external trade

9

External Trade

9.1 Introduction

In the previous lesson you have learnt about internal trade which means

buying and selling of goods within the boundaries of a country. But when

buying and selling of goods and services take place between nationals of

different countries it is called external trade or foreign trade. Every

country, big or small, buys and sells different goods from and to other

countries. Goods worth crores of rupees are bought and sold every year.

Foreign trade is an important economic activity because both the countries

participating in it benefit in the process. For some countries, external

trade is the most essential economic activity because most of their

industrial activities depend on it. For example economic development of

Hongkong, Singapore, South Korea and Japan has been possible largely

due to their foreign trade. World trade is dominated by the developed

countries and the developing countries of Asia, Africa and Latin America

have a small share.

Like other countries, India imports and exports a large number of goods.

After independence, foreign trade of India has considerably expanded.

For economic development, it was necessary to import machinery, raw

materials and fuel oil. As a result, imports into India increased. However,

it was also necessary to increase exports to pay for the imports. Suitable

export promotion measures were adopted by the Government to increase

India's exports. In the present lesson we shall discuss external trade in

detail.

54:: Business Studies

9.2 Objectives

After studying this lesson you will be able to -

• recall the meaning of external trade;

• enumerate the advantages and difficulties in external trade;

• identify the middlemen in external trade;

• describe the procedure in export trade by sea routes;

• describe the procedure in import trade by sea routes;

• enumerate the main documents used in external trade.

9.3 External Trade : Meaning

External trade refers to buying and selling of goods and services between

nationals of different countries, or trade between agencies of the

governments of different countries.

External trade consists of export trade and import trade. Export involves

sale of goods and services to other countries. Import consists of purchases

from other countries. When goods are traded by way of imports and

exports the transactions are regarded as visible trade. External trade in

service is referred to as invisible trade. Thus, for example, if Indian

exporters avail of British shipping services for transportation of goods,

they have to pay for transport services. Hence, services used may be

called invisible imports by India. Sale of services would be regarded as

invisible exports. Likewise, other services such as warehousing, insurance,

banking and finance, and railway services are also required in external

trade.

When goods are imported into a country with the purpose of re-exporting

them to some other country, it is known as entrepot trade.

9.4 Advantages and Difficulties in External Trade

Advantages

Advantages of external trade are enumerated below :

External Trade :: 55

1. Availability of a large variety of goods : External trade enables

a country to avail of the use of a variety of goods which cannot

be produced in the home country or can only be produced at a

higher cost. In this way, a country can get the benefit of using

goods which it is not able to produce due to certain natural,

physical or other limitations, by importing them from other

countries.

2. Export of surplus production : External trade facilitates export

of surplus production of a country and import necessary items.

This results in development of large scale industries.

3. Specialisation based on resources endowment : The quantity

and quality of resources available in countries differ on account

of climate and geographical formation. External trade enables each

country to specialise in the production of those commodities for

which it enjoys relative advantage. Specialisation leads to increase

in productivity and superior quality of goods.

4. Higher standard of living : It improves the standard of living of

people in different countries. Exchange of goods and consumption

thereof leads to a higher standard of living of the people in the

world.

5. Price equalisation : External trade leads to equalisation of prices

of commodities in the world markets after making allowance for

transport and other costs. It brings stability and uniformity in the

prices of commodities in all the countries of the world.

6. Security from natural calamaties : Natural calamities such as

flood, famine, drought etc., adversely affect the productive capacity

of a country. External trade ensures adequate supply of those

commodities which are in short supply within the country due to

such natural calamities. For instance, medicine and food can be

imported from other countries during an emergency.

7. International relations : External trade develops business relations

among different countries of the world which facilitate exchange

of ideas and enrichment of culture. For example, the carpets of

middle east countries, leather goods of Africa, batik art of

Indonesia and brassware of India are known all over the world.


There is always a demand for these goods specially in developed

countries. Thus, external trade promotes cordial relations and

understanding among nations of the world.

8. Development of trade promoting services : Foreign trade has

led to development of modern means of communication and

efficiency in banking and insurance services. These services have

enabled countries to have trade even in voluminous goods like

food grains, wood, coal, and perishable goods, like fruits, flowers,

vegetables, meat, etc.

