ITL is defined as the exchange of goods and services amongst the country for a particular

commodity by way of an agreement between the parties involved. It depends on 4 major

factors: land, capital, labour, and natural resources.

Every country has a combination of the factors mentioned above. For example, India and
China could provide cheap labour and land whereas the USA can provide a sufficient amount
of capital for the production of commodities which will lead to the exchange of goods.

The countries cannot sustain independently without getting involved in IT from another
country as it would be difficult to get access to all the 4 factors required for IT. Therefore,
countries are interdependent through the import and export of goods and services and the ITL
regularises the same concern.

Whenever the domestic production of a particular commodity is greater than the domestic
demand then the excess commodity is traded in the intl. market.

TYPES OF ITL AGREEMENTS:

1. Bilateral agreement

It refers to the agreement between two countries for trading in a particular item. For example,
India and China where the former export rice and wheat to China and import electronic
devices.

2. Multilateral agreement

It refers to an agreement between two or more countries exchanging or trading two or more
commodities with each other. Eg., USA, Mexico, and China trade agreements.

ITL could be defined as the governing legislation for world trade countries that are a part of
WTO, which needs to comply with standardized laws and regulations to stay active in the
Intl. market.

ITL can have both pvt. and public aspects. The public aspect is concerned with regulating
state foreign policies, whereas the private aspect is concerned with terms and conditions
required between two or more enterprises of different nationalities. Therefore, the ITL has
been established to promote free trade and eradicate any kind of monopoly in the domestic or
the Intl. market, and allow consumers to get access to goods and services beyond national
boundaries.

1
HISTORY OF ITL

 After WW II, the USA emerged as the leading country concerning economic, social,
and political status.
 The 1944 Bretton Woods Conference was conducted in which the countries had an
idea to open their domestic boundaries for IT with other countries. Due to this, the
countries required common financial support which led to the creation of IMF and
WB.
 Multiple negotiations by the countries took place under the given economic and social
council. The negotiations took place in New York, Geneva, and Havana.
 In the Geneva negotiations of 1947, three basic objectives were formed-
- The formation of ITO
- Tariff reduction rate
- General agreement for tariff and trade (GATT)
 By the end of 1947, the tariff reduction rules and regulations were established along
with the general trade practices. Therefore, the countries decided to execute the tariff
reduction and GATT by adopting a protocol on the provisional application of GATT.
It was decided that until and unless the ITO charter has been established, the practices
among themselves and later on GATT could be revised or amended after the
formulation of specific trade provisions in the ITO charter.

Note- GATT- every country who signed the agreement shall follow

ITO-specific trade principles between two or three countries shall follow.

 By the end of 1948 in the Havana negotiation round, the ITO charter was
completely established but the support from the USA was at a critical state. In 1950,
the republican govt. in the USA decided not to support the IT charter due to which
ITO came to a dead end.
 Given that, ITO never came into existence, GATT was the only trade practice that
remained effective due to the protocol for a provisional application for 50 years
(started in 1948 after the Havana negotiation).
 The failure of ITO also failed the basic idea or objective of the Bretton Woods
conference which is to form an ITO along with IMF and WB.

2
 GATT transformed from Intl. treaty to Intl. Org.
The internal committee that drafted the ITO became a GATT secretarial committee.
However, although countries did not have any specific trade principles to be followed
for IT, they only followed general trade principles.
 for 50 years, GATT was a provisional execution for IT but it did not have any
authority for decision-making for any dispute between the countries. Also, the major
dominant power over GATT was of the developed countries and the concerns of
developing countries were not the primary focus of GATT.

GATT is always a provisional authority for trading

Uruguay and Tokyo – last GATT conf.

WTO – replaced the GATT after 50yrs of its existence

GATT was est. as the only ITO between countries and it went through 8 trade rounds of
negotiation for the tariff reduction

The first 5 trade rounds were bilateral trade rounds in which countries provided certain
tax reductions to one another for specific commodities.

The next 2 were based upon non-tariff barriers such as license allotment or foreign trade
exchange conditions. The final Uruguay round of 1986 was the largest and longest trade
negotiation round as it had 123 member countries and it continued for 7.5 years.

 In the Uruguay round, the countries decided to expand IT into services, agricultural
products, IPs, and textiles with an obj. to expand IT.
GATT only focused on the trade of goods and not the other areas mentioned above.
 In the Uruguay round which continued at Montreal in 1986, the countries decided
w.r.t the agricultural sector, lower taxes would be applicable for tropical products in
the developing countries.
 The Uruguay round also est. a trade policy review mechanism to check whether the
member countries are complying with the provisions of GATT in their domestic laws.
 The Uruguay round which continued to Brussels in 1990, the countries realized that
the scope of IT had expanded to sectors other than goods and services. IP’s,
agriculture, textile. The need for permanent ITO was emphasized. Therefore, all the
provisions in GATT were again reviewed and a final Act on trade policy was drafted.
 The permanent ITO was needed because GATT was only provisionally executed.
3
  While drafting the final trade policies in 1992, the USA and EU had conflicts over the
trade laws over agricultural products. Due to this, the final Act could not be
completed.
Both countries resolved their dispute through an agreement namely the Blair House
Accord.
 In 1993, the USA, EU, Japan, and Canada announced significant tariff reductions for
developing countries to get equal access in the intl. market.
 Finally in 1994, the final Act was drafted and signed by 123 countries in Marrakesh
agreement provisions regarding agricultural textile products under the Doha
Development Agenda (1st Jan 1995 WTO came into force). In other words, WTO
contains negotiating provisions that can be carried out whenever required.

