As the name suggests, ‘International Trade’ simply means buying and selling goods or services across national borders or territories for the purpose of market expansion and growth. Because there is an uneven distribution of resources all around the world, the need for international trade cannot be overstated.
Unfortunately there exist certain barriers to free trading across borders such as, tariffs (taxes on imports imposed by federal governments which tend to raise the prices of goods), quotas (limit supply of goods to raise prices beyond equilibrium level to reduce demand) and non-tariff barriers (other conditions such as shipping regulations, harbour and airport permits, etc which hinder imports), and consequently create heated arguments within trade and economic circles.
There are four important steps in concluding international trade transactions namely:
Delivery and settlement.
The seller and buyers negotiate on the quantity and quality of said goods or services and in accordance with documentary and shipping requirements and insurance policies, agreements are made and signed for accountability before production and delivery.
There are four methods of payment employed in international trade:
1) Open Account: where the buyer and seller agree on payment only after delivery of products. It is a risky option for sellers but of high advantage to buyers in cash flow and cost terms.
2) Advance payment: Where buyer makes whole or part payment to seller prior to shipping of products. It is expensive and poses a high level of performance risk to the buyer.
3) Documentary credit (Letter of Credit): is a letter of undertaking provided by the buyer’s bank assuring seller of payment for products when delivered provided all terms and conditions of the credit are complied with. To avoid disputes, the terms must be as far from ambiguous as possible to avoid future disputes.
4) Documentary collection: upon delivery of goods, an invoice like statement is drawn and sent to the buyer’s bank with clear instructions for payment collection in the buyer’s location.
International trade is considered the life source of most nations’ economies. This is perhaps the reason why the arguments on whether or not free trade should be implemented will continue in decades to come.