Difficulties in external trade

The various difficulties which are faced by a trader engaged in foreign

trade are enumerated below:

1. Distance : External trade involves transport of goods over long

distances except for neighbouring countries. Distance between

various countries makes it difficult to establish quick and close

trade contact between the importers and exporters. Even though

trade directories provide information regarding the markets for

various products, procurement of information regarding individual

products and their market is a tedious task. There is a long time

lag between placing of indent and receipt of goods from foreign

countries.

2. Diversity of languages : Different languages are used in different

countries of the world. This diversity of language creates another

problem in the external trade. Price-lists and catalogues are to be

prepared in foreign language. So the traders who wish to establish

trade relations with foreigners, must know the language of that

country.

3. Greater risk : Foreign trade involves transport of goods over

long distances. Goods are thus exposed to greater risk. Goods are

transported by ships which may sink due to storm or hidden rocks.

The ships or goods may also be captured by the enemies. These

risks may be covered through marine insurance, but that increases

the cost of goods.

4. Difficulties of transport and communication : Long distances


incidental to foreign trade create difficulties of proper and quick

means of transport and communication. Though modern means of

communication has solved this problem, it is quite costly and

cannot be used for securing all sorts of information. Loading and

unloading of goods often take long time and also involve large

expenses which increases the cost of goods.

5. Difficulties in payments : Each country has its own currency

which makes it difficult for exporters to get payment for the goods

sold. Various formalities are required to be completed for this

purpose. Exchange rates are determined for different currencies in

each country. Devaluation of a country's currency may mean a

great loss to its importers as imports become costlier. There is

loss to exporters also if the volume of export does not increase

adequately after devaluation.

6. Restrictions : Foreign trade is subject to various restrictions by

way of customs, tariff, quotas and exchange regulations, which

restrict the scope of foreign trade.

7. Lack of personal touch : In foreign trade, the transactions are

made with unknown persons through correspondence and other

means of communication. There is no direct contact between the

buyer and seller. In the absence of personal contact, settlement of

disputes becomes difficult. So long as the disputes are not settled

on the basis of mutual trust and faith, there is always a risk of bad

debts.

8. Study of foreign markets : Markets for different products have

their own characteristics as regards demand, intensity of

competition, buyers' preferences, etc. Thus, an extensive study of

foreign markets is required for success in foreign trade, which is

not easily possible from an exporter’s as well as importer's point

of view.

9. Cost : Both import and export of goods involve very costly

operations due to high cost of transport, insurance, intermediaries

and cost of formalities to be completed.


Intext Question 9.1

Fill in the blanks

1. External trade _____________ the standard of living of the

people in different countries.

2. External trade leads to _____________ of the prices of

commodities in the world market.

3. External trade facilitates export of ________ production of

a country.

4. In general, the greatest difficulty in foreign trade is of

____________ between the countries.

5. Goods are exposed to greater ____________ in external

trade.

6. When goods are imported with an idea of re-exporting to

some other country it is know as ____________ trade.

9.5 Middlemen in External Trade

1. Indent Houses/Indent firms : They help importer and exporter in

sending and receiving the order of goods alongwith other

instructions.

2. Export Houses : These are organisations involved in Export

promotion activities, such as STC, MMTC, Handicrafts and

Handloom Export Corporation (H.H.E.C) and Central Cottage

Industries Corporation (CCIC) etc. When an exporter is given a

licence to import goods, it is called replenishment licence.

3. Forwarding and Clearing Agents : Forwarding agents acting on

behalf of exporters complete all the formalities for loading the

goods on the ship. Clearing agents act on behalf of the importer

and complete all the formalities required for clearing the goods from

the port of destination. He sends the goods by rail/road to the place

of importer after taking delivery of the goods from the customs

authority. Both these agents act on an agreed commission to be paid.


4. Shipping Company : It carries goods on behalf of exporters on

payment of freight charges, and undertakes to deliver the same to

the importer. For example, in India this service is provided by

Shipping Corporation of India and other shipping lines.

5. Insurance Company : It also acts as an agency which facilities

external trade as it is ready to bear the loss or damage to the

goods against insured risks right from the godown of the exporter

to the godown of the importer.

6. Merchant Exporter : Wholesalers and retailers are middlemen

engaged in external trade. Wholesalers import or export goods in

large quantities while retailers import or export goods in small

quantities.

