IBT OVERVIEW OUTLINE
1) OVERVIEW
A. Basic Principles
Why do Nations Trade?
· Reasons:
o 1) one may have what the other doesn’t
§ ex: natural resources
o 2) comparative advantage
§ you would be buying it at a lower cost that making it yourself
o 3) military, political alliances
o 4) currency
§ a country would want to store some stable currency so they could buy the things they need.
Adam Smithà specialization
· “Parable of the pens”
o ex: 1 person trying to make a pen – could only make a few an hour
o ex2: 4 people did specialized area – could make lots of pens an hour
§ Division of labor
Comparative Advantage
· Assumptions underlying David Ricardo’s theory
o 1) Certain countries have better endowments of factors of production
§ “factor endowments”
o 2) Factors of Production can’t move freely
§ Not a good assumption today
o 3) Fixed rate of currency
Questions to Consider
· What is a “hard currency”?
o A stable currency, people want to hold onto it
· What is a “soft currency”?
o Not a stable currency, South American currencies
· Why would a country devalue its own currency?
o Makes exports cheaper, some countries do this as a ploy
o Doesn’t have much effect domestically
§ Sometimes other countries
o “Beggar they neighbor”
§ what happened when Brazil devalued its currency à Argentina was ticked off.
· What happens when a country defaults on its foreign debt?
o Argentinaà IMF was loaning them money to pay off their loans
· What are Newly Independent Countries (NIC)?
o Former Russian satellites, also “economies in transition”
§ From command economies to free market economies
· What are Advanced Developing Countries (ADC)?
o Brazil
· What are Less Developed Countries (LDC)?
o West African Countries
o Average income of $1-2 a day
· What is nationalization? Defenses?
o Ex: Venezuela nationalized it’s oil à made it governmental property.
o Defenses à sovereign immunity
· What is privatization?
o Governmental activities taken over by the private sector
Why might nations not trade?
· 1) Trade imbalance
o exports good, imports bad
· 2) Military / political reasons
· 3) Unfavorable to national companies
o measuring welfare
o protecting national industries à should that be the rule?
§ We used to be freaked out about Japanese cars
· Responses:
o A) make a better US car
o B) Slap tariffs on them
§ US manufacturers happy
§ Car buyers unhappy
§ Whose temperature shall we take? Consumers or manufacturers
o C) short term vs. long term
§ What type of industries need this type of protection?
· Infant industries
· Job Protection
Hypo: Razor Blade Manufacturer
· Issues?
o Currency à ask for US $, that way you don’t have to worry about exchange rate fluctuations
o Import/export restrictions à who’s responsible for tariffs, also look out for quotas
§ Choice of law – if you run into an unexpected tariff, force majeure – but does German law have that concept?
§ Choice of forum – where to resolve conflicts?
o Political unrest
o Technical standards / labeling – you don’t want to find out that you can’t sell in Germany because you don’t meet their standards
§ Ex: must be in metric
o Tax issues à do you owe any taxes in Germany
· What about someone who asks for “extra legal” payments?
o Be careful about corrupt practices
Hypo: Razor Blade Manufacturer wants to buy steel from a foreign source
· Issues:
o Unfair competition accusation from domestic steel people
o Import tariffs
Hypo: losing money to cheap foreign imports
· Lobby for tariffs by making a dumping complaint
o Alleging that they are selling the blades at less than production price, or less than they are selling in the home country.
o Tariff = fair value of the product – price the selling
· Lobby for subsidies
o Subject to some discipline, but not as much
Who are the Actors in Foreign Trade?
· The Government
o Lawyers working in the government
· In-house Counsel
· Transnational
d (in New York, because they specified it)
o C & F – Cost and Freight
§ Cost of shipping goods to a particular point (NOT including insurance)
§ In this case, to Athens, Greece
o CIF – Cost, Insurance and Freight
§ Cost of shipping goods to a particular point, including insurance
· 2) Pro Forma
o In K terms, this is probably an offer b/c it has all the requirements
o It give the offeree the power of acceptance
o What is the seller asking for in the phrase “confirmed irrevocable Letter of Credit”
§ Which bank will pay the seller?
· US
§ Confirmed Irrevocable Letter of Credit à the US Bank bears the risk
· 3) Purchase
o In K terms, this could be a rejection and counter-offer, but both parties act as though this is an acceptance.
· 4) Letter of Credit – Confirmed, Irrevocable
o Lists documents seller will have to present to bank in Buffalo in order for the Bank to pay seller
o Look at final sentence for obligation by bank.
o Made pursuant to ICC
§ Choice of law
§ Industry expectations
· 5) Shipper’s Letter of Instructions
o What happens if the ship is hijacked and the goods never reach the seller.??
o This form is just the terms to the shipper.
· 6) Commercial Invoice
o Seller’s obligation ends at port
· 7) Shipper’s Export Declaration
o Contains Tariff Classification Number
§ Under harmonized scheme
· 8) Certificate of Origin
· 9) Dock Receipt
· 10) Bill of Lading
o What does this amount to?
§ A contract to the carrier and the seller. (This is the 3rd contract in this transaction)
§ 1) K between buyer and seller
2) K between buyer and bank
