In this article, I am showing types of international trade and business. I think you are going to get some really good ideas. The possibilities are truly endless when it comes to building your business and be your own boss.
The free, fair, and reciprocal exchange of goods and services between two different countries is largely referred to as international trade. It involves the export and import of products that are meant to fulfill a certain need, meet existing demands, or act as a legitimate way to diversify a country’s economic basket.
The need to conduct global trade primarily arises from the uneven distribution of natural resources. This leads to a division of labor, development of technical know-how, and lowering of comparative cost, thus making some countries more suitably placed to produce certain goods or services.
A smooth flow of international trade ensures that the world economy continues to thrive despite political, social, and cultural differences.
In the last few decades, the international trade scenario has expanded its reach by leaps and bounds. It had risen from a meager $61.81 billion in 1950 to a stupendous $19,453 billion in 2018! This is why, for anyone willing to make a career in the field of international trade and finance, gaining a detailed understanding of the basic types of global trade becomes extremely crucial.
Ready? Let’s dive in. Here’s what to expect in this article:
- What is an Export Trade?
- Types of Exporting
- What are the Pros and Cons of Exporting?
- Top Export Countries in the World
- Top Export Products in the World
- What is an Import Trade?
- Objectives of Import Trade
- Important Steps Involved in a Typical Import Transactions
- Top Import Countries in the World
- Top Import Products in the World
- What is an Entrepot Trade?
- The reasons why most of countries deal in Entrepot Trade
What is an Export Trade?
Export trade is the shipping of domestic goods or services to a foreign country, where the products will be processed, used, sold, or re-exported.
What is the definition of Export?
Exports, along with imports, are a key element in a country’s trade balance as the sale of exported goods increases a nation’s gross output. Many countries encourage export as a way to increase employment, disposable income, and consumer spending.
Furthermore, the more products a country exports, the greater the competitive advantage as it gains expertise in producing goods and services that foreign countries want to use.
On the upside, exports increase a nation’s foreign exchange reserves, allowing the central bank to defend the domestic currency and stabilize its value while lowering the cost of exports to foreign countries.
On the other hand, exporting countries use trade protectionism measures such as tariffs, quotas, and subsidies, to protect their industries and manufacturers and give them a competitive advantage. In this context, government policy, and exchange rates are very important factors that affect a country’s exports.
Let’s look at an example.
Example of Export Trade:
Businesses that seek to expand globally should pay attention to currency fluctuations. Currency risk is one of the reasons that an expansion strategy may fail, especially when a company is mostly dealing with overseas buyers.
For example, company A is a German car manufacturer, and it exports auto parts to Turkey. If the euro is strong against the Turkish lira, it takes fewer euros to export the auto parts to Turkey.
Conversely, if the euro is weak against the Turkish lira, it strengthens the power of the Turkish importer. To deal with currency risk, the German car manufacturer should insist that all deals with Turkish partners are made in Euro. On the downside, this may deter Turkish importers from partnering with the German exporter, preferring to do business in their local currency.
Types of Exporting
Exporting mainly be of two types:
- Direct Exporting
- Indirect Exporting
Direct exporting means the sale of goods abroad without involving middlemen. In the case of direct exporting a firm itself undertakes to sell its products overseas and is responsible for dealing with foreign customers directly. A company may carry on direct exporting by any one of the following modes:
- By establishing company’s own corporate export provision.
- By appointing foreign sales representative and agent.
- Through foreign based distributors and retailers/agents.
- Through foreign based state trading corporation.
- Through overseas sales branches.
Indirect exporting means the sale of goods abroad through middlemen. Indirect exporting involves using the help of independent middlemen and sales intermediaries that take the responsibility of sending the products to foreign countries. Some major types of intermediates of indirect exporting are as under:
- Commision agents.
- Domestic based export merchants or export trade companies.
- Buying or purchasing agents.
- Export agents.
- EMCs (Export Management Companies)
- Cooperative organizations.
There are two types of indirect exporting:
- Occasional (Passive) exporting.
- Active exporting.
Occasional (Passive) exporting:
Occasional or Passive exporting takes place when company exports from time to time either on its own initiative or in response to unsolicited orders from abroad.
Active exporting takes place when the company commits to expand its exports to a particular market.
For example, we have two companies, one of our companies is SOLAR SOLENTURK which is exporting solar street lights. Sometimes we received orders from middlemen for various countries which we didn’t export our products before and we can sell the solar street light that countries with middlemen and we earn together. That is an example of passive exporting.
On the other hand, we have another company which is FUTURESIA Global Trade. We are serving our clients or partners to expand their exports to Turkish and ASEAN markets (especially Thailand and Malaysia). So in this term, we become middlemen and our clients or partners start to do active exporting with us.