7. Trade Commissioners : These are officials appointed by the

Government to represent the country’s interests abroad. They

collect information relating to trade relations and disseminate the

same among traders. They also advise merchants on matters relating

to imports and exports.

8. Trade Representatives : They are officials who provide guidance

to exporters abroad on behalf of the government of their own

country. They make efforts to secure payment for goods and also

advise on legal matters.

Intext Questions 9.2

Match the following phrases given in column A and B

A B

(1) Payment of freight (a) Clearing Agent

(2) Import of goods (b) Forwarding Agent

(3) Export of goods (c) Shipping company

(4) Placement of order (d) Export House

(5) Export promotion activities (e) Indent house


9.6 Procedure in Export Trade

The procedure generally adopted for exporting goods to a foreign country

is as follows :

1. Receipt of an indent or order : After trade enquiry, receiving

the indent/order is the first step in export procedure. Order may

be received either directly from the importer or through some

specified agency like indent houses.

2. 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.

3. 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 such as

submission of G R Form with Reserve Bank of India, furnishing

declaration for surrender of foreign exchange and getting

registration number in order to get an export licence.

4. Collection of goods : The exporter has to assemble the goods

specified in the indent. The goods must be in accordance to the

instructions given in the indent regarding the quality, quantity, price,

etc.

5. 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.

6. 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, he may appoint a forwarding

agent who will perform all the formalities on behalf of the exporter

before shipping the goods, for a commission.


7. 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 alongwith other

instructions. The agent will take delivery of the goods and complete

other formalities before shipping them to the importer.

8. Formalities to be completed by Forwarding agent :

(i) Obtaining the custom permit : The agent has to apply to

the customs office giving full details of the goods and also

their destination in order to receive the custom permit. If

goods are duty free then custom permit is given immediately,

otherwise it will be necessary to complete other formalities.

(ii) Obtaining shipping order : The agent has to secure

adequate space in the ship for loading goods. For this

purpose he has to sign an agreement with the shipping

company for issue of the shipping order which will enable

him to put the goods on board the ship. If the entire ship is

hired it is called ‘Charter party’.

(iii) Completion of Shipping Bill and payment of export

duty : The Agent has to fill in three copies of shipping bill

and submit them to the custom house. On the basis of the

bill, duty is calculated by the customs authority. The agent

has to make payment of the duty and get the original and

third copy of the Shipping Bill from the customs authorities.

(iv) Payment of dock dues : The agent has then to make

arrangement for carrying the goods to the dock. For this

purpose, two copies of properly completed ‘Dock Challan’

are submitted to the dock authorities alongwith one copy

each of shipping bill and shipping order. After dock charges

are received, the dock authorities retain one copy of dock

challan and return the second copy duly signed to the agent.

(v) Custom’s verification before loading of goods : As soon

as the ship touches the port, the dock authorities start loading

the goods on it. Before the goods are actually loaded, custom

officials verify them to know if there is anything on which


duty remains to be paid or which is not mentioned in the

shipping bill. The captain or his assistant (mate) will receive

goods on board the ship only when shipping order has been

produced before him.

(vi) Mate's receipt : The captain or mate will issue a receipt

known as ‘mate’s receipt’ after the goods have been loaded.

This receipt contains particulars like quantity of goods,

number of packages, condition of packing, etc.

(vii) 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 frieght is

paid in advance the bill of lading is marked ‘Frieght paid’

otherwise it is marked ‘frieght forward’ which means frieght

will be paid at the port of destination.

(viii) Insurance of cargo : As a safeguard against marine risks,

it is necessary to insure the goods. Insurance must be done

strictly according to the instructions of the importer, if any,

given in the indent. If there is no instruction, the exporter

himself should insure the goods. The insurance policy is

sent to the importer alongwith the bill of lading and other

documents.

(ix) Advice to the exporter: The agent has then to inform the

exporter about the shipment of goods and other related

matters. He will send the bill of lading, insurance policy,

shipping bill etc., to the exporter alongwith a statement

showing his expenses and remuneration.

9. Preparation of export invoice and consular invoice : Having

received the advice from the forwarding agent, the exporter prepares

an export invoice known as foreign invoice. It is prepared in

triplicate according to the agreed terms and conditions of sale.


