approvals of the boards and committees are required. Deemed Exports CU IDOL SELF LEARNING MATERIAL (SLM) 138

In simple terms, they are those products which were about to be sent for exporting but somehow it remains within the country and the returns are got in either in home country currency or foreign currency. Such products must be made in the home country. Keeping the goods and services tax in mind, it comes under the Act based on the Committees referring. It becomes liable to get advantages which are mentioned based on rules and regulations. The exporting comes under the eligibility of the given perks as far as producing and selling the products, which will be termed as deemed only when the specific conditions are met. i. Prior authorizing for using annually. ii. Exporting withdrawal to perform binary code decimal. iii. Refunding of the annual duties on products mentioned in the Excise Act by which eligibility comes under the above categories with no deductions. The supplying of products gets eligibility for refunding under the Paragraph 7 sub section 3(c) of the trade policy, given the condition that person is not availing any benefits of refunds. The goods supplied can classify for eligibility as per the given provision. The refunding of the taking back when the base duties of product imputing are given for producing and supplying in the above categories will be got on brands rating based on the submitting of documentary evidence in lieu of making payments of those tariffs. Penal Action In cases, claiming can be done only when there is unproper presentation of ideas, apart from additions which effect recovering amount mentioned in the provision, the claimant is eligible to get penalized for the actions, as per mentioning in foreign trading regulations given by the government. Transitional Provision The goods are said to be deemed only when it is mentioned in the policy coming into effect from 30th June 2017, when supplies are made after the date, new provisions come into effect. Conclusion The revenues generated from forex are the factor for economic growth. To improve the influx within the nation, the central Government is prioritizing to do boosting of exporting of products and its related services in order to improve producing for the exporting promoting mechanisms which comes in the trading policies. Hence, whenever a reviewing of the policies to get it as per CU IDOL SELF LEARNING MATERIAL (SLM) 139

GST act, the scheme for exporting will become useful for the manufacturing companies including small and medium enterprises, resulting in growing of exporting units and also improving forex revenues within the nation. 10.3.5 Export and Import Finance All the economies in the world are coming together for international trading through NAFTA, Atlantic region and trade agreements with different nations. International trading can be done with openly having exchange of ideas at world level by utilizing human resources for societal benefits. The governments around the world have been given accessibility for connectivity around the world, getting into worldwide marketplaces needs imports as well as exports of services. The ports around the world are hubs of lots of activities, for example California is among the busy ports followed by Texas and South Carolina. .These hubs will have become empty towns with proper trading activities. Here is when the financing of the imports and exports takes place. The go to guide will give up breakups about every minor details about commercial financing and how commercial banks will become helpful in the activity. 10.3.5 Export and Import Finance The financial solutions provided can become a coverage for the differences between products arrived and payments done. There are third parties in order to give earnings for products so as to retain the cash inflows between the two parties, the logistics involved such as monetary realization and credit reviews. The ensuring of paying helps in establishing relations between parties involved in trade, helpful in building a strong international trade arena. The Exim financing will be able to become a separate entity in the balance sheet to forgo the risks. Import and export trade financing As the words implies, paying for setting off expenditures along with providing for shipment from one country to another. It includes variety of tariffs, expenses, freighting and many more fall under the same. It is tool provided to give cash in advance in return for products. CU IDOL SELF LEARNING MATERIAL (SLM) 140

The whole process is involved of only three different persons namely the person who will be getting the goods, the seller organization as well as lender who provides money. After getting into the agreement, both the sides can involve the lender who will make money available in order to move to the next step. The loans will decide on the allocation of the funding. It is the duty of the lending authority to look into proper use of the funds. In the case of import finance, the banker will be paying the principal amount along with interest. Different nations have different policy mechanisms in place in order to make sure the funds are used in accordance with the currencies. Prior approvals are necessary to carry out the Exim finance. When the financing is carried out before it starts, loans are made available, and it gets approved based on his creditworthiness. In case of selling, the production of goods takes place in advance, though the funds are utilized for different uses like transport and storing. In order to get loans, there should be good credit rating and a strong goodwill in the market. When the business is going for expansion in operating procedures, both the parties are benefited by the improvement in the purchasing power parity. The solutions will provide a good market, bringing improvements in the movement on supply chains as well as keeping relations intact. The designing of the financing is carried out in such a way to become flexible as well as up to the benchmark. There is availability of loans made on the domestic money so as to bring down time. The future predictions along with parties involved will help in getting loans and going apart from bills and payments, running business in full capacity or giving less than standard, all these cases will benefit from the import and export financing which has been mentioned in the Accessing of Commercial Finance. 10.4 SUMMARY  Trading is taking place with different kinds of persons: unidentifiable not known, unidentifiable and identified recognized persons.  The trading conducted in between identified recognized persons does not cover any contracts or funding. Trading is carried out with unidentifiable persons which need agreements as well as sources of funding like LC.  In so many years, the given requirements and regulations have been set in the trading in financing field. Basics of the trade rest in the established relationship arising among the CU IDOL SELF LEARNING MATERIAL (SLM) 141