The main difference between direct and indirect exporting:
The main difference between direct and indirect exporting is that the manufacturer performs the export task to others (middlemen) in the case and indirect exporting. As a result, the costs and risks involved in Indirect exporting are less than those involved in Direct exporting
Advantages of indirect exporting over direct exporting:
- Indirect exporting involves less investment. The manufacturer does not have to develop an export department, an overseas sales force or a set of foreign contracts.
- Indirect exporting involves less risk. Because international trade marketing intermediaries bring know how and services to the relationship, the seller will normally make fewer mistakes.
What are the Pros and Cons of Exporting?
You may think that your product is already doing well in the domestic market and therefore, there is no need to expand to new markets. However, with the increasing opening of your country’s economies to goods and services produced abroad, competition in the domestic market will continue to increase and survival might very well depend on o an ability to compete both domestically and internationally.
In this sense, despite the challenges and risks associated with exporting, it also offers numerous benefits which are not likely to be achieved by remaining domiciled in the local market.
Benefits of Exporting:
Exporting can allow you to gain exposure to new ideas, management practices, marketing techniques, and ways of competing which can help you to better position your business both within the local and overseas markets to increase competitiveness.
Exporting is one way of increasing your sales potential. Given the small size of most local markets, exporting allows a company to expand its market beyond the scope of a limited and increasingly saturated national market.
For instance, a producer in Trinidad and Tobago has access to a market of just over 1.5 million people. However, exporting to Brazil for example expands that producer’s potential market to close to 200 million people. With an expanded market, exporting can pave the way for increased sales and expansion.
No company would export unless it intends to make a profit. Generally speaking, overseas customers in larger markets are likely to place much larger orders than a local buyer.
Some rare products (such as certain specialty foods) may also be able to command a higher price in an overseas market particularly in a market where the consumer is relatively affluent and willing to pay a premium price for a premium product. All these factors can positively affect the profit margins of a company.
By expanding internationally beyond the domestic market, sales will increase and therefore production levels will also increase. As production levels rise, the costs per product are typically reduced depending on the manufacturing process.
When you export, then your firm is no longer solely dependent on sales within the local market. Therefore, if economic conditions become unfavorable domestically, the impact on your operations might not be as huge if you have been able to expand your business to foreign markets.
It is also advisable that you don’t become dependent on a single export market as this too can make you too vulnerable to fluctuations in that market.
Extending the Product Life Cycle:
In the domestic market, your product might be approaching the end of its life cycle. In such an instance, finding an export market would be ideal to extend the life cycle of the product.
Follow your Customer Abroad:
Outward migration from Turkey to Europe and North America, in particular, is fairly high. This has led to the creation of a sizeable Turkish diaspora abroad with Turkish ‘taste’ and a desire for authentically Turkish products. You can take advantage of this situation by targeting the diasporic market to drive your export sales.
Challenges Associated with Exporting:
Competitors can typically not be avoided in export markets. The world is global and to stay competitive. You need to understand your competitive advantages to stay ahead of the competition and be successful abroad.
Developing an export market takes time. It can also be costly to develop new marketing materials, develop new packaging and assign new personnel to travel and undertake other administrative and operational tasks. These can place severe strain on the financial resources of companies, especially the smaller firms.
On the other, developing internet technologies, provide new opportunities for all companies to advertise themselves and their products in the digital environment. And that can be easier and cheaper than the traditional methods.
To meet safety, security, and other requirements in the export market, your product may have to be modified. Some companies may not have the technical know-how where these modifications are concerned and might have to incur the costs associated with hiring an expert. Having to modify your product for the export market can also stretch the human and other operational resources of the company.
Apart from the risk of non-payment, the complicated process involved in the collection of payments using various methods (consignment, letter of credit, etc.) can be consuming. Companies with limited cash flow, therefore, need to fully understand the financial pitfalls associated with exporting.
Economic or government restrictions in the export market could negatively impact your business. Exchange rate fluctuations could also prove to be problematic.
In exporting your product, there is the risk of damage, loss, or theft.
Without a high level of commitment, it is highly unlikely that your export venture would succeed in the long term. Maintaining a sustained presence in the export market requires time, willingness, and substantial resources. It can also take months or even years before your decision to export begins to reap dividends. These are all issues that the potential exporter must bear in mind.
The language, business practices, and other customs in the export market may be different from your own domestic market. To achieve greater success in the export market, you need to become familiar with the cultural situation in your export market and adjust your approach to suit if required.
Finding information on some markets can be extremely difficult. Lack of information would mean that you don’t have sufficient information on your competitors and the trends related to your specific product and similar products. This can negatively affect your ability to do well in the target market.
Top Export Countries in the World
Below are the 20 countries that earned the highest total dollar amounts in export sales for 2019.
