Methods of Foreign Trade

Alina Bernatskaya, IB-411

Methods of Foreign Trade

Nowadays there are five forms of international business:

1)  International trade - an exchange of goods, results of intellectual labour, services and work force on the international level. International trade is the most ancient and important form of the world business. At the heart of international trade lies the tendency of the world economy to use the results of the international   division of labour most  efficiently.  This leads to specialization of countries in the production of a particular good. So, the main reason for people and nations to trade is the benefit derived from specialization. Another one is the difference in technology. Technology refers to the techniques used to turn resources (labour, capital, land) into outputs.   

2)     International production cooperation - production relations for joint activities in terms of international labour division. Joint ventures and multinationals are the examples of this form. Nowadays employing foreign assets is widely spread: selling and purchasing patents and licences, employing foreign technologies, trademarks and brands, franchising, transfer of know-how, etc.       

3)  International services - Economic goods which do not take a tangible and storable form but bring benefit to the consumer. They include consulting, transport, insurance, scientific and technical, tourist and other services.              

4)  International finance and credit relations - world business related to the operations with money and securities. 

5)  International investments - the activity based on international capital transfer from one country to mother aiming at profit gaining and social effect. There are direct investments acquiring the right of ownership and portfolio investments.

Foreign trade may successfully be carried on in a number of ways. These include direct sales, international production cooperation and sales through associations and firms at a government level. Manufactures also may choose to deal in their goods through intermediaries. It often depends on the kind of merchandise and the market available. When new markets are to be gained, it may be advantageous to use the services of foreign agents who have a long experience of trading and know the markets in their countries better. According to world-wide statistics, over half of the world's foreign trade is handled by agents and distributors. Apart from these, trade may be carried at commodity exchanges, auctions, fairs and by tenders. Also joint enterprises can be set up by manufacturing works to produce goods for sale in the host country and in third countries.

Thus foreign trade is carried on in two main ways: directly between enterprises and foreign firms, and indirectly through intermediaries.

Direct sales imply trade based on continual ties between a producer and an ultimate consumer of the product without any intermediary. Such sales mean direct delivery from the seller to the buyer and are practiced by well-established large companies which have good experience of foreign trade and which can gain from the economy of scale. The process of direct sales can be divided into episodic and systematic foreign trade operations. Usually this method is used for sale and purchase of raw materials under long-term contracts, large-size and expensive equipment, as well as agricultural goods.

With the direct method of trade, there is a certain financial benefit as costs are reduced by the sum of a commission to the intermediary. The risk and dependence of the results of commercial activities on possible unconscientiousness or the insufficient competence of intermediary organizations are reduced. This method also allows a company to be constantly on the market, to take into account its changes and duly react to them.

At the same time, the usage of the direct method of trade means less commercial qualification and trade experience, otherwise financial charges will increase considerably. Moreover, international trade is riskier than internal which is caused by economic, political, legal and social features of different countries, their traditions and customs, as well as large distances between trading partners. As a result, for realization of international trading operations it is very often more advantageous and sometimes even necessary to resort to the help of intermediaries, i.e. to indirect methods of trade.