GATT WTO
It only focuses on the trade of goods It focuses on the agricultural trade of services,
IP, and textile
It was provisionally executed due to the failure WTO is a permanent ITO and has a
of the ITO charter permanent legal authority
The dispute resolution was lengthy and GATT The dispute resolution was quicker
as a deciding authority was critical comparatively and it was the legally deciding
authority for any IT dispute
The countries involved in GATT were Since WTO was a permanent international.
considered as contracting parties as it was a org., the countries involved are known as
mere intl. treaty member countries

NEED FOR ITO

 IT will reduce the dependency of countries on their local market and the consumers
will have a variety of choices for goods and services
 It increases the economic status and political relations with other countries along with
the productivity and efficiency of that country
 IT does not allow any concentration of power or monopoly of any one sector in the
country

4
  IT existed before the existence of money through the barter system. Countries must
trade amongst themselves as they cannot be self-sufficient and have to depend upon
other countries
 The profits from IT expand to diff. sectors of a country and increase their importation
and exportation that leads to an overall increase in the country’s GDP

THEORIES OF ITL

 Classical theory

Before WW II and the emergence of industrialization, IT between countries used to follow

classical or country-based theory.

The approach of this theory was to increase the wealth of own country and become self-
sufficient. However, after WW II, due to the rise of industrialization and consumer interest, a
strong and permanent ITO was needed as no country had a combination of all 4 factors to
boost its economic status.

The country-based theories were divided into three divisions: Mercantilism theory, absolute
cost advantage theory, comparative advantage theory, and Hecksher Ohlin theory

a. Mercantilism theory
In the 17th century, the 1st classical theory which gave the idea of countries being self-
sufficient in their economic status was given by the theory of mercantilism. The
approach of this theory was to encourage exportation and not importation. In other
words, the countries should produce goods and services in abundance within their
local market and should sell the same in the Intl. market but not vice versa.
The objective of this theory depended upon the traditional thinking of calculating
wealth in a country, i.e., when the kings used to rule the countries, they judged the
economic status of a country by the amount of wealth in terms of gold and silver.
Therefore, the countries were encouraged to export their products and get gold or
silver in return.
The countries should produce large amounts of goods and services within their closed
market and should not allow the expansion of the market. In this way, the wealth of
the country will be concentrated within the country and no importation shall be
required.

5
 The mercantilism theory had an approach that countries having wealth in terms of
gold and silver and huge armies were only considered as a country of great economic
power.

This theory was well executed by the Britishers by NOTE

way of forming colonies in different countries using
The three basic objectives of this theory to judge
their cheap labour and raw materials to make their the economic status of the country was
products and sell them to those countries at a higher
 Amount of wealth in terms of gold &
price. silver
In the modern century, this theory was known as the  Huge army
protectionism theory in which the countries are less  More dependence on local products &
exportation rather than importation or
dependent upon the goods and services provided by
dependence of goods on other countries
other countries and depend more on their local
market. Eg., China, Japan, Taiwan

b. Absolute cost advantage theory (ACAT)

In 1776, Adam Smith, an economist criticized the previous theory and proposed this
theory. Under this, the economic status of a country should not depend upon the
amount of gold and silver possessed by them rather the standard of living of the
people should decide the economic status of the country.
This theory advocates the laissez-faire economic policy in which the govt. should not
restrict any kind of importation or exportation. However, if the country can produce a
specific commodity at a cheaper rate and efficiently, then the country should only
focus on the exportation of that particular commodity.
In other words, if a country has sufficient trade factors to produce a commodity
efficiently and at a lower cost then, the priority shall be given to the exportation of
that commodity. However, this theory does not restrict any importation or exportation
and promotes a free market. This theory emphasizes the specialization of commodities
that shall have an absolute cost advantage.
c. Comparative cost advantage theory (CCAT)
David Ricardo first coined this theory in the 19 th century. As per this, countries should
prioritize products with a higher CCA rather than an ACA.

6
 In a country having similar trade factors with another country, producing a similar
variety of goods then as per this theory, the country should export the product which
has comparatively higher relative cost than absolute cost.
For example, country A has sufficient trade factors to produce electrical devices and
spices. Country B also has similar trade factors to produce those products. However,
country A is producing 5 times more devices and 3 times more spices than country B.
As per the theory, A should focus on the exportation of devices and importation of
spices from B so that they have mutually benefitted IT between them.
Two or more countries having CCA over a single commodity but the dominant hand
i.e., the country having comparative cost adv. Shall always decide which commodities
to import. A country should emphasize the exportation of those products in which it
has CCA So that both countries can mutually benefit.
d. Hecksher Ohlin's theory
The ACAT and CCAT advocated a free trade market that supported both importation
and exportation. As per these theories, the countries should focus on exporting the
products having higher relative cost value (high CCD). The theories focus on the
mutual benefit of IT between two or more countries. However, the theories could not
explain which specific products should be involved in either exportation or
importation. Therefore, Hecksher and Ohlin came up with their theory which focuses
on the country’s trade factors. This means if a country has an abundance amount of
specific trade factors, then that country shall only produce those products that can be
easily manufactured with the support of those trade factors. The theory divides the
country into a capital-intensive country (CIC) and a labor-intensive country (LIC).
As per this theory, if a country has cheap labour then only products that can be easily
made with the help of cheap labour should be produced by that country, exported
those products to other countries and imported those products for which the country
does not have sufficient trade factors.
Similarly, CIC should produce products that can be easily made without the need for
cheap labour or raw materials, and export capital-intensive goods to those countries
which lack capital (developing or underdeveloped countries).

