1.3 Value Chain and International/Global Trade
Learning Objective
2. Highlight the importance of international trade process, stakeholders, and documents in understanding the concept of global value chain.
Process of International Trade
Let’s assume there is an importer in Canada who wants to purchase finished goods from outside world to take advantages of International trade and their search ends with an exporter in India who sells exactly the kind of product they want. So, they communicate with one another and agree on buying and selling.
Once they agree on terms and conditions and sign sales contract, exporter will start product manufacturing so they can deliver products to the importer on agreed time. The exporter uses local transportation to deliver products to the port of origin where exporter’s products encounter export customs. Export Customs check the goods on complete documentation and clear the goods to the port authorities. Then the goods are loaded onto the main transportation vehicle which could be ship, airplane, truck or rail that will take exporter’s product to the port of destination. At the port of destination, goods will encounter import customs. Import customs will again check the goods on complete documentation and clear them depending upon documentation status. These goods will travel to importer’s warehouse using local transportation and at last importer will have access to the requested goods which he can sell and make profits.
Please note that the actual import-export process includes many other steps and considerations. Here, the process is explained in simplified terms for educational purposes.
Video: Process of International Trade (1:44)
Watch the video to understand international trade process.
Media 1.4. Process of International Trade [Video]. Kiranjot Kaur Walia. (URL: https://youtu.be/gsbDZ3EYQ6E)
On the basis of information shared in the video, we can say that there are five main steps in International Trade:
- Exporters
- Export Customs
- Transportation
- Import Customs
- Importers
For the rest of the book, we will keep these five steps in our mind to understand different concepts in Global Value Chain.
Stakeholders/ Parties in International Trade
Just as it takes many parts to make an international business run smoothly, there are many people, organizations, and entities that have a “stake” in the success of a business. In this section we’ll take a look at who these stakeholders are and how they affect business. The impact of a business on its stakeholders is a bit like the effect of dropping a stone into a pond. The decisions and actions of the business have a ripple effect that can extend beyond the pond and even reach those who are standing far away on the shore. The size of exports in the world grew from less than $100 million after World War II to well over $11 trillion today. Export and import is big business, but it isn’t just for big businesses. Most of the participants are small and midsize businesses, making this an exciting opportunity for entrepreneurs.
The main parties involved in export and import transactions are the exporter, the importer, and the carrier. The exporter is the person or entity sending or transporting the goods out of the country. The importer is the person or entity buying or transporting goods from another country into the importer’s home country. The carrier/transportation provider is the entity handling the physical transportation of the goods. Well-known carriers across the world are United Parcel Service (UPS), FedEx, and DHL.
Customs administration offices in both the home country and the country to which the item is being exported are involved in the transaction. In the United States, the US Customs Service became the US Bureau of Customs and Border Protection (CBP) after the terrorist attacks on September 11, 2001. The mandate now isn’t simply to move goods through customs quickly and efficiently to facilitate international trade; it also ensures that the items coming into the United States are validated and safe as well. Canada’s Custom administration department is called Custom and Border Security agency (CBSA).
Video: What is the Canada Border Services Agency? (1:04)
Watch the media clip and visit the website Canada Border Services Agency to know more about what Canadian Custom and Border Security Agency does. Scroll down on the website and review all components of Services and Information: Trade tab components.
Media 1.5. What is the Canada Border Services Agency [Video]. canadameetings. (URL: https://youtu.be/jKrxBUjoTcI)
Cooperation for Security
The World Customs Organization (WCO) created a framework that calls for cooperation between the customs administrations of different countries. Under the WCO Framework of Standards to Secure and Facilitate Global Trade, if a customs administration in one country identifies problems in cargo from another country, that customs administration could ask the exporting country to do an inspection before goods are shipped. Businesses across the world benefit (in terms of speed and cost) if there is one common set of security standards globally, and the WCO is working toward that goal.
Other Intermediaries in International Trade
In addition to the main players described above, intermediaries can get involved at the discretion of the importer or exporter. Entrepreneurs and small and midsize businesses, in particular, make use of these intermediaries, rather than expending their resources to build these capabilities in-house.
A freight forwarder typically prepares the documentation, suggests shipping methods, navigates trade regulations, and assists with details like packing and labeling. At the foreign port, the freight forwarder arranges to have the exported goods clear customs and be shipped to the buyer. The process ends with the freight forwarder sending the documentation to the seller, buyer, or intermediary, such as a bank.
An export management company (EMC), an independent company performs the duties a firm’s export department and handles the necessary documentation, finds buyers for the export, and takes title of the goods for direct export. In return, the EMC charges a fee or a commission for its services.
Banks perform the vital role of finance transactions. Along with providing finance to primary parties in international trade, they also help in mitigating risks.
Did You Know?
Standard Chartered Bank Mitigated Risk by Duplicating Operations in Chennai and Kuala Lumpur. As you can imagine, banks are very concerned about security because of the highly confidential customer information . As a result, some banks try to mitigate the risks by setting up mirror sites. Standard Chartered Bank, for instance, chose Chennai in South India as the hub for its Scope International operations. Still some of the tasks are also done in Kuala Lumpur in Malaysia: “Because we run the operations of 52 countries, we have to satisfy information security and business continuity issues in all locations,” says Sreeram Iyer, Group Head, Global Shared Services Centers, Standard Chartered Scope International at the time of the decision. “Kuala Lumpur backs up the Chennai center and vice versa”.