different types of documentation such as Letters of Credit, The Drafting and Bills of Lading.  Differences in any of the three like Letters of Credit, Drafting and Bills of Lading will give different techniques to bring in these entries.  The most common entries, which uses the three are put in use during finance is needed, the importing company will apply and receive the LC from the banker.  The LC, the banker will replace its amount given to the importing company and will be liable to make payments on the surety of documentation with the banker.  It relies on the agreement made with the banker but not on the importing company. Exporting company will conduct the shipping on the invoice based on the B/L which is attached to the order of payment received from the banker and when the documents get verified apart from others, it goes through the banker.  When the documentation has been done properly, the importing banker will be making payments for the drafts such as sighting drafts as well as accepting the drafts like timed drafts. In the time drafting, the banker will promise to make payment sometime in the near future. In this stage, the import banker requires name of the products coming with the B/L and then sending the products to the importing company with respect to paying now or later in near future.  .In case of using the sighting draft, the exporting company will be given payment immediately. In case of using timely drafting, the exporting company will get the received drafting, after getting banking approval and then receiving it again from the banker. The export will be held on the bank’s approval till it gets matured or sales is carried out at discounting in the finance markets. 10.5 KEYWORDS Letters of Credit: Letters of credit can be called as document giving crediting/banker crediting and also undertaken letters. It is paying procedure which is applicable in world trading so as to give guarantees of creditworthiness from the banker to the exporting company. Cash Flow: It means the net amount of liquid money putting into and getting it outside the area during the particular firm at a given time period. It will be either less or more. More liquidity means getting cash into the business. CU IDOL SELF LEARNING MATERIAL (SLM) 142

Bill of Exchange: BOE is a legal contract given to a person at a particular worth of money to different persons at a set preset period of time or demands made by the parties. It is always applicable in trading worldwide. Cash-in-Advance: It is a paying method applicable in trading contracts. It needs the parties involved to make cash payments at the time of receiving the shipping order. GST:GST is a type of taxation reform which is applicable on the supplying of products and its services. It is a detailed, multilevel, origin-based taxation policy. Deferred payment: It can be termed as the functions of funds which are used in a particular way in order to create the value for the borrowing by letting products and their related services to get now and make payment later. 10.6 LEARNING ACTIVITY The Toyota motor’s company is buying the cars from its subsidiary called Nakatomi in the United States, selling those cars to the consumers in the country. Ecohires is the clients, a car renting company buying vehicles from it in a bulk price. Its payments become due to the company in about a period of six monthly. It will buy two lakh dollars by making payments of forty thousand dollars, remaining which becomes payable excluding interest that will be charged. The accepting fees is charged at two percent and sales are three percent annually discounted given to Wells Fargos Bank. 1. Give the annual total cost incurred to the company. ………………..………………………………………………………………………… ……………………………………………………………………….…………………. 2. Provide the net inflows in the cash along with the down payments. .………………………………………………………………….…….……………… ………………………………………………………………………………………… 10.7 UNIT END QUESTIONS A. Descriptive Short Questions 1. Describe in detail World trade finances? 2. Which types of organizations are apt for imports and exports financing? CU IDOL SELF LEARNING MATERIAL (SLM) 143

3. Explain the meaning of the terms import finance as well as export finance? Give the procedure in detail? 4. Describe in detail various payment methods used in trading internationally? 5. Explain about the documents used in world trade. Long Questions 1. How do importing mechanisms work and how are the costs taken care of while importing? 2. How will you call the economic policy of China? Explain in detail? 3. Name some of India’s trading nations with which trading is carried on at international level? 4. Merchandising is a kind of bankruptcy theory which does not have any place in today’s trading world. Is the statement true? Explain? 5. Give the benefits of doing trading in products? B. Multiple Choice Questions 1. The purpose of business finance is bringing outside parties in daily business activities so as to get away with________. a) Settlement risks, supplying risks b) Importing risk, exporting risks c) Supplying risks, Creation of needs risks d) None of the these 2. Finance can used for managing_________________. a) Providing the net worth of the business b) Current balances c) Both the these d) None of the these 3. -----------opening is needed by the consumer is required ahead of shipment of products. a) Letters of Credit L/C CU IDOL SELF LEARNING MATERIAL (SLM) 144