LEONTIFF PARADOX

The observation for Hecksher Ohlin's theory changed through a different approach. Acc.
According to Hecksher Ohlin's theory, a CIC should produce capital goods and export the

7
same to LIC. A LIC should produce an export of LIC to other countries and import those
goods for which the country does not have sufficient trade practices. The obj. of this theory
depended upon the CCAT of a product or the abundance or scarcity of any trade factor in the
country. Acc. to the Leontiff paradox, the IT between the countries should depend on the
demand of consumers of the country. After the Hecksher Ohlin theory which focused on
trade between LIC & CIC. It was observed that the USA being a CIC exported labour-
intensive goods and imported capital-intensive goods (opp. to Hecksher Ohlin theory). As per
the eco. status of developed and developing countries the customer demands vary from
country to country which made it difficult to divide the countries and restrict the trade
between LIC & CIC. Therefore, Leontiff referred to the markets of the USA & Germany,
both being CIC have equal demand for automobiles & both conduct IT between themselves
for the growth of their economic status. Both countries have an abundance of capital trade
factors and since the demand of the customers is for capital-intensive goods, both the CIC
import and export those goods between them.

 Modern theory

After WW II, many countries started to have industrialization which led to the emergence of
many MNCs. In classical theory, the main focus was on the needs of the country, but after
Leontiff’s paradox, it changed to customer interest or welfare needs of the customer.

a. Country similarity theory

It was proposed by Leontiff after discarding the Hecksher-Ohlin theory. As per this,
the countries having similar trade needs should get involved in IT with each other.
The theory gave the concept of “in train” industry trade which means that a country
should produce goods which it can manufacture w.r.t. its trade factors and then
expand the production. In other words, a country should 1 st produce goods for its
domestic customers and then expand the production of those goods for which they do
not have an abundance of any of the trade factors.
Therefore, in this theory, IT depends on customer demands and needs, and countries
at similar developing stages should mutually benefit each other.
b. Product life cycle theory (PLCT)
This theory was given by Paul Krugman. The PLCT states that any product will have
3 stages in its life cycle.

8
Stage 1- when a new product is invented by a developed country (invented country) it
is consumed only in the domestic market of that country. This stage is known as the
‘new stage’ of that product.
Stage 2- when the demand for the same product increases in other developed
countries the inventor country starts exporting the product and establishes
manufacturing industries in those developed countries. This stage is known as the
‘maturing stage’ of the product as the demand for the product slowly starts increasing.
Stage 3- in this stage, the demand for that product increases at a larger scale in
developing and under-developed countries. The exportation by the inventor country
also expanded and as a result, the product became common in the intl. market. This
stage is known as the ‘standardized or common stage’ where the demand for the same
product increases in the developed, developing, and under-developed countries, and
the production value of the same product decreases in the inventor country.
 End of product cycle: since the demand for the product has been increased
through exportation and multiple manufacturing productions has been est. by
the inventor country in those developed, developing, or under-developed
countries where the demand for the product is high, the theory gives a
presumption that another developed country could make an advanced version
of the same product.
 As soon as an advanced version of the same product has been created, the
PLCT of the original product comes to an end.
 The criticism of this theory was that it only focused on the developed
countries & and their capability to invent new products. The theory completely
ignored the economic power of other developing countries after
industrialization.
 The PLCT was based on an idealistic approach where only developed
countries approach where only developed countries have strong trade factors.
The contradiction of this theory was observed when developing countries
started producing more technically advanced products & and started to show
equal economic status as developed countries.
 Hence, this theory was not able to function realistically because after the
industrialization, the approach of the economist as well as of the country
started changing, and the focus was shifted to consumer interest, as a result of

9
 which developing countries started engaging & improving their trade factors
& technological knowledge to produce new products in the Intl. market.
c. Global Strategic Theory or New Trade Theory
This theory was given by Paul Krugman in the 1980s. It focused on company
strategies to have a competitive edge over other companies in the intl. market. During
this new trade theory era, it was well est. that not only developed countries but also
developing & under-developed countries had strong combinations of trade factors that
allowed them to invent new products in their domestic market.
As a result, after WW II, industrialization & globalization started emerging
throughout all the countries which shifted the focus from the country’s needs
(classical needs) to the customer or company’s needs (modern theory).
Krugman advocated certain factors that would help the companies to have a dominant
position in the intl. eco. Market, such as
 More focus on research & development
 Strengthening the IPR laws
 Creating trade regulations with those countries that will help in their economic
growth
 Expansion of manufacturing industries in other countries
 Inventing new products with the help of available trade factors
 Focus more on exportation & importation of goods and services
 Focus more on domestic needs & then expand the production for intl. demand

This theory advocated a concept called the ‘first mover advantage’. As per this concept, any
company investing in a new product in a specific relevant market will have a monopoly over
that product by taking into consideration all the factors propounded in this theory in a way,
the new trade theory supported the monopoly of developed countries in the intl. eco. mkt. as
due to strong trade factors, developed countries will tend to invest new products in compared
to other developing or under-developed countries.

The new trade theory completely ignored the fact that the countries are at different levels of
eco. Growth & cannot improve their trade factors or advancement in technological factors.

