MEANING OF foreign trade : Exchange of goods and services between countries.

The inclination for one

country to trade with another is based in large part on the idea of comparative advantage--which says that
any country, no matter how technologically disadvantaged it might be, can always find some sort of good
that will let it enter the game of foreign trade. In this sense, foreign trade is just an extension of the
production, exchange, and consumption that's a fundamental part of life. The only difference with foreign
trade is that producers and consumers reside in separate countries.

International trade is exchange of capital, goods, and services across international borders or territories.[1]
In most countries, it represents a significant share of gross domestic product (GDP). While international
trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and
political importance has been on the rise in recent centuries.

International trade is in principle not different from domestic trade as the motivation and the behavior of
parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not.
The main difference is that international trade is typically more costly than domestic trade. The reason is that
a border typically imposes additional costs such as tariffs, time costs due to border delays and costs
associated with country differences such as language, the legal system or culture.

BOT

• Records only merchandise

transactions
• Does not record transactions
of capital nature
• A part of current account of
BOP

BOP
•Records transactions relating to both goods and services
• Records transaction of capital nature
• Includes BOT , Balance of services , Balance Of Unrequited Transfers and Balance Of Capital
Transactions.

Balance of payments
A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country
and the rest of the world.[1] These transactions include payments for the country's exports and imports of
goods, services, and financial capital, as well as financial transfers. The BOP summarises international
transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic
currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans
and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in
foreign countries, are recorded as a negative or deficit item.

When all components of the BOP sheet are included it must balance – that is, it must sum to zero – there can
be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance
will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned
from its foreign investments, by running down reserves or by receiving loans from other countries.

While the overall BOP sheet will always balance when all types of payments are included, imbalances are
possible on individual elements of the BOP, such as the current account. This can result in surplus countries
accumulating hoards of wealth, while deficit nations become increasingly indebted. Historically there have
been different approaches to the question of how to correct imbalances and debate on whether they are
something governments should be concerned about. With record imbalances held up as one of the
contributing factors to the financial crisis of 2007–2010, plans to address global imbalances are now high on
the agenda of policy makers for 2010. the BOP identity is:

STRUCTURE OF BOP

1. Trade Account BalanceIt is the difference between exports and imports of goods, usually referred as
visible or tangible items. Till recently goods dominated international trade. Trade account balance tells as
whether a country enjoys a surplus or deficit on that account. An industrial country with its industrial
products comprising consumer and capital goods always had an advantageous position. Developing
countries with its export of primary goods had most of the time suffered from a deficit in their balance of
payments. Most of the OPEC countries are in better position on trade account balance.

The Balance of Trade is also referred as the 'Balance of Visible Trade' or 'Balance of Merchandise Trade

2. Current Account BalanceIt is difference between the receipts and payments on account of current
account which includes trade balance. The current account includes export of services, interests, profits,
dividends and unilateral receipts from abroad, and the import of services, interests, profits, dividends and
unilateral Payments to abroad. There can be either surplus or deficit in current account. The deficit will take
place when the debits are more than credits or when payments are more than receipts and the current account
surplus will take place when the credits are more than debits.

3. Capital Account BalanceIt is difference between the receipts and payments on account of capital
account. The capital account involves inflows and outflows relating to investments, short tern
borrowings/lending, and medium term to long term borrowing/lending. There can be surplus or deficit in
capital account. The surplus will take place when the credits are more than debits and the deficit will take
place when the debits are more than credits.

4. Foreign Exchange ReservesForeign exchange reserves (Check item No.9 in above figure) shows the
reserves which are held in the form of foreign currencies usually in hard currencies like dollar, pound etc.,
gold and Special Drawing Rights (SDRs). Foreign exchange reserves are analogous to an individual's
holding of cash. They increase when the individual has a surplus in his transactions and decrease when he
has a deficit. When a country enjoys a net surplus both in current account & capital account, it increases
foreign exchange reserves. Whenever current account deficit exceeds the inflow in capital account, foreign
exchange from the reserve accounts is used to meet the deficit If a country's foreign exchange reserves rise,
that transaction is shown as minus in that country's balance of payments accounts because money is been
transferred to the foreign exchange reserves.

