International Trade

Finance - Overview
(GHANA)
By

Richmond A. Atuahene (Principal Consultant)

Introduction to International Trade

Goods and Services

International trade is the process of buying

and selling between two parties in two
different countries where business activity
calls for payment or settlement in a foreign
currency e.g. (trading of cocoa between
Ghana Cocoa Marketing Company Limited
and Gill and Duffus UK Company Limited).

Continuation

Trading can be conducted for both goods

and services. International trade can be
categorized into visible and invisible trade
where variables are the exports and
imports of goods and invisible trade is the
use of services from other countries, for
example insurance, banking etc.
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Ctd.

The complexities in International Trade

require imaginative and proactive
strategies. It is increasingly vital that
companies receive quality advice from
expert sources to help them make informed
business decisions on the international
trade business.
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Why Companies Expand Into Foreign Markets

To gain access to new customers Expanding into the markets of foreign

countries offers potential for increased
revenues, profits, and long-term growth and
becomes an especially attractive option when
a company's home markets are mature or
saturated.

Firms like Ghana Cocoa Board Ltd, Sony,

Nokia and Toyota from Japan; Mercedes
Benz from Germany, General Motors
motors from USA, British Airways and
British Petroleum which are racing for
global leadership in their respective
industries, must move rapidly and
aggressively to extend their market reach
into all corners of the world.

To achieve lower costs and enhance the

firm's competitiveness

Many companies are driven to sell in more

than one country because the sales
volume achieved in their own domestic
markets is not large enough to fully capture
manufacturing economies of scale and
experience curve effects and thereby
substantially improve a firm's cost
competitiveness.
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The relatively small size of country markets in

Europe explains why companies such as
Nestle previously began selling their products
all across Europe and then moved into
markets in North America, Africa and Latin
America.

To capitalize on its core competencies

A company with competitively valuable

competencies and capabilities may be able to
leverage them into a position of competitive
advantage in foreign markets as well as just
domestic markets. Nokia's competencies and
capabilities in mobile phones have propelled it to
global market leadership in the wireless
telecommunications business.
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To spread its business risk across a

wider market base

A company spreads business risk by

operating in a number of different foreign
countries rather than depending entirely
on operations in its own domestic market.

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Thus, if the economies of certain Asian

countries turn down for a period of time, the
company may be sustained by buoyant
sales in emerging markets in Latin
America, Africa, or Europe. Globalisation
and improved technologies equally offer
immense opportunities for firms to expand
into other markets to benefit from economies
of scale and tax advantages.
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In a few cases, companies in natural

resourcebased industries (like oil and
gas, minerals, rubber, cocoa and lumber)
often find it necessary to operate in the
international arena because attractive raw
material supplies are located in foreign
countries.
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Differences between International Trade

and Domestic Trade
Domestic trade has the following features
which are common for both seller and
buyer but differ entirely from that of
International Trade:
A single currency is the mode of payment
Trading is conducted under the same law

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Documentation to the domestic trade is very

simple
Business is done in absence of stringent
Customs Excise and Preventive regulations
No or little transportation difficulties are
encountered
Most businesses are conducted under
common language and culture

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Inherent Problems/difficulties in
International Trade
As well as the normal problems of trade and
commerce which arise in the domestic
trade there are several additional difficulties
associated with International Trade. Some
of the problems are:
time and distance
differences in laws/customs

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documentation
government regulations
exchange control regulation
transit charges

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Time and Distance

The time lag between placing an order from the

suppliers by the buyer could affect trade in so
many ways i.e. changes in pricing, additional
working capital requirement on the part of the
supplier, non-payment on the part of the buyer,
changes in customers taste, substitute product
and non-delivery time lag. These make the
credit risk potentially severe for the exporter.

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In addition differences in time zone result in

communication difficulties. Distance
between the supplier and buyer also has an
impact on International Trade. The
movement of goods from the supplier to the
buyer also affects the trade because the
distance between the two parties and the
type of transport determine the type of trade.
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Differences in Foreign Customs/Laws

Lack of knowledge and understanding

about customs, habits and laws of the
buyers or the sellers country create an
extra degree of uncertainty or mistrust
between the two parties involved in the
trade e.g. (exporting pork to any Moslem
country).