Since the monopoly of developed countries was supported by this theory, it would lead to a
closed & ltd. intl. mkt. in which the companies from developing or underdeveloped countries
will have difficulties to enter or sustain in the market. Therefore, the new trade theory

10
indirectly supported the growth of developed countries having a monopoly in the intl. mkt by
the developed countries & further to have a competitive edge over other developing or under-
developed countries.

d. Porter’s diamond theory or national advantage trade theory

This theory was propounded by Michael Porter (1990). As per this theory, the
economist gave 4 factors to be considered by the countries or companies to have a
competitive edge or an advantage over other countries.

i. Demand conditions
As per this theory, a country producing a new product should be
technologically advanced to create a high demand in the domestic market of
the home country. If the domestic demand is high in the home country, then
the company will be forced to produce more advanced versions of the original
products. In this case, the customer of the home country should be
knowledgeable enough to demand better and more advanced versions of the
original product.
As a result, the demand will start to grow in intl. the market as the home
country will establish manufacturing industries in other countries where the
demand os this product is high, therefore, the company of the home country
will be able to expand their business to other countries & the exportation of
the same product by the home country will also start increasing
ii. Factor endowments
As per this theory, if a country aims to
produce new inventions or quality goods This theory has divided factor endowments
into two categories-
& services, then it should focus on the
improvement of factor endowments.
a. Basic factor endowments which
consist of natural resources, land, and
To create more advanced goods & capital
services a country should focus on b. Advanced capital endowments which
improving the factors endowments & consist of skilled labor, research &
development & advancement in
that the company of this domestic
technology
countries would have an advantage in
creating advanced goods & services.
iii. Related or supporting industries

11
 If a country aims to produce a new product in their domestic market, then
before the invention of that product the country needs to have strong
production of materials or related products that will help to create this original
product.
For example, Germany has a competitive edge in textile manufacturing
industries (original products) because it can produce high-quality sewing
machines (related products).
iv. Firm strategy, structure, rivalry
As per this, to expand the company's growth it is essential to focus on the
internal components of the company.
The company shall have well-advanced technological growth, and the roles &
functions of its core members shall be well-defined so that it’ll create a strong
managerial structure.
Apart from its core members, the companies should also focus on its financial
& marketing strategies to identify the customer needs, produce goods &
services as per the consumer interest & create a demand for the same amongst
the relevant customers.
The company should also have healthy rivalry or competition with other
companies having similar production of goods & services. This will encourage
the company to improve their technical, marketing & quality of goods &
services to compete with other companies in giving the consumer interest.
The economist approach has changed from the country's needs to the
company's needs because of industrialization.

Criticism of this theory

India follows cost advantage
Due to strong rivalry by the dominant players in the intl.
theory, porter’s theory, country
market small enterprises or new enterprises could not sustain similarity theory
for a longer period in the intl. market.

The theory advocates that a new product shall have a demand in their domestic market which
is termed to be a high demand in the intl. market. however, it was observed that certain goods
don’t have market demand in the country's domestic market but are highly demanded by the
customers in the intl. market. for example, Indian handicrafts, and arts (paintings).

12
Therefore, it contradicts the first factor of Porter's diamond theory. The countries tend to
follow a combination of classical or modern theory w.r.t. these customer needs & economic
growth of a country.

No single theory can fulfill all the requirements of a country for its economic growth.
Therefore, a combination of these theories is preferred.

What are the benefits of global trade? How can countries benefit their economic status
from IT? Give examples to support your answer.

IMPORTATION & EXPORTATION

Importation from a country means when a country is buying or purchasing goods and services
from another country for its own economic development and increase in the standard of
living (GDP) of the people. On the other hand, exportation refers to when a country produces
an abundance amount of any specific product and sells the same in the intl. market to other
foreign countries. To execute either importation or exportation, the countries need to follow
certain trade policies at their domestic level.

In the case of India, the emergence of trade policies & other price/tariff reductions is
regulated by the DG of foreign trade under the Foreign Trade (Development & Regulations)
Act, 1992 consisting of various FTP 2015 & 2023, there policies are considered by the DG of
foreign trade to determine the price or tariff reduction and conditions for importation &
exportation of goods & services.

To determine the standard of living of the people in

To calculate GDP-
India, the GDP is calculated. If the GDP of the country
GDP = C + I + G + (X-M)
is high it indicates that the people can spend on
C = consumer spending on
products of foreign countries and have a stable goods
financial income. However, if the GDP of a country is I = investment or the production
at the lowest, it indicates that the people of the country of goods & services (revenue
earned by the company)
do not have a stable financial income. Fewer jobs are
G= govt. spending on public
generated in the specific country & the importation & goods & services
exportation are at the lowest. X= exportation
M= importation
(X-M) = net export
13
High exportation and low importation mean trade surplus. Vice versa is trade deficient and if
both are equal, it means a stable economy.

In the case of net export if a country has higher exportation and lower importation (the
country is selling its domestic products and being less dependent on foreign products), then
the country is said to have the highest net export which means the countries have trade
surplus. The trade surplus refers to a country's capacity to produce an abundant amount of
goods & services to satisfy its domestic consumers' interest & sell the same at the intl.
markets. (E>I)

If the country has lower exportation & higher importation (the country is dependent on
foreign goods & services rather than its domestic products) then the country is said to have
trade deficient which means that the country is depending more on the importation of foreign
products rather than the production of its domestic products. (I>E).

To have stable economic growth, a country should have a balance between trade surplus &
trade deficit. If a country is more inclined to trade surplus, then the consumers do not have a
variety of choices in goods & services and are restricted in the domestic market.