Top Export Products in the World
Below are the 20 export products that attracted the highest dollar value in sales during 2019.
What is an Import Trade?
Imports are foreign goods and services bought by citizens, businesses, and the government of another country. It doesn’t matter what the imports are or how they are sent. They can be shipped, sent by email, or even hand-carried in personal luggage on a plane. If they are produced in a foreign country and sold to domestic residents, they are imports.
What is the definition of Import?
The import trade is referred to goods and services purchased into one nation from another. The word “import” originates from the word “port” because the products are frequently transported via ship to foreign countries. Similar to exports, imports are also the backbone of international trade. Here, if the expense of a country’s imports is more than the value of its exports then the country has a negative balance of trade (BOT), which is also known as a trade deficit.
Every country imports goods and services that the domestic country cannot manufacture, maybe because the country cannot produce effectively or cheaply like another exporting country. Few countries sometimes also import commodities and raw materials which are not available on their premises. For instance, many nations import oil they cannot manufacture locally or cannot provide sufficient to meet the demand.
Objectives of Import Trade
To Speed Up Industrialisation:
Developing countries import scarce raw materials, capital goods, and advanced technology required for rapid industrial development.
To Meet Domestic Demand:
The goods which are in demand but are not available in the country are imported.
To Overcome Natural Disasters:
During drought, flood, earthquakes, and other natural calamities country imports food grains and other essential commodities to prevent starvation.
To Improve Standard of Living:
- Imports enable consumers in the home country to enjoy a wide variety of products of high quality.
- It helps in improving the standard of living of masses.
To Ensure National Defence:
The importer must get the receipt of credit from his concerned bank and send it to the foreign supplier.
Important Steps Involved in a Typical Import Transaction:
1 – Trade Enquiry and Sending Quotations
- The domestic buyer who wishes to buy the goods from the other country sends an inquiry relating to price, desired quality, terms, and conditions for the export of goods.
- The exporter sends a reply to the inquiry in the form of ‘Quotation’.
- The quotation is also known as ‘Proforma Invoice’ which contains information about the selling price, quantity, quality, mode of delivery, etc.
2 – Procurement of Import License
- Goods can be imported only upon the license, the importer requires to obtain an import license.
3 – Obtaining Foreign Exchange
- The overseas supplier asks payment in a foreign currency.
- Payment requires the exchange of Indian currency into foreign currency.
4 – Placing Order or Indent
- After the receipt of the ‘Quotation’, if the prospective buyer finds the information suitable to him, he places the ‘Order/Indent’ for the import of goods.
5 – Placing Order or Indent
- The importer must get the receipt of credit from his concerned bank and send it to the foreign supplier.
6 – Placing Order or Indent
- The importer makes the finance settlements in advance to remunerate to the exporter when the shipment arrives at the destination.
7 – Receipt of Shipment Advice
- After storing the consignment on the ship, the foreign supplier sends the shipment advice to the importer.
- The shipment advice includes data about the shipment of products such as:
- Invoice number
- The landing or airways bill date and number
- Name of the ship with date
- Port or Destination of export
- Classification of goods and quantity
- Date of the sailing of the vessel.
8 – Arrival of Goods
- The overseas supplier dispatches the Goods as per the contract.
9 – Customs Clearance and Release of Goods
- All the imported goods have to have a clearance from customs after they pass the borders.
- When the ship arrives at the port, the importer has to obtain a delivery order/endorsement for delivery on the back of the bill of lading from the concerned shipping company.
Top Import Countries in the World
Below are the 20 countries that spent the most on imported goods during 2019.
Top Import Products in the World
The world’s top imports by product and leading buyer countries reveal the commodities most in demand on the international market and the location for the most lucrative opportunities for selling to foreign purchasers.
What is an Entrepot Trade?
Entrepot trade, in simple terms, is a specific form of international trade that comprises both – import and export trade. Under this type, goods and services are imported from one country so that they can further be exported to another country.
This is to say that the imported goods are not used for consumption or sale in the importing country. Instead, the importing country just adds some value to the goods before exporting them yet again. For example, if Turkey imports rubber from Thailand, processes it, and re-exports it to another country like Germany, it would be referred to as Entrepot trade.
Most countries deal in Entrepot trade because of the following reasons:
- Lack of access or direct connection between any two countries.
- Better processing or logistical facilities available with a third country.
- Absence of a trade agreement between two countries.
- No trade finance in banking facilities available in the importing country.
Congratulations! You have officially learned Types of International Trade and Business. Now start booming and make the world your business!
Also, if you would like to learn more about international trade, here is a link to our international trade for beginners guide. You can also watch videos on my YouTube channel.
Now I would like to hear your thoughts:
What’s your first takeaway lesson from this article?
Or maybe you have a question about the topic.
Either way, leave a comment below right now.