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NIOS Class 12 Business Studies Chapter 23 External Trade
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External Trade
Chapter: 23
Module – 8 : TRADE AND CONSUMER PROTECTION
INTEXT QUESTIONS 23.1
Q. 1. Mention any two reasons for ‘entrepot trade’.
Ans: Country cannot import goods directly from others because of the following reasons:
(i) The exporting country may not have any accessible trade routes connecting the importing country; or
(ii) The goods imported may require processing or finishing before exporting. And these facilities may be lacking in the exporting or importing countries;
(iii) There may not be any trade agreement between both the countries.
Q. 2. How does external trade improves the standard of living of the people?
Ans: (a) Import.
(b) Import.
(c) Entrepot.
(d) Export.
(e) Export.
Q. 3. State whether there is Export trade, Import trade or ‘Entreport trade’ in the following cases pertaining to India:
(a) India purchased petroleum products from a foreign company.
Ans: Import trade.
(b) USA sold Engineering products to India.
Ans: Import trade.
(c) India bought goods from Russia and sold to Sri Lanka.
Ans: Entreport trade.
(d) UK bought jewellery/gold items/pearls from India.
Ans: Export trade.
(e) Germany bought Telecom services from India.
Ans: Export trade.
INTEXT QUESTIONS 23.2
Q. 1. How can a clearing agent help the importer?
Ans: Clearing agents act on behalf of the importer and complete all formalities required for clearing the goods from the port of destination. He takes delivery of the goods from the customs authority and sends the goods by rail/road to the place of importer.
Q. 2. State any four difficulties faced by buyers and sellers in External trade.
Ans: Difficulties faced in External Trade: It is generally accompanied by many problems, as listed below:
(i) Distance.
(ii) Lack of personal touch.
(iii) Greater risk.
(iv) Study of foreign markets.
(v) Difficulties of transport and communication.
Q. 3. Match the following facilitations:
| Column I | Column II |
| (a) Export Houses | (i) Carries goods on payment of freight charge. |
| (b) Indent Houses | (ii) Agent ready to bear the loss/damage. |
| (c) Clearing Agents | (iii) Organisation involved in Export promotion activities. |
| (d) Shipping Company | (iv) Help in receiving orders to goods with instructions. |
| (e) Insurance Company | (v) Complete all formalities for clearing goods from destination |
Ans:
| Column I | Column II |
| (a) Export Houses | (iii) Organisation involved in Export promotion activities. |
| (b) Indent Houses | (iv) Help in receiving orders to goods with instructions. |
| (c) Clearing Agents | (v) Complete all formalities for clearing goods from destination |
| (d) Shipping Company | (i) Carries goods on payment of freight charge. |
| (e) Insurance Company | (ii) Agent ready to bear the loss/damage. |
INTEXT QUESTIONS 23.3
Q. 1. Define ‘Letter of Credit’.
Ans: The exporter can get immediate payment on the strength of the letter of credit which is issued by the importer’s bank in favour of the exporter. The exporter has to draw the bill in order to get the payment from the local branch of the bank (in home country), which has issued the letter of credit on behalf of the importer.
Q. 2. Name the document referred to in each of the following cases:
(a) Agreement signed with the shipping company to enable to put goods on the ship.
Ans: Shipping order.
(b) Document issued by the captain of the ship after loading the goods on the ship.
Ans: Mate’s Receipt.
(c) Assured payment on the strength of a document issued by the importers bank.
Ans: Letter of credit.
(d) Document which authorises the bank to sell the goods in case of dishonour of bill.
Ans: Letter of Hypothecation. and
(e) Document received in exchange of Mate’s Receipt at the shipping office.
Ans: Bill of Lading.
INTEXT QUESTIONS 23.4
Q. 1. Mention any three roles played by clearing agent in external trade.
Ans: Following formalities to be Completed by the Clearing Agent:
(a) Endorsement for Delivery.
(b) Bill of Entry.
(c) Payment of Dock Charges.
Q. 2. Answer the following questions:
(a) Name the specific department of RBI that controls the foreign exchange transactions.
Ans: Exchange control department.
(b) In import trade, who sends the letter of credit to whom?
Ans: Importer sends the letter of credit to exporter
(c) Who appoints clearing agent?
Ans: Importer
(d) To whom is letter of advice forwarded by the clearing agent.
Ans: Importer.
INTEXT QUESTIONS 23.5
Q. 1. What is meant by Consular Invoice?
Ans: The exporter fills up a special invoice form mentioning all the particulars about the goods shipped and certifying the accuracy of the prices shown. This invoice is signed by the consul of the importer’s country stationed in the exporter’s country. This special invoice is known as Consular invoice. This document is obtained to avoid under and over invoicing as well as for easy clearance of goods by the custom authority at the importer’s country.