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One way of overcoming the difficulties of

different customs and laws is to standardize
procedures in International Trade. The
International Chamber of Commerce provides
uniform rules or practices in the conduct of
International Trade and if exporters, importers
and banks agree to abide by these rules and
practices, misunderstanding and uncertainty
will be removed.
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Documentation

Documentation in international trade is

more complicated than in domestic trade.
The nature of the trade, transportation
requirement, mode of payment and terms
of delivery used in the trade call for
comprehensive and thorough
understanding of documents used.

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Government Regulations
Government regulations on imports and exports
can be a serious threat to International Trade.
Examples of regulations and restrictions are:
exchange control regulations
export licensing
import licensing (system that existed in Ghana
until the Economic Recovery Programme in
1993)

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Trade embargoes the export of certain goods

from a country might be prohibited (South Africa
during the Apartheid era, Iraqi War in 1990 and
also UN sanctions against certain countries
which individual signatories to the world bodys
resolutions are expected to comply with ).

Patent and trademarks

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Import quotas a country might place restriction on the

total quantities of certain goods that may be imported each
month, each quarter or year.

Health and hygiene requirements notably on foods and

drugs. Various countries or economic blocks have standard
rules for imports into their respective environments. The
American Food and Drug Administration Board is one such
regulator which determines what may food and drugs may
be imported into the United States of America..

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Exchange Control Regulation

Exchange Control is a system of controlling the

inflows and outflows of foreign exchange in
and out of a country. The term exchange
control refers to extra measures taken by
Government in defense of its currency.
Typically, a government might enforce
regulations:

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Requiring individuals or firms to obtain foreign

exchange approval from the Central Bank
before engaging in international trade activities.

Rationing the supply of foreign exchange to

those wishing to make payment abroad in a
foreign currency.

Making the holding of foreign currency or

exchange illegal by legislation.

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Principal Players in International Trade

Exporters
Exporters are at the source of any international trade
transaction. They may be manufacturers, traders,
farmers or commodity producers. They sell goods or
services to overseas buyers in a variety of ways and,
unless they are part of a large group, will almost
certainly require the services of the other main
players. Their aim is to get their goods to buyers
around the world in the quickest and safest manner
possible and to be paid in the correct currency and
within their agreed terms of settlement.
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Importers

Importers may equally be manufacturers buying

raw materials for their factories, oil companies
buying crude oil for refining, or simply merchants
and traders fulfilling contracts with domestic and
foreign consumers. For the latter, import finance
is generally critical, often bridging the period
between import and resale. Consequently,
merchants and traders rely heavily on banks and
warehousemen to whom they will pledge their
goods before they are re-packed and transported
to final buyers.
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Freight Forwarders

Freight forwarders, or forwarding agents as

they are otherwise known, are probably the
most versatile operators in the trade chain.
They collect goods from exporters,
sometimes actually packing them for
shipment, transport them to ports of
shipment by road, rail or barge and arrange
with the shipping company (or airline) for
them to be loaded on board their vessels.
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Warehousemen

Warehousemen perform a valuable service prior

to the shipment of goods and after their arrival at
the port of destination. As they are always
holding goods belonging to a third party it is
essential that they meet stringent security
requirements, the most important of which is that
they should be completely independent.

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Carriers

Goods may be transported in a number of

different ways and by several types of carriers.
We have dealt with freight forwarders who can
handle goods through their journey via
different modes of carriage and for which they
issue multimodal transport documents. But
there exists a need for independent road
hauliers, barge operators and railway
companies to carry goods on specific routes
and to be responsible for the whole journey.
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Insurers
Any movement of goods by sea, air or land
transport involves certain hazards. However
well a consignment is packed there is always
the possibility of damage being incurred in
transit. In some parts of the world, piracy and
hijacking is prevalent. Most shipments are
financed by banks or other finance institutions
who want to ensure that their security, for that
is what the goods generally are, is properly
insured.
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Banks
The importance of the role played by banks
in trade finance cannot be over-stressed.
They provide a multitude of services to
every operator in the trade chain and for
every stage of any transaction. Banking
instruments and techniques which have
been developed over hundreds of years are
made available with world-wide branch
networks, affiliates and correspondents.
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Government Agencies And

International Financial Institutions
In times of recession and following natural
disasters those countries most affected
are often unable to purchase essential
commodities, foodstuff and fuels. To
provide assistance a number of
organizations have been set up with funds
subscribed by member countries.

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THE END!

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