International trade is a trade that involves two or more countries. It involves the exchange of goods, services and capital. Countries sell products in other countries; these goods are referred to as exports. Goods bought from other countries are referred to as imports (Batiz, 2004). International companies engage in international trade in order to increase their market share.
This leads to increased sales and revenue. Companies engaging in international trade need to access the profitability of participating in such business. There are several challenges encountered when participating in international trade but the returns are worth the risk.
Companies export goods, which they have a competitive advantage in the production. This is because they know their products will find ready markets in new markets in other countries (Helpman, 1987). The company exporting goods in other country must know the requirements it should fulfill before exporting his goods.
The company also needs to know the policies in its home country regarding international trade. Countries engage in trading agreements to facilitate trade between them. This is because no country can be self-sufficient making trade a must for every country.
Countries strive to maintain an intimate relationship with other trading countries to ensure there is a continuous supply of imports and exports. The imports provide countries with foreign exchange, which it uses to purchase imports. A health trading practice should be observed at all times.
International trade involves the use of different currencies and the importer and exporter, therefore, need to agree about currency conversion rate. This is essential to ensure no party feels cheated after the transaction has taken place. International trade is a significant contributor to a peaceful existence of nations, and every nation should uphold it.
The scenario, in this case, is that of TATA Company based in India and Thompson and Thompson Company based in the United Kingdom. The company, which will be the importer, is Thompson and Thompson Company. Tata Motors Limited is an automobile company and concentrates in manufacturing, sale of commercial, and commercial vehicles (Shinde, 2011).
The company involves itself in the manufacture of trucks, cars, buses and engages in spare part provision to its customers. Tata do engage herself in developing electric and hybrid vehicles for personal, as well as public use (Graham, 2011).
Tata offers its products through dealers, sales and spare parts network. It has expanded its market internationally in regions, in Africa, Europe, and Middle East among other regions. Initially, Tata was referred to as Tata Engineering and Locomotive Company Limited. In July 2003, it changed its name to Tata Motors Limited.
This company was founded in 1945, and it is based in Mumbai India. Thompson and Thompson is a family business, which deals with supplying new and used cars to private and commercial trade. In addition to selling vehicles, it involves itself in repair and servicing. The company was established in 1952 in the UK and has grown tremendously.
The two companies in this transaction have agreed to use incoterm FCI. This is in consistence with trade arrangements of Tata Company. This incoterm requires the exporter to quote a price that is enough to cater all expenses to be incurred by him up to importers warehouse (Feenstra, 2003). Companies, which offer door-to-door services to their customers.
Overview of Trade India & the United Kingdom
India is seeking to improve its bilateral trade with the United Kingdom to £ 24 billion in the next five years from £ 12.6 billion in 2008. The UK exports to India compromise goods and services in 2009 totaled to £ 4.7 billion while India imports totaled to £6.8 billion.
The UK is considered the largest investor in India with investment exceeding £3.8 billion of FDI stock in 2008. The biggest acquisitions in India involve the UK Vodafone’s £7.3 billion and Tata £8 billion. Total bilateral trade between the UK and India has improved from £3.58 billion in 2001 to £ 8.74 billion in 2006. India is ranked eighth largest investor in the UK.
Importing cars in UK
Tata Company has to make sure that vehicles, which it imports to Thompson and Thompson Company, meet all the required qualification laid down by the UK. These cars need to have passed Single Vehicle Approval inspection. Those from European Union should have a certificate, which is issued by VCA under an umbrella of Mutual Recognition Scheme. Thompson and Thompson Company will inspect cars and confirm they are suitable for use in the UK roads as per laid regulations.
Business exporting goods in the UK and is non-members of European Union is required to observe laid down rules and regulations. The products imported have to undergo strict screening process referred to as import control system. Importers are required to pay custom duties and make necessary declarations to customs (Fred, 2006).
Vehicles can be transported using railway, air or sea transport. Tata Company since its price of vehicles comprise of cost insurance and freight (CIF) it will undertake transportation up to the warehouse of Thompson and Thompson Company. It will also be the one to pay all the custom duty required until the warehouse of the importer.
Importer who is Thompson and Thompson Company will be the one to bear unloading expenses from the transporting vehicle (Green, 2011). Since Thompson and Thompson places a large order with Tata Company, the vehicles will be moved through the sea. This is because shipping is relatively cheap compared to air or railway transportation.