Foreign exchange reserves (forex) are used to meet the deficit in the balance of payments. The entry is in the
receipt side as we receive the forex for the particular year by reducing the balance from the reserves. When
surplus is transferred to the foreign exchange reserve, it is shown as minus in that particular year's balance of
payment account. The minus sign (-) indicates an increase in forex and plus sign (+) shows the borrowing of
foreign exchange from the forex account to meet the deficit

5. Errors and OmissionThe errors may be due to statistical discrepancies & omission may be due to
certain transactions may not be recorded. For eg: A remittance by an Indian working abroad to India may
not yet recorded, or a payment of dividend abroad by an MNC operating in India may not yet recorded or so
on. The errors and omissions amount equals to the amount necessary to balance both the sides.

Balance of trade
The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary
value of exports and imports of output in an economy over a certain period. It is the relationship between a
nation's imports and exports.[1] A positive or favorable balance of trade is known as a trade surplus if it
consists of exporting more than is imported; a negative or unfavorable balance is referred to as a trade
deficit or, informally, borrowed prosperity, living beyond a nation's means, or a trade gap. The balance of
trade is sometimes divided into a goods and a services balance.

Early understanding of the functioning of balance of trade informed the economic policies of Early Modern
Europe that are grouped under the heading mercantilism. An early statement appeared in Discourse of the
Common Weal of this Realm of England, 1549: "We must always take heed that we buy no more from
strangers than we sell them, for so should we impoverish ourselves and enrich them."[2] Similarly a
systematic and coherent explanation of balance of trade was made public through Thomas Mun's c1630
"England's treasure by forraign trade, or, The balance of our forraign trade is the rule of our treasure"[3]

Composition of Trade Balance

For a given country, trade balance comprises those products that a country trades on with other countries.
Factors that affect trade balance are:

Demand and supply: The demand and supply trend defines the cost of domestic products to be sold in the
international market.

Domestic business: Sound, domestic policies are required to boost production and international trade. Some
countries like the US provide subsidies to local manufacturers for exported goods and services.

Trade agreements: Bilateral agreements govern international trade and define the products and their prices in
the global context.
External pressures: Many countries export items that face heavy competition in international market. This
results in market segmentation and low pricing. Countries that are mostly oil exporters or IT hubs tend to
generate favorable trade balance due to less competition in the international market. External pressures also
work in the form of trade bans. These bans are enforced by either individual countries or international
organizations such as the WTO or IMF.

Exchange rate: For nations with low exchange rate values, balance of trade tends to remain unfavorable.

Proactive market policies are required to ensure that a country’s trade balance remains favorable. A sound
trade balance represents an important benchmark as it reflects economic stability between nations. It fortifies
trade ties with other countries and generates immense possibilities to stem job losses, inflation and
unemployment.

Benefits Of Foreign Trade

Trade is not an end in itself, but a means to economic growth and national development. The primary
purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity.
For India to become a major player in world trade, an all encompassing, comprehensive view needs to be
taken for the overall development of the country's foreign trade.
While increase in exports is of vital importance, we have also to facilitate those imports which are required
to stimulate our economy. Coherence and consistency among trade and other economic policies is important
for maximizing the contribution of such policies to development. Thus, while incorporating the existing
practice of enunciating an annual Foreign Trade Policy, it is necessary to go much beyond and take an
integrated approach to the developmental requirements of India's foreign trade.
[pic][pic][pic][pic]The Foreign Trade Policy is built around two major objectives. These are:
• To double our percentage share of global merchandise trade within the next five years;
• To act as an effective instrument of economic growth by giving a thrust to employment generation.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all
having a major impact on the international trade system. Increasing international trade is crucial to the
continuance of globalization. Without international trade, nations would be limited to the goods and services
produced within their own borders..