b) Letters for cash c) Letters of currencies d) None of the these 4. During sales throughout the world ___________________ is the common method applicable to the exporting companies. a) Wired transfer b) Use of credit card c) Both of these d) None of the these 5. -------------------involves getting drafts which needs the importing company to pay the given value at a said or on a particular day. a) D/C’s b) Destinations collection c) Departing Collection d) None of the these Answers: 1-(a), 2-(c), 3-(a), 4-(c), 5-(a) 10.8 REFERENCES Textbooks  Carbaugh, Robert J. 1995, International Economics, South-Western.  Cross, Frank B. 1996, Paradoxical Perils of the Precautionary Principle,‖ Revision 851, Washington and Lee Home Page, Volume 3.  Health Alert, Earth Guardian, QS, 1999, New Principle to Protect Human Health and the Environment. Reference Books  De, Prabir. \"Assessing Barriers to Trade in Services in India: An Empirical Investigation.\" Journal of Economic Integration. CU IDOL SELF LEARNING MATERIAL (SLM) 145

Website  https://www.export-u.com  https://www.termpaperwarehouse.com/  https://www.britannica.com/ CU IDOL SELF LEARNING MATERIAL (SLM) 146

UNIT 11: THE RICARDIAN THEORY STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 The Ricardian Theory 11.2.1 Comparative Advantage & the Pure Exchange Model of Trade 11.2.2 Ricardian Model Assumptions 11.2.3 Relationship between Prices and Wages 11.2.4 Deriving the Autarky Terms of Trade 11.3 Summary 11.4 Keywords 11.5 Learning Activity 11.6 Unit End Questions 11.7 References 11.0 LEARNING OBJECTIVES After studying this unit, student will be able to:  Explain Ricardian theory of comparative advantage.  Explain pure exchange model of trade.  Discuss Ricardian model assumptions.  Explain relationship between prices and wages. 11.1 INTRODUCTION Somewhere in the range of 1500 and 1750 most financial specialists pushed Mercantilism which advanced the possibility of global exchange to procure bullion by running an exchange surplus with different nations. Ricardo tested that the reason for exchange was just to collect gold or silver. With \"comparative advantage\" Ricardo contended for industry specialization and streamlined commerce. He proposed that industry specialization joined with free global CU IDOL SELF LEARNING MATERIAL (SLM) 147

exchange consistently creates positive outcomes. This hypothesis developed the idea of absolute advantage. Ricardo proposed that there is shared public profit by profession regardless of whether one nation is more serious in each region than its exchanging partner and that a country should gather assets just in businesses where it has a similar benefit, that is in those enterprises wherein it has the best productivity of creation comparative with its own elective employments of assets, instead of ventures where it holds a serious edge contrasted with rival countries. Ricardo proposed that public ventures which were, truth be told, somewhat productive and insignificantly universally serious ought to be discarded for the businesses that utilized restricted assets – the supposition that being that ensuing monetary development because of preferred asset use would more over counterbalance any short-run financial disengagement which would come about because of shutting somewhat beneficial and possibly serious public enterprises. It tends to be contended that world yield would increment when the standard of comparative advantage is applied by nations to figure out what products and ventures, they ought to work in delivering. Comparative advantage is a term related with nineteenth Century English financial expert David Ricardo. Ricardo thought about what products and ventures nations should create and recommended that they ought to practice by designating their scant assets to deliver merchandise and enterprises for which they have a near cost advantage. There are two kinds of cost advantage – total, and relative. Absolute advantage implies being more gainful or cost-proficient than another country while similar benefit identifies with how much profitable or cost productive one nation is than another. 11.2 THE RICARDIAN THEORY Ricardian equivalence is an economic theory that says that financing government spending out of current assessments or future expenses (and current deficiencies) will equivalent affect the general economy. This implies that endeavours to invigorate an economy by expanding obligation financed government spending won't be viable on the grounds that financial backers and purchasers comprehend that the obligation will in the long run must be paid for as future assessments. The hypothesis contends that individuals will save dependent on their assumption for expanded future duties to be exacted to take care of the obligation, and that this will counterbalance the expansion in total interest from the expanded government spending. This additionally infers that Keynesian financial approach will for the most part be insufficient at boosting monetary yield and development. CU IDOL SELF LEARNING MATERIAL (SLM) 148

