International Trade (Intl Trade) 101: Introduction to International Trade - Trade Barriers, Tariffs Specific Ad Valorem NonTariff Barriers Quotas Embargoes Subsidies Standards Licenses

What This Is

Trade barriers are restrictions on international trade that can either be tariffs (taxes on imported goods) or non-tariff barriers (NTBs). Tariffs can be specific (a fixed amount per unit) or ad valorem (a percentage of the goods' value). Non-tariff barriers include quotas (limits on quantity), embargoes (total bans), subsidies (government support), standards (regulations), and licenses (permits). Understanding trade barriers is crucial in international trade as they can significantly impact a company's profitability and competitiveness. For instance, a US importer may face a 25% tariff on Chinese solar panels, while a Chinese exporter may struggle to meet EU standards for food safety.

Key Terms & Rules

• Tariff: A tax on imported goods, which can be specific (e.g., $5 per unit) or ad valorem (e.g., 10% of the goods' value).
• Quota: A limit on the quantity of goods that can be imported or exported.
• Embargo: A total ban on the import or export of certain goods.
• Subsidy: Government support for domestic industries, which can distort international trade.
• Standard: A regulation or requirement for goods, such as safety or environmental standards.
• License: A permit or authorization required for the import or export of certain goods.
• Incoterms: International commercial terms that define the responsibilities of buyers and sellers, such as EXW (Ex Works) and FOB (Free on Board).
• UCP 600: Uniform Customs and Practice for Documentary Credits, which governs letter of credit transactions globally.
• HS Codes: Harmonized System codes that classify goods for customs purposes.
• Tariff Classification: The process of determining the correct tariff rate for imported goods.

Step-by-Step Process

1. Identify the trade barrier: Determine if the trade barrier is a tariff or non-tariff barrier, and if it's specific or ad valorem.
2. Research the regulations: Look up the relevant regulations, standards, and licenses required for the import or export of the goods.
3. Classify the goods: Use HS codes to classify the goods for customs purposes and determine the correct tariff rate.
4. Calculate the tariff: Calculate the tariff amount using the specific or ad valorem rate, and apply any quotas or embargoes.
5. Obtain necessary permits: Secure any required licenses or permits for the import or export of the goods.
6. Comply with standards: Ensure that the goods meet the relevant standards and regulations.

Common Mistakes

• Mistake: Confusing CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid To).
• Correction: CIF includes the cost of insurance, while CIP only includes the cost of carriage and insurance.
• Example: A US importer buys Chinese goods under CIF, but the insurance is not included, resulting in additional costs.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account means that the buyer pays without a letter of credit or bank guarantee, which can leave the buyer exposed to payment risks.
• Example: A Chinese exporter sells to a US buyer on open account, but the buyer defaults on payment, leaving the exporter with losses.
• Mistake: Misusing "free on board" with air freight.
• Correction: FOB only applies to sea or inland waterway transport, not air freight.
• Example: A US importer buys goods from a Chinese exporter under FOB Shanghai, but the goods are transported by air, resulting in additional costs.

Exam / Certification Tips

• FOB vs FCA: FOB (Free on Board) transfers risk at the port gate, while FCA (Free Carrier) transfers risk at the seller's premises.
• Confirmed vs unconfirmed LC: A confirmed letter of credit is guaranteed by the issuing bank, while an unconfirmed letter of credit is not.
• DPU (Destination Port Unloaded) successor to DAT (Destination Arrival Terminal): DPU is a more specific term that replaces DAT.
• Common question patterns: Tariff classification, Incoterms, and letter of credit transactions.

Quick Practice Scenario

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

Answer: The buyer pays for the main carriage.

Explanation: FOB transfers risk at the port gate, which includes the main carriage.

Last-Minute Cram Sheet

• Tariffs can be specific or ad valorem.
• Quotas limit the quantity of goods that can be imported or exported.
• Embargoes ban the import or export of certain goods.
• Subsidies distort international trade.
• Standards regulate goods, such as safety or environmental standards.
• Licenses are permits or authorizations required for the import or export of certain goods.
• Incoterms define the responsibilities of buyers and sellers.
• UCP 600 governs letter of credit transactions globally.
• HS codes classify goods for customs purposes.
• Tariff classification determines the correct tariff rate for imported goods.
• CIF includes the cost of insurance, while CIP only includes the cost of carriage and insurance.
• Open account means that the buyer pays without a letter of credit or bank guarantee.
• FOB only applies to sea or inland waterway transport, not air freight.
• DPU is a more specific term that replaces DAT.
• Confirmed letters of credit are guaranteed by the issuing bank, while unconfirmed letters of credit are not.
• Tariff classification, Incoterms, and letter of credit transactions are common question patterns.