Risk in international trade

Companies doing business across international borders face many of the same risks as would normally be
evident in strictly domestic transactions. For example,

• Buyer insolvency (purchaser cannot pay);

• Non-acceptance (buyer rejects goods as different from the agreed upon specifications);
• Credit risk (allowing the buyer to take possession of goods prior to payment);
• Regulatory risk (e.g., a change in rules that prevents the transaction);
• Intervention (governmental action to prevent a transaction being completed);
• Political risk (change in leadership interfering with transactions or prices); and
• War and other uncontrollable events.

In addition, international trade also faces the risk of unfavorable exchange rate movements (and, the
potential benefit of favorable movements).[28]

Top trading nations

Main articles: List of countries by exports and List of countries by imports
Rank Country Exports + Imports Date of
 information
- European Union (Extra-EU27) $3,197,000,000,000 2009 [26]
1 United States $2,439,700,000,000 2009 est.
2 People's Republic of China $2,208,000,000,000 2009 est.
3 Germany $2,052,000,000,000 2009 est.
4 Japan $1,006,900,000,000 2009 est.
5 France $989,000,000,000 2009 est.
6 United Kingdom $824,900,000,000 2009 est.
7 Netherlands $756,500,000,000 2009 est.
8 Italy $727,700,000,000 2009 est.
- Hong Kong $672,600,000,000 2009 est.
9 South Korea $668,500,000,000 2009 est.
10 Belgium $611,100,000,000 2009 est.
11 Canada $603,700,000,000 2009 est.
12 Spain $508,900,000,000 2009 est.
13 Russia $492,400,000,000 2009 est.
14 Mexico $458,200,000,000 2009 est.
15 Singapore $454,800,000,000 2009 est.
16 India $387,300,000,000 2009 est.
17 Taiwan (Republic of China) $371,400,000,000 2009 est.
18 Switzerland $367,300,000,000 2009 est.
19 Australia $322,400,000,000 2009 est.
20 United Arab Emirates $315,000,000,000 2009 est.

Source : Exports. Imports. The World Factbook.

Top traded commodities (exports)

Rank Commodity Value in US$('000) Date of
information
1 Mineral fuels, oils, distillation products, etc $1,658,851,456 2009
2 Electrical, electronic equipment $1,605,700,864 2009
3 Machinery, nuclear reactors, boilers, etc $1,520,199,680 2009
4 Vehicles other than railway, tramway $841,412,992 2009
5 Pharmaceutical products $416,039,840 2009
6 Optical, photo, technical, medical, etc apparatus $396,337,696 2009
7 Plastics and articles there of $386,628,064 2009
8 Pearls, precious stones, metals, coins, etc $320,174,080 2009
9 Organic chemicals $310,106,432 2009
10 Iron and steel $273,024,416 2009

Source: International Trade Centre [27]

Highlights of the
Annual Supplement 2010-11
to the
Foreign Trade Policy 2009-14
Higher Support for Market and Product Diversification

1. Additional benefit of 2% bonus, over and above the existing

benefits of 5% / 2% under Focus Product Scheme, allowed for about 135 existing products, which
have suffered due to recession in exports. Major sectors include all Handicrafts items, Silk Carpets,
Toys and Sports Goods (all of which were earlier eligible for 5% benefits); Leather Products and
Leather Footwear, Handloom Products and Engineering Items including Bicycle parts and Grinding
Media Balls (all of which were earlier eligible for 2% benefit).
2. 256 new products added under FPS (at 8 digit level), which
shall be entitled for benefits @ 2% of FOB value of exports to all markets. Major Sectors / Product
Groups are Engineering, Electronics, Rubber & Rubber Products, Other Oil Meals, Finished Leather,
Packaged Coconut Water and Coconut Shell worked items.
3. Instant Tea and CSNL Cardinol included for benefits under VKGUY @ 5% of FOB value of
exports.
4. Nearly 300 products (at 8 digit level) from the readymade
garment sector incentivised under MLFPS for further 6 months from October, 2010 to march, 2011
for exports to 27 EU countries.