Vehicles will be assembled in Tata company assembly plant in Mumbai, India. After this, they will be ferried by long vehicles to Nhava Sheva Mumbai Port. They will then be loaded to a ship designated to the UK. Tata Company is the one, which will ensure cars are cleared for exportation to the UK. Any cost to be incurred will be full born by Tata Company up to importers warehouse (Krugman, 1994).
Tata Company will undertake the following roles concerning this transaction. Tata Company will assemble the cars needed by the importer and arrange for their transportation through road to Mumbai Port. Tata Company will clear the goods at the port and pay custom duty on vehicles and loading expenses.
It will insure the goods during the voyage to the UK port. Tata Company will clear the goods in the UK port and pay custom duty imposed on goods. The cars will also be inspected to see whether they fit to use the UK roads. All the expenses associated with this process will be borne by Tata Company.
Tata Company will transport vehicles to the warehouse of Thompson and Thompson company/importer. After reaching the warehouse, Thompson and Thompson Company will clarify whether the goods are the ones it had placed an order. Importer will inspect the quality and condition of the imported consignment to see whether all the specifications documented are genuine. Importer will pay the cost of offloading to his warehouse (Wesley, 2001).
Documents to be used in transportation
Certificate of origin. This document will show the country in which imported goods originate. It is crucial to assist the custom officials on charges to impose to vehicles as different countries are charged differently. This is the case of European Union members and non-member countries. For members, there are no custom duties to pay while non-members do pay.
Import export code. This is a document which acts as a license to allow Indian company to export goods to other countries. Tata Company must obtain this document before exporting cars to the UK. Failure to have this document will lead to Tata Company being disallowed to transport goods to any country.
Proforma invoice. This document will be prepared by Thompson and Thompson Company. It will serve the purpose of quotation to highlight the amount of money it will be charged by Tata Company to sell cars to them.
Bill of landing. This is legally binding document between the exporter of goods and the carrier. It gives details of goods particulars such as the type, quantity and the destination the goods are shipped. These documents do serve as a receipt of shipment after goods have been delivered to the agreed destination. The document has to accompany goods irrespective of the form of transportation used. This document has to be signed by authorised representatives from exporter, carrier and importer.
Commercial invoice. This document will be issued by Tata Company as an acceptance of quotation from Thompson and Thompson Company. This acts as evidence that a transaction exists between Tata and Thompson and Thompson Companies. Commercial invoice also shows the amount of money that importer owes exporter incase the transaction takes place successfully. It is debited on accounts books of exporter reflecting a debit against Thompson and Thompson Company.
Goods in transit insurance certificate. This document is crucial to prove that the dispatched cargo is insured. In case there may be an accident, Tata company would be compensated making it not to incur loss. Tata Company will pay this cost because they have a policy of CIF.
Single administrative document (C88). This document must accompany all goods imported in European Union country. It is used to determine custom duty to be paid for imported goods and services. In this scenario, Tata Company is the one that will fill the document and declare particulars of cars it is importing in the UK. This is crucial in this case considering that India is not member of European Union.
Export cargo-shipping instruction. This document will be prepared by Tata Company to the shipping company. It gives direction on the destination of goods transported. It gives a description of goods, transport requirement and custom information. This form discloses the person intended to receive goods upon docking. Exporters are advised to fill this document accurately. This form serves many functions as it can be used in shipping, forwarding and transport of goods as well as allocation of freight and other related charges pertaining to cargo.
Multimodal Transport Bill of Lading
This is a bill of landing involving sea and other modes transport involving several carriers before goods reach their destination. The carrier whereby he commits to be responsible for the goods until they reach their destination issues this bill of landing. This document does apply even when there is only one carrier of goods.
The shipping company will pass this document to contracted transporter after reaching the dock in the UK. The new bearer of the document will take responsibility of the goods until they reach in Thompson and Thompson Company warehouse.
Standard Shipping Note (SSN)
This is a document used by the shipping company to accompany cargo from their place of origin. In this scenario, it will be from Tata Company manufacturing plant to the place of loading or the port of shipment. A copy is issued to parties handling the cargo until they are in the ship.
After this, a shipped bill of landing is issued after details of SSN. This document gives full information about exporter, custom status, and description of goods, stowage requirement, vehicle size and type among other information. This document enables people to receive goods to have adequate information on how the goods need to be handled. It should not be issued to goods, which are classified as hazardous.