This hypothesis was created by David Ricardo in the mid nineteenth century and later was explained upon by Harvard teacher Robert Barro. Thus, Ricardian equality is otherwise called the Barro-Ricardo comparability recommendation. Key Takeaways  Ricardian identicalness keeps up that administration shortage spending is comparable to spending out of current duties.  Because citizens will save to pay the normal future expenses, this will in general balance the macroeconomic impacts of expanded government spending.  This hypothesis has been broadly deciphered as subverting the Keynesian idea that shortage spending can support financial execution, even in the short run. Understanding Ricardian Equivalence Governments can fund their spending either by burdening or by acquiring (and apparently burdening later to support the obligation). Regardless, genuine assets are removed from the private economy when the public authority buys them, yet the technique for financing is extraordinary. Ricardo contended that in specific situations, even the monetary impacts of these can be viewed as same, since citizens comprehend that regardless of whether their current charges are not brought up for the situation of deficiency spending, their future expenses will go up to pay the public authority obligation. Subsequently, they will be compelled to put to the side some current pay to set aside to settle the future assessments. Since these investment funds fundamentally include renounced current utilization, from a genuine perspective they viably move the future tax rate into the present. Regardless, the increment in current government spending and utilization of genuine assets is joined by a relating decline in private spending and utilization of genuine assets. Financing government going through with current duties or deficiencies (and future expenses) is hence comparable in both ostensible and genuine terms. Financial analyst Robert Barro officially displayed and summed up Ricardian identicalness, in light of the advanced monetary hypothesis of level-headed assumptions and the lifetime pay theory. Barro's variant of Ricardian equality has been broadly deciphered as sabotaging Keynesian monetary arrangement as a device to help financial execution. Since financial backers and customers change their present spending and saving practices dependent on judicious assumptions for future tax assessment and their normal lifetime after-charge pay, diminished private utilization and speculation spending will balance any administration sending in overabundance of current expense incomes. The basic thought is that regardless of how an CU IDOL SELF LEARNING MATERIAL (SLM) 149

administration decides to expand spending, whether through getting more or burdening more, the result is something very similar and total interest stays unaltered. 11.2.1 Comparative Advantage & the Pure Exchange Model of Trade The comparative advantage theory maybe the main idea in global exchange theory. It is likewise perhaps the most normally misjudged standards. There is a mainstream story told among financial specialists that once when financial matters doubter asked Paul Samuelson (a Nobel laureate in financial matters) to give a significant and nontrivial result from the financial matters discipline, Samuelson immediately reacted, \"comparative advantage.\" The wellsprings of the misconceptions are not difficult to distinguish. In the first place, the rule of comparative advantage is obviously irrational. Numerous outcomes from the proper model are in opposition to basic rationale. Second, it is not difficult to mistake the theory for another idea about profitable exchange, referred to in exchange theory as the theory of supreme benefit. The rationale behind supreme benefit is very natural. This disarray between these two ideas leads numerous individuals to feel that they comprehend comparative advantage when indeed what they comprehend is absolute advantage. At long last, the comparative advantage theory is all around frequently introduced distinctly in its numerical structure. Mathematical models or diagrammatic portrayals are very helpful in exhibiting the fundamental outcomes and the more profound ramifications of the theory. Notwithstanding, it is likewise simple to see the outcomes numerically while never understanding the essential instinct of the theory. The early rationale that streamlined commerce could be invaluable for nations depended on the idea of absolute advantages underway. In the Wealth of Nations, Adam Smith has written \"If a far-off nation can supply us with an item less expensive than we ourselves can make it, better get it of them with some piece of the produce of our own industry, utilized in a manner by which we have some benefit\" The thought here is basic and instinctive. In the event that our nation can create some arrangement of merchandise at a lower cost than an unfamiliar nation and if the far-off nation can deliver some other arrangement of products at a cost lesser than what we could deliver them, at that point obviously would be much better for us to exchange our moderately less expensive merchandise for their generally less expensive products. Along these lines, the two nations may acquire from exchange. The first thought of comparative advantage takes us back to the early part of nineteenth century. Refer Douglas A. Irwin, Against the Tide: An Intellectual History of Free Trade (Princeton, NJ: CU IDOL SELF LEARNING MATERIAL (SLM) 150