Support for Technological up-gradation

5. Zero duty EPCG scheme, introduced in August 2009 and valid for only two years upto 31.3.2011,
has been extended by one more year till 31.3.2012. In addition, to give a boost to technological up-
gradation for additional sectors as well, the benefit of the scheme has been expanded to cover paper
& paperboard and articles thereof, ceramic products, refractories, glass & glassware, rubber &
articles thereof, Plywood and allied products, marine products, sports goods and toys and additional
engineering products.
6. Additional Towns of Export Excellence (TEEs) announced viz.Barmer (Rajasthan) for Handicrafts;
Bhiwandi (Maharashtra) for Textiles; and Agra (Uttar Pradesh) for Leather Products.

Benefit and flexibility to Status Holders:

7. Status Holders contribute to a substantial part of our exports. To support them to upgrade their
technology, 1% Status Holder Incentive Scheme (SHIS) introduced in August 2009 and valid for
only two years upto 31.3.2011, has been extended by one more year for 2011-12 exports. In addition,
to give a boost to technological up-gradation for additional sectors as well, the benefit of the scheme
has been expanded to cover chemical & Allied products, paper, paperboard and articles thereof,
ceramic products, refractories, glass & glassware, rubber & articles thereof, plywood and allied
products, electronics products,
sports goods and toys and additional engineering products.
8. Additional flexibility provided for transferability of Duty Credit Scrips being issued to Status
Holders under paragraph 3.13.4 of FTP under VKGUY scheme by allowing transfer of scrip for
import of cold chain equipments to unit(s) in the Food Park.

Stability / Continuity of the Foreign Trade Policy:

9. The popular and exporter friendly Duty Entitlement Passbook (DEPB) scheme has been extended
beyond 31.12.2010 till 30.06.2011.
10. Availability of concessional Export Credit:
Interest subvention of 2% for pre-shipment credit for export sectors namely, Handloom, Handicraft,
Carpet and SMEs for all export sectors, have been allowed till 31.3.2011 in the budget 2010-11. This
facility has now been extended to a number of additional products pertaining to sectors like
Engineering, leather, textiles, Jute.
11. Advance Authorization for Annual Requirement shall also be exempted from payment of anti-
dumping & Safeguard duty in line with the underlying principle that goods and services should be
exported and not the taxes and levies.
Procedural Simplification and Reduction of Transaction Cost:

12. Exporters shall now have the flexibility to get a high value
EPCG authorisation by filing their EPCG application on Annual basis, without the need to file the
application for individual capital goods from time to time. It will reduce transaction time and cost.
13. Exporters shall now have the flexibility to Club Advance
authorisation with Advance Authorisation for Annual Requirement for the purpose of account
closure.
14. To impart flexibility to exporters and to facilitate smooth
clearance of consignments, a Single customs notification for the two variants of Advance
Authorization scheme namely advance authorisation for physical exports & deemed exports shall be
issued. It will also eliminate the ambiguity in clubbing of such exports.
15. Adhoc Norms ratified under Advance Authorisation scheme
shall henceforth apply to all cases for the same export product upto one year not only prospectively
but also retrospectively.
16. Clarification on the availability of 4% SAD refund benefit, as
given by DOR in terms of customs Notification No. 102/2007, only to trader importers, to be also
extended to manufacturers, who sell the imported items like traders.
17. Chartered Engineer Certificate for Advance Authorisation on self declared basis, has been dispenced
with. This will reduce documentation and the transaction cost.