Custom regulations of many countries require consular invoice

for the purpose of easy clearance of goods at the port of destination

in the importing country. If it is required by the importer, then the

exporter has to arrange for such a document also.

10. Securing Payment: There are two alternative methods by which

payment can be received by the exporter.

(i) 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.

(ii) Letter of hypothecation: If the exporter wants to receive

payment immediately, he can get the bill (bill of exchange)

accepted by the importer and given to the exporter,

discounted with his bank. In that case he gets the amount

stated in the bill (minus the discount charges of the 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 (accepted by the

importer) drawn by the exporter for the goods shipped by

him. 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. Thus, a letter of

hypothecation gives the bank a charge on the goods and its

sales proceeds. In the letter of hypothecation it is clearly

mentioned that if the sales proceeds of goods (after meeting

expenses of selling the goods) exceeds the amount advanced,

the excess will be returned to the exporter, but if it is less,

then the exporter has to pay the difference (sales proceeds

– expenses of selling the goods – amount advanced) to the

bank.



Fill in the blank :

1. The exporter has to bear the _________ if goods have not

been packed according to the instructions of the importer.

2. Forwarding agent acts as an agent of the __________.

3. Goods are marked according to the instructions so that they

can be easily __________.

4. Letter of hypothecation gives the bank the right to sell the

goods if bill of exchange is _________ by the importer.

5. Last step in export procedure is to send an ______ to the

importer.

9.7 Procedure in Import Trade

The steps involved in importing goods are discussed below :

1. Obtaining the import licence: An importer cannot import goods

without having a valid licence from the Import Licensing Authority.

He has to get a valid licence according to the import policy

announced by the Government of his home country from time to

time.

2. Obtaining foreign exchange : As foreign exchange transactions

are controlled by Reserve Bank of India, the importer has to submit

an application along with a duly filled G R Form to the Exchange

Control department of R B I. After scrutinising the application,

the Reserve Bank of India will sanction the release of foreign

exchange.

3. Placing the Indent : 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.

4. Sending letter of credit : Generally, the parties in foreign trade are

not 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.

5. 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.

6. Appointment of clearing agent : The importer may take delivery

on his own or appoint an agent (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.

7. Formalities to be completed by the clearing agent

(i) 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 frieght has not been

paid by the exporter, it will have to be paid before

endorsement of the bill of lading.

(ii) Bill of entry and Bill of sight. The agent has to fill in and

submit three copies of the bill of entry to the custom

authorities. The custom authorities will calculate the duty

and receive the same from the clearing agent.

If the agent does not have detailed information of the

imported goods, he has to prepare a document known as

Bill of sight. The bill of sight must contain as much

information as the agent possesses and the document is

completed by the custom authorities on the arrival of goods.

(iii) 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 alongwith 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.

(iv) 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.

(v) 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.

8. Delivery of goods from Railway/Transport Authority. The

importer can take delivery of the goods and carry them to his

godown. Thus the whole procedure of importing goods is

completed.


Fill in the blanks.

1. An importer has to complete various formalities with the

Reserve Bank of India in order to get ______exchange.

2. Letter of Credit ensures payment to the ______.

3. The agent appointed for the importer to complete various

formalities in importing goods is known as _____ agent

4. When the clearing agent does not have details of the goods


imported, he has to fill up a document known as Bill of

_______

5. Indent is a document which is sent by the ______ to the

______.

9.8 Documents to be used in External Trade

The documents which are used in external trade are classified under

three heads.

1. Documents used in both import and export trade

2. Documents used in export trade

3. Documents used in import trade


(i) Indent

It is an order placed for import of goods. It is sent to the exporter

for supply of the goods. It contains full information regarding the

goods to be imported: quantity, quality, mode of packing and

marking, period of delivery, mode of payment and other instructions

regarding shipment and insurance, etc. An indent is a closed indent

when the price at which goods are to be purchased and the source

from where they are to be purchased are clearly specified. Indent

is said be ‘open’ when no price is specified and it is left to the

discretion of the exporter to purchase goods at the lowest price.

(ii) 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 in 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.

(iii) Bill of Lading

It is a document prepared by the ship owner or by the master of

the ship acknowledging the receipt of goods on board the ship and

undertaking to deliver the goods at the port of destination. This is,

on the one hand, proof of the receipt of goods specified therein

and, on the other, 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.