If the country is inclined to a trade deficit, then the consumers are more dependent on foreign
products, and there’s no or less competition & in their domestic market which will make
them dependent on the higher prices of foreign goods & services. Therefore, for stable
economic growth over a certain period, a country needs to have both surplus & deficit in a
balanced way.

For example- India is the net importer of China goods.

In the current situation where India is known as the net importer as it is highly dependable on
the products of other countries such as Chinese products, electronics from Japan, and
Germany, ^ not producing good quality of goods & services that could fulfill the demands of
the consumers. Therefore, to have gradual economic growth, India already has a high GDP
which means the consumers can spend more on quality goods & services, therefore the
country needs to invest more in the exportation of goods and services in the labour market
such as the exportation of technical or marketing services to other countries.

Trade surplus

14
If a country is said to have a trade surplus that means the exportation rate of that country is
higher than its importation. Due to high exportation, the industries or the companies of the
country tend to produce more outcomes or they produce advanced products which create
consumer interest in the intl. market. as a result, more jobs are est. to enhance the production
of the company which leads to high employment rates of a trade surplus country.

Trade surplus also benefits the country as more funds come to the country from other foreign
countries which leads to the overall economic development.

Trade Deficit

In a trade deficit country, the countries do not have sufficient trade factors to fulfill the
consumer interest in their domestic market. the companies or enterprises of the domestic
country do not have a higher production rate, or higher employment rate because of this the
country has to depend on the goods and services of foreign countries.

However, trade deficit countries also have higher economic growth if they are importing
productive assets such as electronics or automobiles that will help them to increase their
production at the domestic level. In other words, if the countries are importing advanced
machinery that will help to increase the production, and level of any domestic goods or
services, then the domestic country can fulfill the demands of its domestic customers.
Therefore, in the long run, a trade deficit country can also have economic growth by using
imported products and enhancing its domestic production. Therefore, to have steady
economic growth the countries should focus on both trade surplus and trade deficit.

Benefits of importing

1. Introduction of new product in the market- as the country is importing new

technologically advanced products or any product that’s not available in their
domestic market, the consumers are getting an opportunity to use those products
which are valuable in the intl. market. the consumers get a variety of choices and are
not restricted within the limitations of their domestic market
2. Reduction of production cost- domestic companies import the raw materials or heavy
machinery at a cheaper rate rather than producing the same machinery at a higher cost
in their domestic country. In other words. To increase the production of goods &
services they import machinery & raw materials from other countries at lower prices
& avoid creating the same in their domestic country at a high rate. Also by importing

15
 goods and services from foreign countries, the companies get the status of being a
dominant player in their relevant market as they have introduced a new product to the
customers earlier than their competitors.

Benefits of exporting

By way of exporting goods & services, the companies & enterprises expand their sales,
indirectly increasing the GDP of the country (increasing the standard of living) &
including foreign customers in their customer base.

Due to exportation the country economically grows and strengthens the intl. trade
relations with the other dominant countries which results in strong domestic as well as
international markets.

USA case study w.r.t protectionlaism theory & trade deficit country

 The protectionalism theory states that a country should focus more on exportation &
shouldn’t get involved in any kind of exportation activities
 USA follows the protectionalism theory is not a strict way, i.e., it focuses on the
importation countries. The main objective of importing from other countries is that
the US currency being one of the highest currency values in the world can impose
higher tax rates for importation
 As a matter of fact, in case of importation the country importing goods & services will
decide the tax or tariff rates. It is to be noted that the country that is selling or
exporting its goods & services to another country will decide the selling amount, &
the country buying or importing goods & services from another country will decide
the tax imposed on those goods & services.
 The US being a protectionist country, with a strong currency value imposes standard
tax rates on imported goods & services which is a higher tax rate for those countries
whose currency value is low.
 By following the protectionalism theory for the importation of goods & services, the
US imposes higher tax rates for other countries which leads to a collection of more
funds into their own domestic country
 The US follows the protectionalism theory to strengthen its currency by importing
basic goods & services from other countries & imposing the import tax as a matter of
fact, the importing countries will decide how much tax should they pay after

16
 importing any goods & services from other foreign countries. It is done so to regulate
the tariff reductions while importing or exporting of intl. trade.
 Since the value of the dollar is one of the highest currency. The US follows the
protectionalism theory, not in a strict way in the case of international. trading &
impose taxes on those foreign countries which are comparatively higher to pay for
them. In other words, since the currency value of a dollar is high, the import tax on
the part of the US is a basic minimum tax, but it’s a higher tax on the part of other
foreign countries that have low currency value.
 The USA being trade deficient country, is known to be a net importer, that imports
cheap products or raw materials from other countries at low prices & produces
advanced products for their domestic market
 In other words, on one hand, the USA follows the protectionalism theory which
implies less focus on importation, on the other hand, the USA is a trade-deficient
country that focuses more on importation rather than exportation
 The theoretical and practical approach of the country w.r.t intl. trade is different using
the protectionalism theory. It imports necessities to impose high tax rates on other
countries, & by way of a trade deficient concept, the USA imports raw materials at
cheap prices from other countries, even if the USA can produce the same raw
materials, it gets the same raw materials at cheaper price which helps the country to
produce their advanced products in their domestic market. Any kind of import tax
imposed by those countries is considered to be a low amount for the USA because of
its high currency value.
 Therefore, this capital-intensive country with a high currency value follows a
combination of protectionalism theory & trade deficient concept to strengthen its
currency value and provide a variety of goods & services made with cheap labor &
raw materials to its domestic customers