Method of payment
Tata Company and Thompson and Thompson Company have chosen to use documentary: documents against payment. This has been chosen because the trading companies have been trading together for the last ten years. They have developed trust among themselves due to long trading relationship.
Tata Company has recognised Thompson and Thompson Company is credit worthy and, therefore, it does not fear losing its payment. Under this mode of payment the Tata ships cars after which it gives the documents to its business bank, this bank then forward the documents to importing bank of Thompson and Thompson Company along with instruction on how to collect the money from Thompson and Thompson Company. The collecting bank will release the documents to the importer only upon payment of the imported goods.
After receipt of payment, collecting bank is supposed to transmit the payment funds to remitting bank payment to the exporter trade in EU (Johnes, 2011).
In this scenario, Tata Company will be paid after 60 days; thus, Tata has extended credit to Thompson and Thompson Company by use of time draft. This implies that documents will be released to Thompson and Thompson to posses the cars upon acceptance of this time draft.
When Johnson and Johnson accept drafts, the company becomes legally obligated to pay Tata Company after the agreed 60 days. Under documentary collection agreed upon by the importer and exporter has little recourse against the importer incase importer refuse to pay.
Therefore, it is paramount that this method of payment is used only when exporter and importer have a strong trading relationship for long. This method requires exporter to have confidence that there is no way the importer will refuse to remit his money in time.
The documents, which will be used to claim payment under collection payment method, will include bill of exchange, consular invoices, transport documents. Others include marine insurance policy, certificate of origin as well as Single Vehicle Approval inspection certificate to prove that the cars Tata company is exporting meet the require standards to use the UK roads.
It takes approximate of 20 days to ship goods from India to UK. Tata Company though, it is a well-established company would find it hard to cater for all expenses incurred to complete the whole transaction without getting funds from an outside source. Tata will, therefore, take a credit insurance cover to keep them safe incase Thompson and Thompson Company defy paying them.
This will enable Tata Company to access credit easily from banks because the insurance company will acts as a guarantor that Tata Company will pay the loan granted to it. This will enable Tata access credit from banks at a lower interest rate to cater for expenses before Thompson and Thompson Company pays in 60 days. The funds borrowed will be used to cater for transportation, insurance and custom payments.
Risks associated with international trade
There are numerous risks, which affect smooth transaction of trade between importers and exporters. These risks include delays in the shipping company whereby it takes long for the exporter to load goods in the ship. Goods are required to be inspected before they dispatch to the intended destination and this process takes time.
Clearing and forwarding process do consume a lot of time. This leads to importers taking long before goods reach their warehouse. This may cause perishable goods to go bad. There is also the risk of buyer failing to honor the payment and risks associated with shipping of goods from India to the UK.
There are no risks associated in the UK country, and the country has strong credit control system, which makes exporters have confidence in importing goods in the UK. This gives confidence to Tata Company to have confidence in accepting documentary collection.
In order to ensure that risks are not borne fully by Tata Company in case calamities happen during the shipping of goods, Tata company will take marine insurance policy. This policy will cater for any damage that may result during the voyage. Since Tata Company uses Incoterm (CFI), all expenses incurred during the transaction will be upon it to pay. The documents used will be used to clarify the costs incurred and used in collection payment method.
Despite numerous advantages associated with international trade, there are several risks associated with it as well. Some of these challenges include damage of goods while in transit, delays, which may lead to lose, as well as a lot of expenses associated with this trade. In this case, Tata Company has incurred a lot of expenses before cars get into Thompson and Thompson Company.
There is also a lot of time taken to accomplish this process leading to additional expenses. International trade is complex and new companies engaging in it should be exceptionally cautious to avoid loses. It is believed that, with technological development taking place, this trade will be easy.
Method of payment chosen should be evaluated well as some importers may refuse to honor their obligations, which may lead to lose to exporters. Exporters should strive to ensure they meet the requirements of importers to ensure the importer accepts the goods they export. Failure to meet specific specifications of importer will lead to importer refusing to honor the agreement, which may lead to a big loss on the part of the exporter.
Governments should work hand in hand with exporters and importers to ensure fair trade exists between countries. In case one party is aggrieved by another, government should act as an arbitrary between exporter and importer. Government should advise companies engaging in international trade on requirements needed to be fulfilled before the companies engage in the transaction.
It is paramount for a company importing or exporting goods to understand the terms of contract well to avoid any misunderstanding in the future. International trade is not static and requires exporters and importers to keep in touch with all the developing in international trade.
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