EDI Initiatives:

18. To reduce the transaction cost and time, the scope and domain of EDI is endeavoured to be
continuously broadened. To remove redundancy of repeated submissions of RCMC, an ‘e-RCMC’
initiative has been commenced. Under this, the Export Promotion Councils would upload the RCMC
data of their members on DGFT’s website only once, thus reducing the procedural burden of
repeated submissions and associated cost and time.
19. Facility of a data preparation module for Advance Authorization and Export Promotion Capital Good
(EPCG) has been provided on an offline mode, which would reduce the need of continuous online
interaction for long and address the connectivity and server response issues significantly.
20. In order to provide wider choice to the users and enlarge access for online filing, additional licenced
certifying authorities for digital signatures and banks for electronic fund transfer (EFT) operations
have been included in the gamut of EDI operations.
21. The online message exchange for Annual Advance Authorization and Duty Free Import
Authorization (DFIA) shall also be made operational with Customs w.e.f. 1.12.2010.

Leather Sector:

22. Leather sector shall be allowed re-export of unsold imported raw hides and skins and semi-finished
leather from Public bonded warehouses, without payment of any export duty. This will facilitate the
logistics for establishment of such warehouses and easy access to raw material for the leather sector.
23. Finished Leather export shall be entitled for Duty Credit Scrip @ 2% under FPS.
24. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme
would significantly benefit the Leather Sector.

Handloom sector:

25. Duty free import of specified trimmings, embellishments etc.

shall be available on Handloom made-ups exports @ 5% of FOB value of exports.
26. Additional 2% bonus benefits over and above the existing
benefits under Focus Product Scheme would significantly benefit the Handloom Sector.

Textiles sector:
 27. Duty free import of specified trimmings, embellishment etc shall be available @ 3% on exports of
polyester made-ups in line with the facility available to sectors like Textiles & Leather. It will
promote export of products such as micro cloth, which has become popular in home textiles.
28. Readymade Garment sector granted enhanced support under MLFPS for a period of further 6 months
from October, 2010 to March, 2011 for exports to 27 EU countries.

Gems & Jewellery sector:

29. The list of items allowed for duty free import by Gems &
Jewellery sector has been expanded by Inclusion of additional items such as Tags and labels,
Security censor on card, Staple wire, Poly bag. This will reduce the cost of the product to some
extent.

Handicraft Sector:

30. The facility of duty free import of tools under Duty Free Import scrips for Handicraft sector shall be
made operational.
31. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme will
significantly benefit the Handicrafts and Silk Carpets sectors.

Service sector:

32. Scrips issued under Served From India Scheme (SFIS) can now be used for payment of duty on
import of Vehicles, which are in the nature of professional equipment.

Agriculture and Plantation:

33. Instant Tea and CSNL Cardinol included for benefits under
VKGUY @ 5% of FOB value of exports.
34. Oil Meals (Cotton, rape seed, groundnut), Castor Oil derivatives, Packed Coconut Water and
Coconut Shell worked items shall be entitled for benefits @ 2% of FOB value of exports to all
markets under FPS.

Engineering and Electronics:

35. Additional 2% bonus benefits over and above the existing

benefits under Focus Product Scheme will significantly benefit Bicycle parts and Grinding Media
Balls exporters.
36. Additional items of Engineering, namely, Pipes & Tubes,
Electric Generating Sets, Cast Articles of Iron & Steel, Ferro Manganese and Ferro Silicon shall now
be entitled for benefit @ 2% under FPS.
37. A number of Engineering items namely, Machine Tools, Compressors, Iron & Steel Structures
including Transmission Towers and Scaffolding, LPG Cylinders, Ductile Tubes & Pipes shall now
be entitled for benefits @ 2% of FOB value of exports to all markets under FPS instead of their
exports to specific markets under MLFPS earlier.
38. Telecom Equipments, Colour TVs, Audio Systems, Optical Media, Semi-conductors, Capacitors,
Resistors, PCBs, LEDs, Conductors, Desktops and Notebooks shall now be entitled for benefits @
2% of FOB value of exports to all markets under FPS instead of their exports to limited market under
MLFPS earlier.

Toys and Sports goods:

39. Additional 2% bonus benefits over and above the existing benefits under Focus Product Scheme will
significantly benefit the Toys and Sports Goods Sector.
40. 40. Benefits under Zero duty EPCG and SHIS schemes will significantly promote technological
upgradation of Toys and Sports Goods sectors.