PROCEDURES FOR IMPORTATION & EXPORTATION IN INDIA

a. Importer and exporter code (IEC)

 An IEC is a 10-digit number allotted to an entity or company for the requirement of
import or export activities. The IEC number holds the same importance as a PAN
number for any company if they is required to be involved in international trading

17
  No importation or exportation shall be allowed for any organization without an IEC
number until & unless an exemption has been given by the DG of foreign trade
 The application process for obtaining the IEC number can be found on the govt.
website of foreign trade. The details of the IEC application shall be updated every
year during the first quarter. If updation is not followed by the org. then the
application will automatically be de-activated
 The DG of foreign trade scrutinizes the IEC application of org. which would include
IT activities.
b. Functions of DG of foreign trade
 The DG has the responsibility to keep a check on org. that are involved in foreign
trade activities.
 The DG may prohibit any importation or exportation of goods if it directly or
indirectly hampers the national security of the country
 The trade activities shall be conducted within the ambit of the foreign trade
development & regulation Act. The DG may specify any procedures to be followed
by the importer or exporter, these procedures if not mentioned in the Act, can be
published by the DG as a mandatory guideline through public notice
 If any org. does not follow the provisions given under the Act or rules & regulations
laid down by the DG, then the case will be adjudicated under NCLT.
c. Mandatory documents for import and export

Mandatory docs for export of goods from India-

 Bill of lading that consists of the quantity of goods, quality, type of goods, places
from where the goods are being exported, and the period.
 Airway receipt/railway/shipping receipt/portal receipt.

Mandatory docs for import-

 Bill of lading consisting of the same docs & details regarding the goods
 Airway/railway/shipping/portal receipt
 Any NOC from DG if required
 Bill of entry to the country which shall be required with permission of DG
 The specific cases of importation of goods from other countries, the DG may seek/
require other docs apart from the ones mentioned above as a part of legal compliance

18
FOREIGN TRADE POLICY

History

 In 1947, the rules & regulations for intl. trading was covered under the Import &
Export Control Act. The DG of foreign trade was the regulating authority.
 Under this Act, there were various EXIM policies which regulated majorly the
exports from the country
 In 2004, the EXIM policies were replaced by foreign trade policies (FTP)to regulate
the intl. trading
 However, the Import & Export Control Act, of 1947 was also under review by the
Central govt. est. a special committee for the revision of all the policies under the Act
of 1947
 The committee examined & established the weakest aspect of the Act 1947, i.e., the
Act focused majorly on the exports from the country. For a country to have stronger
economic development, it needs to focus both on exportation & importation.
 Therefore, after reviewing the provisions of the Act 1947, the govt. declared 1 st EXIM
policy in 1985 for 3 years
 However, the 1985 EXIM policy had two weaker conditions:
a. It restricted trade of certain goods i.e., it only involved exportation & no
negligible importation
b. The consumers of the domestic market had no benefits from this policy as the
market was restricted, which was not even beneficial for the manufacturers or the
companies
 The government again reviewed the Act of 1947 & finally replaced it with the Foreign
Trade Development & Regulation Act, of 1992. The Act had two major
conditions/amendments
a. It equally focused on the importation into the country &
b. The trade policies which were earlier for a period of 3 years extended to 5 years
 In the same year 1992, the govt./ministry of commerce &
trade declare its first EXIM policies of 5 years. However, in In every 5years, the
2004 the EXIM policies were renamed to FTP new FTPs come into
effect on 1st April

19
  The DG of FTP is the regulating authority who can make any amendments to
schemes/importation, and exportation procedures in these FTPs within 5 years

Objectives of FTP & its importance

 The FTPs are est. by the govt.. to increase the import & export of the country
 It expands the domestic market & makes it diversify by introducing new products in
the market
 It generates employment in the country and increases the GDP which in turn increases
the standard of living of the people
 It provides access to essential raw materials, their improvement & development,
development of technologically advanced products & provides improvement to
agricultural services of the country
 By abiding by these rules & regulations of FTP, the country establishes stronger intl.
relations & creates a strong global market
 Through FTP, the customers of the domestic market get an opportunity to get access
to advanced quality at cheaper rates, and the manufacturers in the country get access
to import either raw materials or advanced machinery from other countries at low
prices to increase the production of goods & services in their domestic market
 FTP also promotes e-commerce, easy regulation of intl. trade regulated the low tariff
reductions & removed any internal barrier to trading with other countries

Objective of FTP 2015-2020

 The main objective of this FTP is to increase the exportation of goods & services
from India to different foreign countries
 The initiative of ‘Make in India’ was introduced by the central govt. under the 2020
FTP
 There are 6 major schemes under this FTP which help in increasing the exportation
from the country

Merchandise exports from India & service exports from India-

- Under this, the CG encourages the exportation of goods from India & under
service exports, the CG encourages the exportation of services from India. Under
this scheme, the CG provides a duty credit scrip to the companies that export
goods & services to other foreign companies.

