International Trade (Intl Trade) 101: International Trade Theories Mercantilism ZeroSum Trade Surplus NeoMercantilism

What This Is

Mercantilism is an economic theory that a country's wealth and power can be increased by exporting more goods and services than it imports. This concept is still relevant in international trade, where countries often engage in trade wars and protectionism. For example, consider a shipment of Chinese electronics to the US. If China exports more goods to the US than it imports, it will have a trade surplus, which can lead to a stronger currency and increased economic power.

Key Terms & Rules

• Zero-Sum Game: An economic theory where one country's gain is another country's loss. In international trade, a zero-sum game can lead to trade wars and protectionism.
• Trade Surplus: When a country exports more goods and services than it imports, resulting in a positive balance of trade.
• Trade Deficit: When a country imports more goods and services than it exports, resulting in a negative balance of trade.
• Neo-Mercantilism: A modern version of mercantilism, where countries use trade policies to promote their domestic industries and increase their economic power.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers in international trade. Examples include EXW, FOB, and CIF.
• UCP 600: Uniform Customs and Practice for Documentary Credits, which governs letter of credit transactions globally.
• Letter of Credit (LC): A financial instrument that guarantees payment to the seller upon presentation of compliant documents.
• Confirmed LC: A letter of credit that is guaranteed by the issuing bank, providing additional security to the seller.
• Unconfirmed LC: A letter of credit that is not guaranteed by the issuing bank, providing less security to the seller.
• HS Codes: Harmonized System codes, which are used to classify goods for customs purposes.

Step-by-Step Process

1. Determine the trade balance: Calculate the difference between a country's exports and imports to determine its trade balance.
2. Identify the trade policy: Determine whether the country is pursuing a trade surplus or deficit, and what trade policies are in place to achieve this goal.
3. Apply Incoterms: Use Incoterms to determine the responsibilities of buyers and sellers in international trade.
4. Use LCs: Utilize letters of credit to guarantee payment to sellers and ensure compliance with trade regulations.
5. Classify goods: Use HS codes to classify goods for customs purposes and determine applicable duties and taxes.

Common Mistakes

• Mistake: Confusing CIF and CIP Incoterms.
• Correction: CIF (Cost, Insurance, and Freight) includes the cost of insurance, while CIP (Carriage and Insurance Paid To) only includes the cost of carriage and insurance.
• Example: A seller ships goods to a buyer under CIF terms, but the buyer assumes CIP terms and disputes the insurance costs.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account transactions do not involve a letter of credit or bank guarantee, leaving the buyer and seller exposed to payment and delivery risks.
• Example: A buyer purchases goods from a seller on open account terms, but the seller fails to deliver the goods, leaving the buyer with no recourse.
• Mistake: Misusing "free on board" with air freight.
• Correction: Free on board (FOB) is typically used with sea or inland waterway transport, not air freight.
• Example: A seller ships goods to a buyer under FOB terms, but the buyer assumes the seller is responsible for air freight costs.

Exam / Certification Tips

• FOB vs FCA: FOB (Free on Board) transfers risk to the buyer when the goods are on board the vessel, while FCA (Free Carrier) transfers risk to the buyer when the goods are handed over to the carrier.
• Confirmed vs Unconfirmed LC: A confirmed letter of credit is guaranteed by the issuing bank, providing additional security to the seller, while an unconfirmed letter of credit is not guaranteed by the issuing bank.
• DPU (Destination Port Unloaded) vs DAT (Destination Port Unloaded and Tolerated): DPU requires the goods to be unloaded at the destination port, while DAT allows for a tolerance of 10% of the goods being unloaded at a different port.

Quick Practice Scenario

Scenario: A Chinese exporter sells goods to a US importer under FOB Shanghai terms. Who pays for the main carriage?

Answer: The buyer pays for the main carriage.

Explanation: Under FOB terms, the seller is responsible for delivering the goods to the buyer's carrier, but the buyer is responsible for the main carriage costs.

Last-Minute Cram Sheet

• Zero-Sum Game: An economic theory where one country's gain is another country's loss.
• Trade Surplus: When a country exports more goods and services than it imports.
• Trade Deficit: When a country imports more goods and services than it exports.
• Neo-Mercantilism: A modern version of mercantilism, where countries use trade policies to promote their domestic industries and increase their economic power.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers in international trade.
• UCP 600: Uniform Customs and Practice for Documentary Credits, which governs letter of credit transactions globally.
• Letter of Credit (LC): A financial instrument that guarantees payment to the seller upon presentation of compliant documents.
• Confirmed LC: A letter of credit that is guaranteed by the issuing bank, providing additional security to the seller.
• Unconfirmed LC: A letter of credit that is not guaranteed by the issuing bank, providing less security to the seller.
• HS Codes: Harmonized System codes, which are used to classify goods for customs purposes.
• CIF (Cost, Insurance, and Freight): Includes the cost of insurance, while CIP (Carriage and Insurance Paid To) only includes the cost of carriage and insurance.
• FOB (Free on Board): Transfers risk to the buyer when the goods are on board the vessel, while FCA (Free Carrier) transfers risk to the buyer when the goods are handed over to the carrier.
• Confirmed vs Unconfirmed LC: A confirmed letter of credit is guaranteed by the issuing bank, providing additional security to the seller, while an unconfirmed letter of credit is not guaranteed by the issuing bank.
• DPU (Destination Port Unloaded) vs DAT (Destination Port Unloaded and Tolerated): DPU requires the goods to be unloaded at the destination port, while DAT allows for a tolerance of 10% of the goods being unloaded at a different port.