Q. 2. Arrange the following document in proper sequence:
(a) Dock Receipt.
(b) Dock Challan.
(c) Dock Warrant.
Ans: Proper sequence:
(a) Dock challan.
(b) Dock warrant.
(c) Dock Receipt.
Q.3. Answer the following in a word or phrase:
(a) The document prepared by the master of the ship acknowledging the receipt of goods.
Ans: Bill of Lading.
(b) The document issued as a proof of the fact that goods have been produced in the country mentioned on it.
Ans: Certificate of origin.
(c) The document forwarded by the exporter to the importer after the shipment of goods.
Ans: Export Invoice/Foreign Invoice.
(d) The document issued by the dock authority after receiving the goods from the exporters.
Ans: Dock Receipt.
(e) The document needed in sending goods by air.
Ans: Airway Bill.
(f) Document which acts as a proof that goods of stated value and quantity are being brought into the Country from abroad.
Ans: Bill of Entry.
TERMINAL EXERCISE
Very Short Answer Type Questions:
Q. 1. What is meant by External Trade?
Ans: Meaning of External trade: When buying and selling of goods take place across the national boundaries of different countries it is called External trade. It is also known as Foreign trade or International trade.
Q. 2. Name the different types of External trade.
Ans:
Kinds of External Trade
Q. 3. What is meant by Entreport trade?
Ans: When the firm of a country imports goods for the purpose of exporting the same to the firms of some other country with or without making any change, it is known as entrepot trade or re-export trade for that country. For example, if an Indian company imports rubber from Thailand and exports it to Japan then it is called Entrepot trade for India.
Q. 4. Give two reasons for the importance of External trade.
Ans: (a) External trade promotes specialisation.
(b) Exernal trade Improves Standard of Living.
Q. 5. Name any two promotion measures for Export trade.
Ans: (i) Export Procedure Zone.
(ii) Special Economic Zone.
Short Answer type Questions:
Q. 6. Explain ‘packing and marking’ of the goods in external trade.
Ans: Packing and marking of the goods: Packing should be done strictly according to the instructions given in the indent. If loss arises due to defective packing, the exporter may have to bear it. If necessary, grading should be done before packing. The packages should be properly marked according to instructions, if any, so that they may be easily recognised
Q. 7. Explain the two alternative methods of payment to the exporter.
Ans: There are two alternative methods by which payment can be received by the exporter.
(a) Letter of credit: The exporter can get immediate payment on the strength of the letter of credit which is issued by the importer’s bank in favour of the exporter. The exporter has to draw the bill in order to get the payment from the local branch of the bank (in home country), which has issued the letter of credit on behalf of the importer.
(b) Letter of hypothecation: If the exporter wants to receive payment immediately, he can get the bill (accepted by the importer) discounted with his bank. But for this purpose, he has to give a letter of hypothecation to his bank. Letter of hypothecation is a letter addressed to a bank attached with the bill of exchange which is accepted by the importer. Through his letter of hypothecation, the exporter authorises the bank to sell the goods in case of dishonour of the bill by the importer so that the bank can realise the amount advanced by it to the exporter.
Q. 8. What is meant by ‘Letter of Credit’?
Ans: Letter of credit: The exporter can get immediate payment on the strength of the letter of credit which is issued by the importer’s bank in favour of the exporter. The exporter has to draw the bill in order to get the payment from the local branch of the bank (in home country), which has issued the letter of credit on behalf of the importer.
Q. 9. What are:
(i) Bill of Lading.
(ii) Shipping order. and
(iii) Mate’s receipt.
Ans. (i) Bill of lading: The forwarding agent has to present the mate’s receipt at the office of the shipping company and in exchange will get a document known as Bill of Lading. He has to fill in three blank forms of bills of lading giving details regarding the goods, destination, name of the ship, date and place of loading and name and address of the person to whom delivery is to be made. If the freight is paid in advance the bill of lading is marked ‘freight paid’. Otherwise it is marked ‘freight forward’ which means freight will be paid at the port of destination.
(ii) Shipping Order: In order to hire space in the ship, the exporter or his agent has to enter into an agreement with the shipping company. The shipping company on the conclusion of the agreement gives a shipping order, which contains instruction to the captain of the ship to receive on board the specified quantity of goods from the exporter.