(iv) 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.

(v) 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

(vi) 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 taken by the

exporter while under FOB (Free on Board) contract, insurance is

taken by the importer. There are different types of insurance

policies to cover different types of risks in foreign trade.

Documents used in export trade

Besides the documents used both in export and import trade, the

documents used in export trade are as follows :

1. Export Permit : It is received by the exporter by applying to the

Chief Controller of Exports. The licence is issued according to

the Import and Export Policy of the Government of the home

country. Such a policy is announced from time to time by the

Government in India. When the exporter is given a licence to

import goods it is called a ‘Replenishment Licence’

2. 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.

3. Shipping Bill : The shipping bill is a document prepared in

triplicate by the exporter. There are three different forms for

different classes of goods. Goods are classified as (i) Free goods,

(ii) Dutiable goods, and (iii) Goods for re-export or ‘Bonded

goods’. The copies of shipping bill along with the export

licence and G R forms are carefully checked by the custom


authorities. They assess the duty payable on dutiable goods which

the exporter has to pay.

4. 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.

5. Charter Party : It is a formal agreement for hiring the whole

ship or a substantial part of it to carry the goods for a special

voyage for a particular time. When the entire ship is hired by the

exporter it is known as charter party. Here it should be noted that

the bill of lading is an acknowledgement of the receipt of goods

on board the ship as well as a document of title to the goods. It

does not indicate hiring of ship. But in case of charter party, the

ship owner loses his control on the ship for some time because

the crew begin to act as agents of the charterer.

6. Dock Challan, Dock Warrant and Dock Receipt : The exporter

has to fill up a form in duplicate for the payment of dock charges.

This form is known as ‘Dock Challan’. It is after completion of

this process that the exporter can bring the goods for loading in

the ship. For this purpose, 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 dock authorities for loading in

the ship, the document issued as a proof of delivery is known as

Dock Receipt.

7. Consular Invoice : The exporter fills a special invoice form

available from the office of the consul of the importer’s country

stationed in his (exporter’s) country and gets it signed by the

consul. In this document the exporter or his agent enter all the

particulars about the goods shipped and certify the accuracy of the

prices shown. The special invoice bearing the signature of the


consul of the importer’s country stationed in the exporter’s country

is known as Consular invoice. This document is obtained to avoid

under and over invoicing as well as to save time of custom

authorities in the importer’s country.

8. Certificate of origin : It is a document issued as a proof of the

fact that the goods have been produced in the country mentioned

in it, that is, 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 also authorised to issue such certificates.

9. Airway bill : When goods, specially perishable ones, are sent to

the importer by air, then this document is needed.It is a receipt

given by the airline for the goods it is carrying. At the destination

it has to be surrendered by the importer to the airline 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 frieght

and total frieght, airport of loading and destination, flight number

and date, etc.

10. Export Invoice/Foreign Invoice : The foreign invoice is prepared

by the exporter in duplicate at agreed price quotations. The 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 frieght,

dock dues, and insurance charges.

Documents used in import trade

Besides the documents used in both export and import trade, the

documents used in import trade are as follows:-

1. Import licence : The Government of India announces the import

and export policy of the country from time to time. Everybody is

not free to import anything he likes. He has to obtain a valid

import licence for the import of required quantity and value of

goods by completing various formalities with the Reserve Bank of India


(RBI) and other concerned authorities. Import Licence is the

document which enables the importer to import goods upto a

specified quantity and value from a specific country.

2. Bill of Entry and Bill of sight : It is a document which acts as

a proof that the goods of stated value and description in specified

quantity are being entered into the country from abroad. Three

copies of this document are prepared in which the importer has to

give each and every detail of goods imported. Separate bill of

entry forms are used for (a) free goods i.e. those goods on which

customs duty is not payable, (b) bonded goods or dutiable goods

which are subject to payment of customs duty. Import duty payable

may be specific duty when it is payable on the basis of weight or

measurement of the goods, or ad valorem duty when it is payable

on the basis of market value or the invoice value of the goods.

