Trade barriers are obstacles for trade. These are measures that make trade more difficult or less attractive, and thus discourage trade. For example, the following are trade barriers:
Import duties (they increase the price of imported goods, and thus make the import less attractive)
Inefficient border controls cause a delay (in clearing goods) at the border, which in turn causes disruptions to the supply chains of companies that rely on the goods.
Administrative procedures for import/export, e.g. the need to submit paper-based documents, the need to provide the border control authorities extra information, the need to translate documents for the authorities. All these extra efforts by the exporter/importer cost time and money, and hence they make trade less attractive.
Complex IT requirements: if exporters and importers are required to submit data to multiple government agencies, they entail extra IT costs. Also, these costs become “costs of trade”, making trade less attractive.
The term “international trade agreement” is somewhat broader than FTA. It refers to any treaty between countries regarding trade. Most international trade agreements remove tariffs (hence they are called Free Trade Agreements) or at least offer preferential treatment, i.e. reducing tariffs but not abolishing them. The latter case is referred to as preferential trade agreement. However, trade agreements can also introduce other measures, such as removing trade restrictions/barriers of any kind. By setting simplifying rules for trade between countries, international trade agreements add transparency and predictability to international trade between the countries at hand. Such transparency and predictability are highly appreciated by the business community, thus creating confidence and increasing the likelihood that companies from the countries at hand will seek to do more business with companies in the other country.
There are many aspects to making international trade fairer. A few of them are listed below. Yet in this discussion, one should remember that global trade is a means, not an end. The ultimate goal is not to make global trade fairer, but rather to make the world fairer.
Free Trade Agreements can enhance a more equal global trade environment, where rich countries open up their markets to poorer countries, thereby helping them profit the wealth of the richer countries.
It’s often easiest to trade with your neighbors. The costs of shipment/logistics are limited, and often you share more commonalities (e.g. language). Setting up schemes for regional integration can bring stability to local markets.
Local policies can promote specifically SMEs (Small Medium Enterprises), allowing them to benefit from FTAs (to avoid that only large corporations benefit from FTAs)
Some of the key aspects that impact global trade are:
Countries, where the cost of production is low, are more likely to export. Countries with high production costs are more likely to import. The cost of production includes the cost of labour, capital, taxes and more.
The availability and the cost of raw materials will impact production, and therefore export.
Political turmoil causes unrest, which impacts trade. For example, carriers will avoid a country at war, and trade will cease.
Political turmoils cause major changes in currency exchange rates, resulting in trade becoming more expensive (thus less attractive), or vice versa. When the value of a specific currency decreases, import becomes more expensive, yet the country’s products become cheaper for foreign markets. While this can be interpreted as an advantage (to a certain extent), it’s an opportunistic advantage. Many companies will seek long term suppliers and avoid highly volatile and thus unpredictable markets.
Import duties/taxes: when import duties are raised (trade barriers), the products become more expensive for importers, and thus import is likely to decline. Buyers will search for new suppliers from other markets (for which lower import duties apply), or local production will receive a boost.
The need and the difficulty to comply with various procedures (at the country of export and at the country of import) concerning environmental, health or safety regulations.
Automation and predictability of supply chain. Buyers like predictability. They want to know when their products will arrive. If for example Customs operations in the country of export are not streamlined, such that shipments often are delayed a long time at the border, trading with that country becomes less attractive. Automation of procedures speeds up border operations, and contributes to predictability and thus to the attractiveness of a country as a trading partner.
Global trade is important for all the reasons listed above. A short summary is:
It gives people access to resources and to products from around the world
It offers companies increased opportunities to sell their products, by opening up global markets for them
It helps promote a fairer world, by giving poor countries (which may have been exploited in the past) access to wealthy markets
It promotes stability and reduces political unrest and crime by providing employment opportunities worldwide
It generates incomes for governments, which are subsequently invested in social programs, in infrastructure and in improving the quality of life.
The Incoterm that places the most responsibility on the buyer, EXW, or Ex Works, indicates an international trade contract in which the seller has the goods ready for pickup from an agreed on location and (often the seller’s factory) buyer is responsible for all operations including pickup, export responsibilities, and all transportation.
According to EXW Incoterms, what is each party responsible for?
Under EXW, the seller is responsible only for having the goods ready for pickup. Often the seller will help load the goods onto the vehicle, however, it is at the risk and cost of the buyer and it must be clearly documented in the contract of sale. Responsibility for both cost and risk transfers from the seller to the buyer as soon as the goods are ready for pickup.
The buyer, on the other hand, is responsible for loading the goods on the pickup vehicle, transportation to the port of origin, export costs and arrangements, main carriage, import costs and arrangements, and all transportation in the country of destination.
When is EXW used?
EXW can be used across all modes of transport.
What is the most common form of international business?
Import-export is the most fundamental and the largest international business activity, and it is often the first choice when the businesses decide to expand abroad as it is the easiest way to enter the market with a small outlay of capital.
Freight on Board (FOB), is an international commercial term (Incoterms®) indicating the point where costs of shipping and liability of goods transfers from the seller to the buyer. The term, which was defined as part of the International Chamber of Commerce’s (ICC), is the most common agreement when shipping internationally.
The FOB, also known as “Free on Board” is used when referring to shipments made via the sea or waterways and is determined in the terms of the sale contract or purchase order of an ocean freight shipment. A FOB only defines the responsibility of the shipping and costs and not the owner of the goods en route. Ownership is always defined by the bill of lading.
Does FOB only refer to maritime shipping?
Freight on Board was originally used as a term to describe the shipment of goods transported by sea, as maritime shipping was always the main method of transporting cargo internationally. FOB has evolved to include all modes of shipping transport, including air and land. However, Free on Board is specific to shipping over the sea.
Who pays for the freight cost in a FOB?
Usually, in Free on Board shipping, the seller is responsible for the goods and transport costs until their delivery to the shipping ports. Subsequently, the buyer takes responsibility from the port until the goods’ final destination. However, depending on the terms outlined in the sale contract, there can be two types of FOBs that affect the seller and buyer differently, with the primary difference between the two types being the point of transfer.
CIF, or Cost, Insurance, Freight, is an international trade term that describes a contract in which the seller is responsible to cover transport to the port of origin, main carriage, and minimum insurance.
According to CIF Incoterms, what is each party responsible for?
Under CIF, the seller is responsible for transport up to the port of destination, export clearance and fees, and minimum insurance coverage up to the named port of destination. The insurance obtained must insure the goods to 110% of their value and provide necessary documentation to the buyer for any insurance claims.
The buyer is responsible for the cost of the goods, import clearance and associated fees, and carriage from the port of destination.
Under CIF the buyer assumes risk once the goods are loaded onto the vessel for main carriage, but is not financially responsible until the goods reach the port of destination.
When is CIF used?
CIF applies only to ocean or inland waterways and is commonly used for bulk cargo, oversized, or heavyweight shipments.