(iii) Mate’s Receipt: When goods are brought to the docks for shipment, the document issued by the dock authority is known as a dock receipt. It is the duty of the dock authority to load the goods in the ship. But if goods are directly taken into the ship, the captain or his assistant (mate) gives a receipt as a proof of goods loaded in the ship. This receipt is known as Mate’s receipt. If the mate is not satisfied regarding the packing of goods, he issues a foul Mate’s receipt, otherwise he issues a clean Mate’s receipt.
Long Answer type questions:
Q. 10. Explain the various measures taken up by Government of India to facilitate exports.
Ans: Following are the various measures taken up by government of India to facilitate exports:
(i) Export processing zones: One of the export promotion measures is the creation of export processing zones. Export processing zones may be defined as the zones created to increase production base for export. Export processing zones are industrial estates which form enclaves within customs territory.
Following are the major objectives of export processing zones:
(a) to earn foreign exchange.
(b) to create links between export promotion zones industries and domestic economy.
(iii) 100% export-oriented units: 100% export oriented units have been set up for the export of entire product. These units enjoy the benefits provided to units in export processing zones.
(iv) Export houses: Various export firms have been recognised, as export houses to promote exports by assisting them in marketing their products in international markets.
(v) Duty drawback scheme: Duties paid on export goods are refunded to exporters. This scheme includes refund of excise duties paid on goods, custom duties paid on raw-materials and machines imported for export production.
(vi) Tax relief: Goods meant for export purposes are not subject to payment of excise and other duties and sales tax. Profits on exports are exempted from income tax.
(vii) Advance license scheme: Under this scheme an exporter is allowed duty free supply of domestic as well as imported inputs required for the manufacture of export goods. Advance licenses are available to exporters.
(viii) Finance: Exporters are provided financial facilities at concessional rates of interest.
Q. 11. Discuss the various documents used in External Trade.
Ans: The main documents which are used in external trade are discussed below:
1. Indent: It is an order placed for import of goods. It is sent to the exporter for supply of goods. It contains full information regarding the goods to be imported i.e., quantity, quality, mode of packing and marking, period of delivery, mode of payment and other instructions regarding shipment and insurance, etc.
2. Letter of Credit: In external trade, the importer has to prove his credit-worthiness to the exporter, who may demand a certain amount of deposit or even full payment of due price before the shipment of goods. For this purpose, the importer arranges with his bank for issuing a letter of credit in favour of the exporter. Thus, a letter of credit is issued by a bank of the importer’s country in favour of the foreign dealer. It contains an undertaking by the bank concerned that the bill of exchange drawn by the foreign dealer on the importer will be honoured on presentation to the extent of amount specified in it. Thus, it establishes the credit-worthiness of the importer and guarantees payment of price to the exporter for the goods exported by him.
3. Bill of Lading: It is a document prepared by the ship owner or by the master of the ship acknowledging the receipt of goods and undertaking to deliver the goods at the port of destination. This, on one hand, acts as a proof of the receipt of goods specified there in and on the other, is a document of title to the goods. The document is sent by the exporter to the importer who can take delivery of the goods at the port of destination on presentation of the bill of lading and other shipping documents.
4. Advice Letter: It is a document, which is prepared by the forwarding agent and sent to the exporter indicating that all the formalities for export of goods have been completed and goods have been shipped. Along with this letter, the forwarding agent sends a statement showing expenses incurred on the goods exported and his remuneration. Similarly, a letter of advice is also prepared by the clearing agent and sent to the importer stating that all the formalities for clearing the imported goods have been completed. Along with this letter, the clearing agent sends the railway receipt as a proof of goods sent to importer as well as his statement of account for expenses incurred and commission charged. Thus, it is a document used both in export and import trade.
5. Documentary Bill: When the documents of title to goods are sent along with the bill of exchange drawn by the exporter on the importer, it is called a documentary bill.
It may be of two types.
(a) Documentary bill against payment.
(b) Documentary bill against acceptance.
In case of documentary bill against payment, the documents of title to exported goods are delivered to the importer only when the importer has paid the amount specified in the bill of exchange. In case of documentary bill against acceptance, the documents of title to the exported goods are delivered to the importer after he has accepted the bill of exchange drawn by the exporter.
6. Insurance Policy: The insurance policy is issued by the insurance company to cover the risks of loss or damage to goods due to specified causes. If there is no insurance then the loss will have to be borne by the owner of the goods, the exporter or importer. Under CIF (Cost Insurance Freight) contract, insurance is generally done by the exporter while under FOB (Free on Board) contract, insurance is done by the importer. There are different types of insurance policies to cover different types of risks in external trade.