If the importer or his agent does not have details of the goods to

complete the form of Bill of entry, he has to file a document

called Bill of sight. The bill of sight gives him permission to

examine the goods in the dock in the presence of customs officers

and collect the details about the goods to be recorded in the bill

of entry form. If the goods are not subject to custom duty, this

Bill of sight is converted into a Free entry, and delivery of the

goods is given to the importer. If the goods are liable to duty, it

is converted into a ‘Prime entry’ and on payment of the duty,

goods are delivered.

3. Dock Challan : It is a document which acts as proof of payment

of dock charges on the imported goods. This document is issued

by the dock authorities in the imported country to the importer.

Intext Question 9.5

State which of the following statements are true or false.

1. Insurance policy is used as a document both in export trade

and import trade.

2. Certificate of origin is used in export trade.


3. Dock Challan is a proof of payment of dock charges in

import trade.

4. Letter of credit is sent by the exporter to the importer.

5. Bill of lading is a document of title sent by the importer

and is used as a document in both import and export trade.

What You Have Learnt

External Trade means buying and selling of goods and services between

nationals of different countries across the boundaries of two nations. It

includes import trade, export trade and entrepot trade.

Advantages of external trade

(1) Availability of large variety of goods; (2) Export of surplus production;

(3) Resource endowment; (4) Higher standard of living; (5) Price

equalisation; (6) Relief in case of natural calamities; (7) International

relations; (8) Development of trade promoting services.

Difficulties in external trade

(1) Distance; (2) Diversity of language; (3) Greater risk; (4) Difficulties

in transportation and communication; (5) Difficulties in payments; (6)

Restrictions; (7) Lack of personal touch; (8) Study of foreign markets;

(9) Cost

Middlemen in foreign trade

(1) Indent house, (2) Export houses, (3) Forwarding and Clearing agents,

(4) Shipping company, (5) Insurance company, (6) Merchant exporter, (7)

Trade Commissioners, (8) Trade representatives

Procedure in export Trade

In the export procedure the following steps are taken:

(1) Receipt of an indent, (2) Credit enquiry,(3) Obtaining export licence,

(4) Collection of goods, (5) Packing and marking of goods, (6)

Appointment of forwarding agent, (7) Despatch of goods by rail/road. (8)

Formalities to be completed by forwarding agent : (i) Obtaining the


custom permit, (ii) obtaining the shipping order, (iii) completion of

shipping bill and payment of export duty, (iv) payment of dock dues, (v)

custom verification before loading of goods, (vi) Mate’s receipt, (vii)

Bill of lading, (viii) Insurance of cargo, (ix) advice to the exporter (9)

Preparation of export invoice and consular invoice; (10) Securing payment

: (a) Letter of credit, (b) Letter of hypothecation; (11) Advice to importer

Procedure in import trade

In import procedure the following steps are taken in sequence;

(1) Obtaining the import licence, (2) obtaining foreign exchange, (3)

placing the indent, (4) sending letter of credit, (5) procuring the shipping

documents, (6) appointment or clearing agent, (7) formalities to be

completed by the clearing agent, (a) Endorsement for delivery, (b) Bill

of entry and Bill of sight, (c) payment of dock charges, (d) despatch of

goods by rail/road, (e) advice to importer. (8) Delivery of goods from

Railway/Transport authority.

Documents used in external trade

These are classified under three heads


(i) Indent : It is an order sent by the importer to the exporter. It is

received by the exporter for supply of goods.

(ii) Letter of Credit : It is issued by a bank in the importer’s country

in favour of the foreign dealer certaining an undertaking to honour

the bills of exchange drawn by the latter on the former. It is a

proof of the credit worthiness of the importer.

(iii) Bill of Lading : It is a proof of goods received and specified the

document to be carried and to be delivered at the port of

destination. It is issued by the shipping company to the exporter

who sends it to the importer. It is also a documents of title to the

goods.

(iv) Letter of Advice : It is sent by the forwarding agent and indicates

that all the formalities for export of goods have been completed

and goods have been shipped. It is prepared by the forwarding


agent and is sent to the exporter. Similarly a letter of advice is

prepared by the clearing agent which indicates that all the

formalities have been completed and delivery of the imported goods

have been taken. It is sent by the clearing agent to the importer.

(v) Documentary Bill : When a bill of exchange drawn by the exporter

on the importer is sent alongwith other documents of title to the

goods, it is known as documentary bill.

