Countries import either what they can't produce domestically or what can be produced in foreign markets more cheaply and efficiently, and they export the excess of what they produce. The U.S. has historically run a large trade deficit because it imports far more than it exports.
Each country has its own international trade policy, which balances the needs of its citizens to obtain goods and services at the lowest price against the needs of its businesses that produce those goods and services. One reason that the U.S. runs a trade deficit is that its trade policy typically favors the consumer over the producer. As a result, its trade rules tend to encourage other countries to sell their products in the U.S.
Other countries approach international trade differently and erect trade barriers that discourage countries from exporting goods and services to those countries. Japan's trade rules, for example, tend to favor the producer over the consumer, which helps its businesses but forces its citizens to pay comparatively higher prices for their goods and services.
Tariffs. One means by which countries implement their trade policy is called tariffs, which are duties or fees imposed on certain goods or services. For example, to protect its domestic steel industry, the U.S. imposed tariffs on imported steel to drive up the cost. Without the tariffs, U.S. steel consumers would purchase their steel from countries that could produce steel more cheaply and efficiently than U.S. steel companies could, thus imperiling those U.S. companies. The U.S. government doesn't want domestic steel companies to go out of business because domestically produced steel may be needed at critical times, such as at wartime.
Although tariffs are generally thought to be imposed only on imports, in fact they are also imposed on exports. Export tariffs are designed to ensure that domestic needs of certain products or services are met by raising the cost of exporting those goods and services.
Most-favored-nation status. When a country accords another country most-favored-nation trading status, it means that a discounted tariff is imposed on goods and services imported from that country. In the U.S., there are several ways that a country can get most-favored-nation status, but practically speaking all countries have most-favored-nation status except those that by some law are denied the status.
The status of those countries that do not have most-favored-nation status is reviewed from time to time. Legislation has actually replaced the term "most-favored-nation" with the term "normal trade relations," but most-favored-nation continues to be used.
Subsidies. Another means by which countries implement their trade policy is subsidies, which are payments made by the government to businesses within certain industries, usually because the government believes that the industry provides an essential good or service. U.S. farm subsidies are one example. The U.S. government props up the farm industry because food production is an essential industry.
Currency exchange rates. An exchange rate is the price of one country's currency in terms of another country's currency. Importers frequently have to buy foreign goods or services in the currency where the good or service is sold. If not, they are least need to know the value between currencies in order to determine the cost of what they're buying.
International monetary markets are the means by which the relative values of currencies are set. The actual value of a currency is determined by the supply and demand for the currency in the international currency markets.
Trading unions. Various international agreements and organizations exist to facilitate trade among nations that sign the agreements or join the organization. Here are some of the more common examples.
GATT. The General Agreement on Tariffs and Trade, first signed in 1947, provided an international forum to encourage free trade between member states. Primarily, it reduced tariffs on certain goods and provided a common dispute-resolution mechanism. More than 110 countries are members of GATT.
WTO. The World Trade Organization is an international organization based in Geneva that was established in 1995 to serve as a global trading union for member nations. It administers WTO trade agreements, serves as a forum for trade negotiations, handles trade disputes, monitors national trade policies, and provides technical assistance to developing countries. Most of the world's trading nations are members of the WTO. One example of how the WTO operates was the trade dispute between the European Union and the U.S. over U.S. laws that allowed U.S. corporations to establish tax havens in the Virgin Islands called foreign sales corporations. The EU alleged that the tax scheme violated international trade rules by allowing U.S. corporations to avoid $4 billion in taxes each year. The WTO sided with the EU and allowed it to impose $4 billion in tariffs on U.S. goods to put pressure on the U.S. Congress to change the tax laws.
NAFTA. The North American Free Trade Agreement was created in 1994 among the U.S., Mexico, and Canada to establish a free trade area across North America that would eliminate trade barriers, promote fair competition, and increase investment opportunities. Critics of NAFTA contend that it is has hurt U.S. workers by enabling U.S. companies to move jobs to Mexico, in particular, where labor is cheaper.