20
 - The duty credit scrip is a certificate provided by the CG to the exporters to get
some concession on the import tax rate
- When a country exports certain goods & services, and another country imports the
same goods & services, the importing country has the power to impose the tax
rate. The duty credit scrip provides concession to the exporters on any kind of
import tax rate.
- Under merchandise exports from India, when India exports goods, a concession of
3-5% is provided through duty credit scrip on the import tax rate imposed by other
foreign countries.
- Similarly, under service exports from India, a concession of 2-5% is provided to
the service exporters on the import tax rate

Star House export

There are classifications of five-star house exports

- 1st star house export- exportation for the value of 3 million dollars
- 2nd- value of 25 million dollars
- 3rd- 100 million dollars
- 4th- 500 million dollars
- 5th- 2000 million dollars

This classification of exporting companies is done by the CG to identify how many

companies are involved in the maximum exportation of goods & services. It is done
so to give an advantage to companies having maximum star house export status,
which means companies that are involved in maximum exportation value will be
given priority in case of clearance of goods & services. In other words, these
companies will have easier procedures while exporting their goods & services to other
foreign countries.

Niryat Bandhu Scheme

 Under the scheme, the CG provides training to new enterprises or new exporting
companies regarding the current foreign trade policies, procedures of exporting goods
& services from India, and documentation required by the DG of FTP for exportation
& encouraging the new enterprises to focus more on exporting goods & services &
advantageous of various FT schemes.

21
Improvement of infrastructure

 the CG focuses on the basic minimum of importing roadways, railways & airways
conditions internally in the country so that the exporters can move their goods from
one place to another or from one country to another in a smooth transition
 therefore, the govt. needs to improve the country’s infrastructure i.e., public transport
ways to ease the exporters for transporting their goods from one place to another

market access initiative or market development assistance

 the three main objectives of this initiative are to encourage exporting companies
of India to attend foreign exhibitions
 to get the knowledge of new technologically advanced products
 to make global relations with other foreign exporting companies & understand
their market standards
 to get an idea or be familiarized with the global market standards, customer
demand & the competition in the international market.

Export promotion of capital goods

 to increase the exportation, the Indian companies have to produce advanced

products/goods or services. To achieve their aim, the Indian exporting companies
import highly advanced machinery, raw materials, or any other assistance from a
foreign country
 t, whenever an importing country imports any goods or services from a foreign
country, the Indian companies have to pay a customs duty tax to the Indian govt.
 under the EPCG Scheme, Indian exporting companies increase their exportation and
import advanced machinery or raw materials from other foreign countries at 0%
customs duty tax. In other words, the Indian exporting companies will only pay the
amount of the heavy machinery or raw materials decided by the foreign companies, &
no customs duty tax is required to be paid to the Indian govt.
 under this scheme, since the govt. is exempting the Indian exporting companies from
paying any kind of customs duty tax, the only condition applied is that the Indian
exporting company has to do an exportation business of 6 times the amount from
which the company has bought the machinery from the foreign company within 6
years. If India has imported any machinery at a rate of 100 million dollars from a

22
 foreign company, then within 6 years, the particular Indian exporting company will
have to do an exportation business with other foreign companies for a value of 600
million dollars
 the EPCG scheme provides advanced authorization to Indian exporting companies to
import technologically advanced machinery & raw materials from other foreign
companies at 0% custom duty with the above mandatory condition

under FTP 2023, the Aathma Nirbhar Bharat Scheme or Objective was initiated by CG to
focus more on exportation from the country.

The FTP 2023 does not have any expiration date which means the correct trade policy will be
applicable for more than 5 years & it will be amended on a necessity basis.

Remission of duties and taxes on export products-

 under this scheme, the merchandise export from India scheme & service export from
India scheme of FTP 2015 was replaced by the remission of duties & taxes on export
products scheme. The CG was finding it difficult to provide concessions for the
exportation of goods & services, therefore, it replaced two schemes with one scheme
to streamline the concessions to be paid to the exporting manufacturing companies
 the concession rates of 3-5% for exportation of goods & 2-5% for exportation of
services remain the same

Export promotion through collaboration

 there are 2 basic objectives under the scheme

a. the private companies were encouraged to collaborate with public sector
companies i.e., either CG org. or State govt. org. to expand the exporting market.
in other words, both the public & pvt. org. should collab together to take benefit of
each other’s trade factors to increase the exportation production
b. export promotion councils were formed to identify new markets in which
exportation business can be started

ease of doing business & transaction cost

under this scheme, there are 3 basic objectives

23
 a. the DGFT tries to lay down simple procedures for the exportation of goods & services
b. the CG helps the exporting manufacturing companies to reduce the transaction costs,
i.e., any cost which is required for the companies to pay to the govt. whole
transporting goods & services from one place to another.
c. The CG tries to take the help of IT-based systems to streamline the exportation
activities of the exportation companies

Emergence of e-commerce

Under FTP 2015, exportation of  Under this scheme, the CG focused on the exportation
e-commerce was not included of e-commerce or digital products, sustainable
rather it was focused under FTP products, by strengthening the trade factors of India &
2023
acquiring the knowledge of local customs demands in
the 21st century
 The CG established district export cost in which it tries to collaborate with local
markets or rural markets with multinational companies

Start house export & scheme

 Under this scheme, few amendments were made to the exportation valuation

FTP 2015 FTP 2023

1st star house export 3 3
2nd SHE 25 15
3rd SHE 100 20
4th SHE 500 200
5th SHE 2000 800
 The new house plan/certificate given by the CG to the exporting companies will
remain valid for up to 5 years

Committee on trade disputes or quality issue

 Under DGFT, several regional authorities were formed to regulate the scheme of FTP
2023
 A committee was established under these regional authorities within their specific
jurisdictions. The committee is known as the ‘committee on trade disputes & quality
issues’, the committee is responsible for enquire any issues regarding the quality &
quantity of exporting goods & services from India, other than if there are any trade
24
 disputes domestically, it will be handled by this committee under the authorization of
a specific regional authority of jurisdiction.