7. Shipping Order: In order to hire space in the ship, the exporter or his agent has to enter into an agreement with the shipping company. The shipping company on the conclusion of the agreement gives a shipping order, which contains instruction to the captain of the ship to receive on board the specified quantity of goods from the exporter.
8. Shipping Bill: The shipping bill is a document prepared by the exporter, or the forwarding agent on the basis of which the custom authority calculates the duty to be paid by the exporter.
9. Mate’s Receipt: When goods are brought to the docks for shipment, the document issued by the dock authority is known as a dock receipt. It is the duty of the dock authority to load the goods in the ship. But if goods are directly taken into the ship, the captain or his assistant (mate) gives a receipt as a proof of goods loaded in the ship. This receipt is known as Mate’s receipt. If the mate is not satisfied regarding the packing of goods, he issues a foul Mate’s receipt, otherwise he issues a clean Mate’s receipt.
10. Dock Challan, Dock Warrant and Dock Receipt: The exporter has to fill up a form for the payment of dock charges. This form is known as ‘Dock Challan’. After paying the dock charges, a document is issued permitting the goods to be brought to the docks for loading. This document is known as Dock Warrant. After the goods are actually brought to the docks and handed over to the doc authority for loading in the ship, the document issued as a proof of delivery is known as Dock Receipt.
11. Consular Invoice: The exporter fills up a special invoice form mentioning all the particulars about the goods shipped and certifying the accuracy of the prices shown. This invoice is signed by the consul of the importer’s country stationed in the exporter’s country. This special invoice is known as Consular invoice. This document is obtained to avoid under and over invoicing as well as for easy clearance of goods by the custom authority at the importer’s country.
12. Certificate of Origin: It is a document issued as a proof of the fact that the goods have been produced in the country mentioned on it, i.e., a certificate about the genuine origin of the goods exported. This document is issued on the basis of trade agreements between the countries in which they agree to levy lower rates of import duties on the goods produced by them. Some chambers of commerce are authorised to issue such certificates,
13. Airway Bill: When goods, especially perishable ones, are sent to the importer by air, then this document is needed. It is a receipt given by the airline authority for the goods it is carrying. At the destination it has to be surrendered by the importer for releasing goods. It contains such information as name and address of exporter, name and address of importer or his agent, description of goods, number of packages, weight and volume of goods, rate of freight and total freight, airport of loading and destination, flight number and date, etc.
14. Export Invoice/Foreign Invoice: The foreign invoice is prepared by the exporter and he/she sends it to the importer after the shipment of goods. This invoice contains details such as the name of the ship, port of shipment, port of destination, number of indent, details regarding packing and marking, price of goods and other expenses including freight, dock dues and insurance charges.
15. Bill of Entry: Bill of entry is a form to be filled up by the importer at the time of receiving the goods. It is a document based on which imported goods are cleared from the port.
Q. 12. Advise Suresh, the procedure to import ball pens from Japan.
Ans: For importing the ball pens from Japan, Suresh will follow following Procedure:
1. Trade Enquiry: It is a written request by the importer to the exporters for supply of relevant information regarding the price, quality, quantity and various terms and conditions of export etc. In response to the trade inquiry of the importer, the exporter prepares the quotation and sends it to the importer.
2. Obtaining Import Licence: An importer cannot import goods without having a valid licence from the Import Licensing Authority. In India it is compulsory to get the IEC number from the DGFT.
3. Obtaining Foreign Exchange: As foreign exchange transactions are controlled by Reserve Bank of India, the importer has to submit an application along with necessary
documents to the Exchange Control department of RBI. After scrutinising the application, the Reserve Bank of India will sanction the release of foreign exchange.
4. Placing the Indent or Order: Indent is the purchase order to the exporter by an importer for specified goods. The indent may be sent directly to the manufacturer of goods or to the exporting agent.
5. Sending Letter of Credit: Generally, the parties in external trade are not very well known to each other. So the exporter wants to be sure of the credit-worthiness of the importer. Usually, the exporter asks the importer to send a letter of credit. An importer can get a letter of credit issued as per terms and conditions of his banker and send it to the exporter. It ensures payment of bill of exchange drawn by the exporter upto the amount specified in the letter of credit.
6. Procuring the Shipping Documents: The importer will arrange to obtain necessary documents such as bill of lading, shipping bill, etc, after receiving the advice letter from the exporter. The documents are procured to take delivery of the goods. He has to go to the exporter’s bank to make payment in order to get the necessary documents for taking delivery of the goods.