EU. The European Union, begun just after World War II as the European Community, was created to unite European nations economically in order to avoid another war. In 1993, the European Union was finally officially established as a single market in which goods and services could move through member countries as if they were a single country.
The member states of the European Union form a customs union, which means that they apply a common tariff on goods and services imported from outside the EU, but they do not apply any tariffs on those goods and services once they are inside the EU. The Maastricht Treaty on European Union created a single currency and a central EU bank.
IMF. The International Monetary Fund is a United Nations agency with 184 member countries that was established in 1945 to promote world financial health by providing loans to various countries. Headquartered in Washington, the IMF typically places conditions on the loans that it believes will lead to sound fiscal policy and help the countries grow economically.
The IMF is also the central institution of the international monetary system, which includes international payments and exchange rates among national currencies that enables business to take place between countries.
World Bank. The World Bank, headquartered in Washington, was established in 1944 to provide development assistance to poorer countries. It has 184 member nations. It provides loans and grants aimed at eliminating poverty in developing countries.
Import-export terms. There are a number of terms unique to the world of importers and exporters. The following are a few key terms.
HS numbers. Each individual product involved in international trade is assigned a Harmonized System number. Customs officials use the HS numbers to identify products in order to apply duties and taxes. The numbers are typically 6 to 10 digits long. The first 6 digits are standardized worldwide; some governments use the other 4 to distinguish products in certain categories. In the United States, HS numbers are also called Schedule B and HS Tariff Classification numbers.
Freight forwarder. Freight forwarders advise clients on how to move goods most efficiently from one destination to another. They can, for example, provide advice on documentation, regulations, transportation costs, and banking practices. They are licensed by the International Air Transportation Association for air exportation and by the Federal Maritime Commission for handling ocean-bound cargo.
Customs broker. Importers hire customs brokers to guide their goods into a country. The broker advises the importer on how to get goods through customs. U.S. exporters generally don't directly hire foreign customs brokers because freight forwarders typically have arrangements with foreign customs brokers.
Duty rates. CIF (Cost, Insurance, Freight) and FOB (Free on Board) are the two generally accepted methods for calculating duty rates. Most countries use the CIF method, which is a term indicating that the cost of goods, insurance, and freight are included in the quoted price. FOB, on the other hand, is a term that applies to the commercial invoice value and does not include the cost of shipping and insurance. FOB applies only to shipments via sea or inland waterway transport.
Customs charges. Miscellaneous customs charges can add to a product's final cost. The buyer is usually responsible for paying the charges, but it ultimately depends on how the contract is worded.
Incoterms. International commercial terms, usually frequently in international contracts, guide buyers and sellers in determining who is responsible for paying the fees associated with foreign trade. The terms are published by the International Chamber of Commerce. Their goal is to outline exactly who is obligated to take control of or insure goods at a particular point in the shipping process. are widely used and exceedingly handy, they are not meant for every type of contract. Specifically, the terms used in a contract state exactly when the shipper unloads and relinquishes obligation, and when the buyer takes over for carriage and insurance. The Incoterms are not meant to replace statements in a contract of sale that outline transfers of ownership or title to goods. Therefore, the Incoterms may not be of use when looking to resolve disputes that may arise regarding payment or ownership of goods.
Federal assistance. The U.S. government provides assistance to importers and exporters. The following are some of the resources that are available.
International Trade Administration. The International Trade Administration is dedicated to opening markets for U.S. products and providing assistance and information to exporters. It export-focused offices in the U.S. and around the world, which perform analyses, promote products, and offer services and programs for the U.S. exporting community.
The Trade Information Center. The Trade Information Center provides additional export assistance. It provides counseling and services, including guidance on the services available from the U.S. government.
U.S. and Foreign Commercial Service. The US&FCS promotes the export of goods and services from the United States, particularly by small- and medium-sized businesses.
The Export Assistance Center Network. The U.S. Department of Commerce, the U.S. Small Business Administration, the Export-Import Bank, the U.S. Agency for International Development, and the U.S. Department of Agriculture have joined forces to establish a nationwide network of Export Assistance Centers (EACs). EACs provide small- and medium-sized American businesses with hands-on export marketing and trade finance support.