EPCG scheme

It is to be noted that the exportation

business shall be done with the Under this, the conditions remain the same as FTP 2015
products manufactured from the
i.e., if any exporting company increases its exportation
same imported machinery.
production and imports any advance machinery or raw
materials from a foreign country, then the exporting company shall not be liable to pay any
customs duty tax. However, due to the advanced authorization given to the exporting
companies, there shall be an exportation obligation on these companies to conduct an
exportation business of 6 times the amount of importation value of the machinery within 6
years.

Amnesty Scheme

 Under this scheme, some relaxation was given to the exporting companies for
fulfilling their export obligation under the EPCG scheme
 The amnesty scheme states that the regional Does FTP 2023 come under the
authorities have the power to give an extension of protectionalism theory? If yes,
180 days twice in 2 years after the expiration of the how can the country have stable
economic growth if less focus is
export obligation. The exporting companies need to
given to importation from the
inform the regional authorities under DGFT 90 days country?
before the expiration of the export obligation, that
they are not able to fulfil the export obligation. Hence, the regional authorities can
extend the export obligation period, however, if the exporting companies are not able
to fulfill the export obligation even after the extension, their export license will be
canceled by the regional authorities
 However, within the export obligation & extension period the exporting companies
have fulfilled 75% of the trade obligation. Then the rest 25% will be relieved by the
regional authorities & the export license of the exporting companies will not be
canceled.

WTO

25
The WTO is a result of the conclusion of the Uruguay Round in which multiple trade
negotiations took place

 WTO was established in 1994 & came into effect in 1995

 The main agreement through which WTO was formed was the Marrakesh agreement
which was signed by the member countries of Uruguay round
 WTO consists of several multi-lateral & plurilateral trade agreements regarding the
reduction of trade barriers & formation of trade relations with the member countries
 Presently, WTO consists of 164 member countries
 Under WTO there are several aspects such as
GATT, GATS, TRIPS, dispute settlement body, trade policy review body- these are
the five main pillars of WTO

Article 1- establishment of WTO

During the Uruguay round, 123 signatory countries upon multiple discussions of trade
relations formed one single organisation which would regulate the intl. trade relations
amongst the member countries

Article 2- Objective of WTO

WTO is an organization that provides legal rules & regulations for trade in goods, services &
IPR (GATT, GATS, TRIPS)

Article 3- functions of WTO

 WTO implements & administers several multilateral & plurilateral trade agreements
 It regulates the IT between the member countries & forms rules & regulations that the
member countries need to follow for international. trading
 WTO provides a forum for negotiations of any trade disputes between the member
countries
 It provides a dispute resolution mechanism body which settles the trade disputes
 It provides a trade policy review body that analyses the trade policies or general
principles laid down by WTO for international. trading
 WTO consults with intl. monetary fund to establish any trade policies concerning
global economic standards

26
Article 4- structure of WTO

 The WTO consists of two main bodies for the regulation of policies under WTO. The
higher/superior body of WTO is the Ministerial conference
 The Ministerial conference consists of the representatives of every member country.
They are reasonable for carrying out any decision-making process of the WTO
 The conference meets or holds a meeting once in 2 years
 Under the conference, there is a general council body that carries out the functions of
the conference & regulates the rules & regulations of WTO during the period when
the ministerial conference is not in session
 The general council also consists of representatives of member countries & holds
meetings whenever it is necessary
 The General Council also regulates the dispute settlement mechanism body & trade
policy review body
 Under the general council, there are several committees or subordinate councils such
as the Council for Trade of Goods, council for Trade & services & council for the
Trade of IPR
 Under the conference, there are 3 core committee
a. Committee on trade & developments
b. Committee of balance of payments
c. Committee of budget finance & administration

Article 5

It is stated that the member countries of WTO need to apply rules & regulations of the
multilateral or plurilateral agreements under WTO into their domestic laws.

For example- TRIPS is a multilateral WTO agreement, as India is a member country of

WTO, it needs to apply the general principles of TRIPS into its jurisdiction through the
Patent Act, Trademark Act, Copyright Act, etc.

Article 6- Secretariat body of WTO

 The conference will establish a secretariat body under them which will be headed by a
DG of foreign trade appointed by the conference
 The main function of this secretariat body is to regulate the trade relations amongst
the member countries, if there is any dispute or any chance of negotiation then it will

27
 report to the conference & general council to move ahead to the dispute settlement
body or negotiation forum

Article 7- other functions of DG

 The DG shall present the annual budget & financial statement of WTO, & shall report
it to the committee of budget finance & administration. When the conference is not in
session, the general council will approve the final budget laid down by the committee
for WTO.

Article 8- legal status of WTO

It states that the countries that are the core members of either the conference or the general
council will be provided with privileges & certain exemptions while conducting IT.

Article 9- decision making of WRO

In case of any new amendments or any new rules & regulations for the org., the decisions
will be made by following the majority, or if there is a tie then the voting of members of the
conference & general council will be followed

Article 10- amendments in WTO

In case, there needs to be any amendment in the provisions followed by WTO, then any
member country can submit a proposal for amendment to the conference. The conference
needs to decide upon it within 90 days if no decision has been made then 2/3 rd the member
countries will decide upon that amendment

Article 11

All the contracting parties of GATT should be known as the original members of WTO. In
other words, the contracting parties of GATT holds the original ownership of WTO

28