View this interactive below that summarizes International Trade Stakeholders:
Trade Documentation
Importing and exporting require much documentation (i.e., filing official forms) to satisfy the regulations of countries invoved. The value of the documentation is that it enables trade between entities who don’t know each other. The parties are able to trust each other because the documentation provides a common framework and process to ensure that each party will do what they say in the import/export transaction. Various forms of documentation are required for import and export transactions.
The bill of lading is the contract between the exporter and the carrier (e.g., UPS or FedEx), authorizing the carrier to transport the goods to the buyer’s destination. The bill of lading acts as proof that the shipment was made and that the goods have been received.
A commercial or customs invoice is bill for the goods shipped from exporter to importer/buyer. Exporters send invoices to receive payment, and governments use these invoices to determine the value of the goods for customs-valuation purposes.
Did You Know?
IBM does business with 160 countries. Daily, it sends 2,500 customs declarations and ships 5.5 million pounds of products worth $68 million.
The export declaration is given to customs and port authorities. The declaration provides the contact information for both the exporter and the importer (i.e., buyer) as well as a description of the items being shipped, which the custom department uses to verify and control the exports. The government also uses the information to compile statistics about exports from the country.
Humorous Anecdote
Customs regulations in some countries—particularly emerging-market countries—may impede or complicate international trade. A study of the speed and efficiency of items getting through customs in different countries found that it can take anywhere from three to twenty-one days to clear incoming goods. This variation causes problems because companies can’t plan on a steady flow of goods across the border. Some countries have customs idiosyncrasies. In Brazil, for example, no goods move within the country on soccer game days and documents that are not signed in blue ink will incur delays for their accompanying goods.
The certificate of origin, as its name implies, declares the country from which the product originates. These certificates are required for import duties. These import duties are lower for countries that are designated as a “most favored nation.”
Certificate of Origin as Marketing Tool
Not all governments or industries require certificates of origin to be produced, but some companies are seeing that a certificate of origin can be used for competitive advantage. For example, Eosta, an importer of organic fruit, puts a three-digit number on each piece of fruit. Nature & More customers can type in that number and get a profile of the farmer who grew the fruit, getting a glimpse into that farmer’s operations. For example, Fazenda Tamanduá, a farm in Brazil, grows mangoes using a variety that needs less water to grow and a drip-irrigation system that optimizes water use. This database gives customers a way to learn about growers and provides a way for growers and others to share what they learn. Providing this type of certification to customers differentiates Eosta products and makes them more attractive to sustainability-minded consumers.
Although not required, insurance certificates show the amount of coverage on the goods and identify the merchandise. Some contracts or invoices may require proof of insurance in order to receive payment.
Some governments require the purchase of a license (i.e., permission to export) for goods due to national security or product scarcity. Interestingly, licenses for import and export date back to the 1500s at least, when Japan required a system of licenses to combat the smuggling of goods taking place (Manresa, 2010).
Impact of Trade Agreements
Trade agreements impact the particulars of doing business. For example, the former North American Free Trade Agreement (NAFTA) (now USMCA – US- Mexico- Canada Agreement) makes Mexico different from other Latin American countries due to the ease of movement of goods between that country and the United States. Changes in agreements can affect the competitiveness of different countries. When China joined the World Trade Organization (WTO), the rapid elimination of tariffs and quotas on textiles harmed US makers.
The letter of credit is a legal document issued by a bank at the importer’s (or buyer’s) request. The importer promises to pay a specified amount of money when the bank receives documents about the shipment. Simply put, the letter of credit is like a loan against collateral (in this case, the goods being shipped) in which the funds are placed in an escrow account held by the bank. Letters of credit are trusted forms of payment in international trade because the bank promises to make the payment on behalf of the importer (i.e., buyer) and the bank is a trusted entity. Given that the letter of credit is like a loan, getting one issued from the bank requires proof of the importer’s (or buyer’s) ability to pay the amount of the loan.
Video: Required Documents for International Shipping (2:08)
Watch this video that summarizes different documents required while shipping internationally.
Media 1.6. Required Documents for International Shipping [Video]. Exfreight. (URL: https://youtu.be/FewozrREymU)
A person or organization that sells products and services that are sourced from other countries.
A person or organization that sells products and services in foreign countries that are sourced from the home country.
The entity handling the physical transportation of the goods, such as UPS, FedEx, and DHL.
A governmental agency that monitors imports and collects import duties on goods coming into the country.
The official forms that must be presented to satisfy the import and export regulations of countries and for payment to be processed.
The contract between the exporter and the carrier, authorizing the carrier to transport the goods to the buyer’s destination; acts as proof that the shipment was made and that the goods have been received.
The bill for the goods shipped from the exporter to the importer or buyer.
Documentation that provides the contact information of both the exporter and the importer (i.e., buyer) as well as a full description, declared value, and destination of the products being shipped.
Documentation that declares the country from which the product originates.
Competitive Advantage defines how different and superior you are to your competitors. It is usually achieved in the form of Low Cost Leadership or Differentiation.
Documentation that shows the amount of insurance coverage on the goods and identifies the merchandise.
products
Purchased permission to export goods from a country.
A legal document issued by a bank at the importer’s (or buyer’s) request in which the importer promises to pay a specified amount of money when the bank receives documents about the shipment.
Documents in custody of bank and taking effect only when specified conditions are met.
