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MEANING OF foreign trade  : Exchange of goods and services between countries. The inclination for onecountry to trade with another is based in large part on the idea of comparative advantage--which says thatany country, no matter how technologically disadvantaged it might be, can always find some sort of goodthat 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 foreigntrade 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 internationaltrade 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 thata border typically imposes additional costs such as tariffs, time costs due to border delays and costsassociated with country differences such as language, the legal system or culture.

BOT

• Records only merchandise

transactions• Does not record transactionsof 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 CapitalTransactions.

Balance of paymentsA 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 internationaltransactions for a specific period, usually a year, and is prepared in a single currency, typically the domesticcurrency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans

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and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest inforeign 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 balancewill be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earnedfrom 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 countriesaccumulating 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 aresomething governments should be concerned about. With record imbalances held up as one of thecontributing factors to the financial crisis of 2007–2010, plans to address global imbalances are now high onthe 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 aswhether 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 andunilateral 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 accountsurplus 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

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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'sholding of cash. They increase when the individual has a surplus in his transactions and decrease when hehas a deficit. When a country enjoys a net surplus both in current account & capital account, it increasesforeign exchange reserves. Whenever current account deficit exceeds the inflow in capital account, foreignexchange 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 beentransferred to the foreign exchange reserves.

Foreign exchange reserves (forex) are used to meet the deficit in the balance of payments. The entry is in thereceipt side as we receive the forex for the particular year by reducing the balance from the reserves. Whensurplus 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 maynot yet recorded, or a payment of dividend abroad by an MNC operating in India may not yet recorded or soon. The errors and omissions amount equals to the amount necessary to balance both the sides.

Balance of tradeThe balance of trade (or net exports, sometimes symbolized as NX ) is the difference between the monetaryvalue of exports and imports of output in an economy over a certain period. It is the relationship between anation'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 tradedeficit 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 ModernEurope 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 fromstrangers than we sell them, for so should we impoverish ourselves and enrich them." [2] Similarly asystematic 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 theinternational market.

Domestic business: Sound, domestic policies are required to boost production and international trade. Somecountries 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 inthe global context.

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External pressures: Many countries export items that face heavy competition in international market. Thisresults in market segmentation and low pricing. Countries that are mostly oil exporters or IT hubs tend togenerate favorable trade balance due to less competition in the international market. External pressures alsowork in the form of trade bans. These bans are enforced by either individual countries or internationalorganizations 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 soundtrade balance represents an important benchmark as it reflects economic stability between nations. It fortifiestrade ties with other countries and generates immense possibilities to stem job losses, inflation andunemployment.

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 betaken 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 requiredto stimulate our economy. Coherence and consistency among trade and other economic policies is importantfor 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 anintegrated 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 allhaving a major impact on the international trade system. Increasing international trade is crucial to thecontinuance 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 beevident 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  

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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 2010-11to the

Foreign Trade Policy 2009-14

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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, whichhave 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 andLeather Footwear, Handloom Products and Engineering Items including Bicycle parts and GrindingMedia Balls (all of which were earlier eligible for 2% benefit).

2. 256 new products added under FPS (at 8 digit level), whichshall be entitled for benefits @ 2% of FOB value of exports to all markets. Major Sectors / ProductGroups 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 readymadegarment sector incentivised under MLFPS for further 6 months from October, 2010 to march, 2011for 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 additionalengineering 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 schemehas 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. Thisfacility has now been extended to a number of additional products pertaining to sectors likeEngineering, 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 beexported and not the taxes and levies.

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Procedural Simplification and Reduction of Transaction Cost:

12. Exporters shall now have the flexibility to get a high valueEPCG authorisation by filing their EPCG application on Annual basis, without the need to file theapplication for individual capital goods from time to time. It will reduce transaction time and cost.

13. Exporters shall now have the flexibility to Club Advanceauthorisation with Advance Authorisation for Annual Requirement for the purpose of accountclosure.

14. To impart flexibility to exporters and to facilitate smoothclearance of consignments, a Single customs notification for the two variants of AdvanceAuthorization scheme namely advance authorisation for physical exports & deemed exports shall beissued. It will also eliminate the ambiguity in clubbing of such exports.

15. Adhoc Norms ratified under Advance Authorisation schemeshall 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 dispencedwith. 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 becontinuously 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 RCMCdata 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 onlineinteraction 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 licencedcertifying authorities for digital signatures and banks for electronic fund transfer (EFT) operationshave been included in the gamut of EDI operations.

21. The online message exchange for Annual Advance Authorization and Duty Free ImportAuthorization (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-finishedleather from Public bonded warehouses, without payment of any export duty. This will facilitate thelogistics 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:

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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 monthsfrom 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 someextent.

Handicraft Sector:

30. The facility of duty free import of tools under Duty Free Import scrips for Handicraft sector shall bemade 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 onimport 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 andCoconut Shell worked items shall be entitled for benefits @ 2% of FOB value of exports to allmarkets 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 MediaBalls 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 willsignificantly benefit the Toys and Sports Goods Sector.

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40. 40. Benefits under Zero duty EPCG and SHIS schemes will significantly promote technologicalupgradation of Toys and Sports Goods sectors.