Daisy Galilea

Import and Export

Definition:

An import is a good brought into a jurisdiction, especially across a national border,

from an external source. The party bringing in the good is called an importer. An import in
the receiving country is an export from the sending country. Importation and exportation
are the defining financial transactions of international trade.

The term export means transferring of goods or produced in one country to another
country. The seller of such goods and services is referred to as an exporter; the foreign
buyer is referred to as an importer. Export of goods often requires the involvement of
customs authorities. An export's counterpart is an import.

Effect of Import and Export

Imports and the Trade Deficit

If a country imports more than it exports it runs a trade deficit. If it imports less
than it exports, that creates a trade surplus. When a country has a trade deficit, it must
borrow from other countries to pay for the extra imports. It's like a household that's just
starting out. The couple must borrow to pay for a car, house, and furniture. Their income
isn't enough to cover the necessary expenses that improve their standard of living.

But, like the young couple, a country should not continue to borrow to finance its
trade deficit. At some point, a mature economy should become a net exporter. At that point,
a trade surplus is healthier than a deficit.

Why? First, exports boost economic output, as measured by gross domestic product.
They create jobs and increase wages.

Second, imports make a country dependent on other countries' political and

economic power. That's especially true if it imports commodities, such as food, oil, and
industrial materials. It's dangerous if it relies on a foreign power to keep its population fed
and its factories humming. For example, the United States suffered a recession when OPEC
embargoed its oil exports.

Third, countries with high import levels must increase their foreign currency
reserves. That's how they pay for the imports. That can affect the domestic currency
value, inflation, and interest rates.
 Fourth, domestic companies must compete with the imports. Small businesses that
can't compete will fail. Since they create 65 percent of all new jobs, that will affect
employment.

And finally, exports help domestic companies gain a competitive

advantage. Through exporting, they learn to produce a variety of globally-demanded goods
and services.

Four Ways Countries Increase Exports

Countries often increase exports by increasing trade protectionism. That insulates

their companies from global competition for a while. They raise tariffs (taxes) on
imports, making them more expensive. The problem with this strategy is that other
countries soon retaliate. A trade war hurts global trade in the long run. In fact, this was one
of the causes of the Great Depression.

As a result, governments are now more likely to provide subsidies to their

industries. The subsidy lowers business costs so they can reduce prices. This strategy has a
lower risk of retaliation. If other countries complain, the government can say the subsidies
are temporary. For example, India claims the subsidy allows its poor to afford basics like
fuel and food. Some emerging markets protect new industries. They give them a chance to
catch up with technology in developed markets.

A third way countries boost exports is through trade agreements. Once

protectionism has lowered trade for everyone, countries see the wisdom in reducing tariffs.
The World Trade Organization almost succeeded in negotiating a global trade agreement.
But the European Union and the United States refused to end their agricultural subsidies.
As a result, countries rely on bilateral and regional agreements.

Most countries increase exports by lowering their currency value. That has the same
effect as subsidies. It lowers the prices of goods. Central banks reduce interest rates
or print more money. They also buy foreign currency to raise its value. Countries like China
and Japan are better at winning these currency wars.

The United States can produce everything it needs, but emerging market
countries can make many consumer items for less. The cost of living is low in
China, India, and other developing countries. They can pay their workers less, creating
a comparative advantage.

The United States is a free market economy that's based on capitalism. These low-
cost imports cost American jobs. U.S. companies cannot both pay a living wage and
compete on price.
 Commodity Trading Process Flow

Once you complete the three steps necessary to start commodity futures trading, it
is almost time to place your first order. But you must first understand the commodity
trading process that takes place after you place an order.

There are two parts to the commodity trading process: order processing and mark
to market (MTM) settlement.

Order processing

Placing an order with your broker (i.e. the broker’s dealing desk) over the phone
initiates the trade. The dealer gives a price and asks you to deposit the initial margin. If you
remember, the initial margin can be 5–10% of the price, depending on the commodity and
the exchange. Once you agree, the dealer places your order in the exchange trading system
for the exchange to fill. You own the contract as soon as the exchange fills the order. From
then on, your contract will be marked to market at the end of each trading day.

Mark to market settlement

The clearinghouse (i.e. the exchange) determines a ‘settlement price’ for each
commodity at the end of a trading day. The settlement price is usually the last price at
which the commodity trades during the day.

The clearinghouse compares the settlement price of your commodity with the price
at which you had placed the order. If the price has moved favourably (i.e. increased in case
of a long position and decreased in case of a short position), the difference is credited to
your account.

If the price has moved adversely (i.e. decreased in case of a long position and
increased in case of a short position), the difference is debited from your account.

This process repeats at the end of each trading day. From the third day onwards, the
comparison is between the settlement price of that day and that of the previous day.

Example:

Let us say you took a long position in a commodity yesterday at a price of Rs 50 per
unit for 1,000 units. The exchange has determined Rs 52 per unit as the settlement price for
today. This means you have made a theoretical profit of Rs 2 per unit—i.e. a profit of Rs
2,000 for 1,000 units. This amount will be credited to your account by the end of the day.
Had you taken a short position, this amount would have been your loss and it would have
been debited from your account.
 Exchange Clearing Corporation
Trading system Daily Mark to Market

Order Confirmation
Daily Margin
VSAT
Link

Broker Broker’s
Clearing Bank A/c

Order Confirmation

Investor Gain/ Loss

Credited/ debited to Investor A/c
References:

Ecochard P., Fontagné L., Gaulier G. & Zignago S. (2006), "Intra-Industry Trade and
Economic Integration", in Daisuke Hiratsuka, East Asia's De Facto Economic
Integration, Macmillan

Feenstra, R. C., et al. (2005). World Trade Flows, 1962–2000. NBER working paper 11040

BACI: International Trade Database at the Product-Level. The 1994-2007 Version CEPII
Working Paper, N°2010-23, Octobre 2010 Guillaume Gaulier, Soledad Zignago

Website:

https://oec.world/en/visualize/tree_map/hs92/import/phl/all/show/2017/