(vi) Insurance Policy : It is issued by the insurance company to cover

the risks of loss or damage to goods when the goods are in

voyage. The exporter insures the goods to be exported and sends

the policy to the importer.

Documents used in export Trade

Besides the documents used in both import and export trade, the following

documents are used in export trade.

(i) Export permit : This document permits the exporter to export

goods specified in it.

(ii) Shipping order : It is a document which instructs the captain of

the ship to receive the specified goods on board the ship. It is

prepared by the shipping company and is delivered to the exporter.

(iii) Mate’s receipt : It is a document which acts as a proof of goods

loaded into the ship. It is issued by the captain or his assistant

(mate).

(iv) Charter Party : When the whole ship is hired by the exporter to

carry the goods, the document issued by the shipping company is

known as Charter party. It is a contract between the hirer and the

shipping company.

(v) Dock Challan/Dock Warrant/Dock Receipt : Dock Challan is

used to pay dock charges on the goods to be exported. Dock warrant

is issued to bring the goods from the port for loading in the ship.

Dock receipt is a proof of delivery of the goods to the dock

authority for loading into the ship.


(vi) Consular invoice : It is a special invoice issued by the consul of the

importer’s country stationed in the exporter’s country. This document

prevents under and over invoicing of the goods to be exported and

saves time of the customs authority in calculating the duties to be

charged from the importer at the time of delivery of goods.

(vii) Certificate of origin : This document acts as a proof of the fact

that the exported goods have been produced in the country specified

in the document. This document helps to pay lower rate of import

duties on the goods imported.

(viii) Airway bill : It is a receipt issued by the airline authority to

carry and deliver the goods at the particular airport. It contains all

the details regarding the exporter, importer, goods, and the freight

charged.

(ix) Export invoice : It is prepared by the exporter and sent to the

importer in which all the details relating to the exported goods

including name of ship, port of shipment, freight, insurance charges,

dock charges, etc, are specified.

Documents used in Import trade

Besides the documents used in both import and export trade, the following

documents are used in import trade:

(i) Import Licence : It is a document which entitles the importer

named in it to import the specified quantity of goods upto the

specified value.

(ii) Bill of entry and Bill of sight : Bill of entry is filled up when

the importer/agent has details of the goods imported. But when he

does not have the details, the importer/agent has to fill up a

document known as Bill of sight. Bill of sight entitles him to

open the packages of imported goods so that he/agent can fill up

a bill of entry form and can pay the custom duties on imported

goods.

(iii) Dock Challan : It is a proof of payment of dock dues on the

imported goods. It is issued by the dock authority to the importer/

his agent.


9.10 Terminal Exercise

1. What do you mean by external trade ? Explain its advantages.

2. What are the difficulties which may be faced in external trade by

traders ? Discuss.

3. Explain the procedure for exporting goods to the United States of

America by sea route.

4. Explain the procedure for exporting goods from India.

5. Describe the procedure of importing goods by sea from London

to Bombay.

6. A Delhi merchant desires to buy tinned milk from Australia.

Describe in brief the procedure he will adopt to buy goods.

7. Write short notes on:

(i) Shipping Bill

(ii) Consular invoice

(iii) Bill of lading

(iv) Mate’s Receipt

(v) Letter of Credit

(vi) Air-way Bill

Short Questions

1. Distinguish between open and closed indent.

2. Distinguish between Bill of Lading and Charter Party.

3. Identify/ Name any three middlemen in external trade.

4. Name any four important documents in export trade.

5. Name any four important documents used in import trade.

6. Name two main difficulties faced by traders in external trade.

7. Name any three documents used both in export and import trade.


9.11 Answers to Intext Questions

9.1 (i) Improves (2) Equalisation (3) Surplus/excess (4) Distance

(5) Risk (6) Entrepot.

9.2 (1) c, (2) a, (3) b, (4) e, (5) d

9.3 (1) loss (2) exporter (3) recognised/identified

(4) dishonoured (5) Advice

9.4 (i) Foreign, (2) exporter, (3) clearing,

(4) sight, (5) importer, exporter.

9.5 (1) True (2) True (3) True (4) False (5) False

external trade

Business

export trade

import trade

invisible trade

meaning of external

internal trade

world trade

entrepot trade

foreign trade of india