7. Appointment of Clearing Agent: The importer may take delivery on his own or appoint an agent known as clearing agent, to take delivery of the goods. The importer sends necessary documents to his agent to clear the goods. The clearing agent charges commission for his services for clearing the goods.
8. Formalities to be Completed by the Clearing Agent:
(a) Endorsement for Delivery: When the ship arrives at the port, the clearing agent approaches the concerned shipping company and gets the bill of lading endorsed in his own name from the shipping company. If the freight has not been paid by the exporter, it will have to be paid before endorsement of the bill of lading.
(b) Bill of Entry: The agent has to fill in and submit three copies of the bill of entry to the custom authority. The custom authority will calculate the duty and receive the same from the clearing agent.
(c) Payment of Dock Charges: The agent has to complete and file two copies of Port Trust receipt and three copies of Bill of entry to the landing and shipping dues office. After receiving the dock charges, the dock authority will return one copy of Port Trust receipt and two copies of the Bill of entry to the agent. Then the agent has to submit this copy along with two copies of Bill of entry to the custom office. If customs duty is to be paid, he will make the payment and take delivery of the goods.
(d) Despatch of Goods by Rail/Road: The clearing agent has to arrange carriage of the goods to the railway station or the transport authority after taking the delivery from the dock authority. He will despatch the goods by rail/road to his principal and get the railway receipt/carrier receipt.
(e) Advice to the Importer: The clearing agent has to write a letter of advice to the importer after despatch of goods. In this letter of advice, information regarding arrival of goods and their despatch by rail/road are specified. He has to enclose with it the railway receipt/carrier receipt and a statement of his expenses and charges.
9. Delivery of goods from Railway/Transport Authority: The importer can take delivery of the goods from the railway or transport authority and carry them to his godown.
Q. 13. Satish wants to export leather goods to Singapore. You are required to explain to him the procedure for the same.
Ans: The procedure generally adopted for exporting goods to a foreign country (Singapore) is as follows:
1. Receipt of Enquiry and Sending Quotations: The importer of goods first sends an enquiry to different exporters requesting them to send information about price, quality, terms of payment etc. In reply to the enquiry, the exporters then send the quotation mentioning details about the products, price, quality, mode of delivery, terms and conditions if any.
2. Receipt of an Indent or Export Order: If the prospective importer finds the terms and conditions acceptable, then he places an order for export of goods which is known as indent. An indent contains a description of the goods ordered, price to be paid, terms and conditions of delivery, packing of goods and other details. On receipt of indent if the exporter finds it satisfactory, then he forwards his acceptance to export the goods.
3. Credit Enquiry: The exporter must ensure that there is no risk of default in payment. He should verify the credit worthiness of the importer. For this purpose he may ask the importer to send a letter of credit, bank guarantee or any other guarantee.
4. Obtaining Export Licence: Each and every country has its own import and export policy for free goods and restricted goods. An exporter in India has to complete various formalities and apply for export license to the appropriate authority. If the authority is satisfied it will issue the export license. To get an export license, the exporter must have
(i) an IEC number.
(ii) RCMC from appropriate export promotion council. and
(iii) Registration with Export Credit and Guarantee Corporation (ECGC). The registration with ECGC safeguards against risk of non-payments.
5. Production or Procurement of goods: The exporter has to produce the goods or buy them from the market. The goods must be in accordance with the instructions given in the indent regarding the quality, quantity, price, etc.
6. Pre-shipment Inspection: To ensure that only good quality products are exported from our country, the Government of India has made compulsory pre-shipment inspection of goods by certain authorised agencies.
7. Excise Clearance: In India, manufactured products are subject to excise duty under the Central Excise Act. Therefore, excise clearance certificate is a must for the goods to be exported. It may be noted here that the Government of India has exempted excise duty in many cases if the goods are manufactured exclusively for the purpose of export.
8. Packing and marking of the goods: Packing should be done strictly according to the instructions given in the indent. If loss arises due to defective packing, the exporter may have to bear it. If necessary, grading should be done before packing. The packages should be properly marked according to instructions, if any, so that they may be easily recognised.
9. Appointment of forwarding agent: Packed goods may be despatched to the port directly by the exporter or through a forwarding agent. If the goods are stored in any location, the exporter may appoint a forwarding agent who will perform all the formalities on behalf of the exporter before shipping the goods. The forwarding agent will charge commission for this work.
10. Despatch of goods by rail/road: The exporter has to despatch the goods by rail/road to the port town. He will send the R/R (railway receipt) to the forwarding agent along with other instructions. The agent will take delivery of the goods and complete other formalities before shipping them to the importer.
