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Final Trade PDF
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2
Requirements and Evaluation in the
Course International Trade
The Credit – total maximum 50 points (min. 26)
Assignment: 15 (min. 9); 3-4 students, deadline for electronic form in the coursework
submission on 15th December
Presentation: 5
Credit test: 20 (min. 12); 13th December
Additional points for activity: 10
Exam – total maximum 50 points (min. 30), consists of open questions
3
Literature
KRUGMAN, P. R. and OBSTFELD, M. International economics: theory and policy,
Boston: Pearson Addison-Wesley, 2009. ISBN 978-0-321-49304-0
GRIFFIN, R. W. and PUSTAY, M. W. International business: A Managerial Perspective,
Reading Addison Wesley, 1998. ISBN 0-201-85767-7
PALÁT, M., PEPRNÝ, A. and TWEREFOU, D. K. International trade, Brno: Mendel
University in Brno, 2013. ISBN 978-80-7375-814-1
Internet sources
Articles
Lectures (not obligatory), seminars (obligatory)
4
Topics of the course, 13 weeks/lectures
1st week 27.09.2019 - conditions, basic (economic) terms, introduction to the topic of international trade, globalization (for /
against, influence, tendencies)
2nd week 04.10.2019 - a new dynamic world, developed and developing countries, world economy and its historical
development, foreign trade
3rd week 11.10.2019 - classical theory of IT
4th week 18.10.2019 - new theories of IT, external economic equilibrium - balance of payments
5th week 25.10.2019 - economic aspects of IT, determinants of trade, foreign trade policy instruments
6th week 02.11.2019 - customs duties, barriers and barriers to IT, global trade flows
7th week 08.11.2019 - importance and position of international institutions for trade, regional integration groupings,
contractual relations
8th week 15.11.2019 - risk (types) and financial aspects of IT
9th week 22.11.2019 - introduction to international public and private law, international organization in IT
10th week 29.12.2019 - Vienna Convention on IT law, operations in IT
11th week 06.12.2019 - operations in the Ministry of Defense (contractual relations, satisfaction, transport, documents,
incoterms, intraterms, deadlines, accent, payment of insurance, etc.), Transport
12th week 13.12.2019 - customs procedures and forms of entry to foreign markets
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13th week 20.12.2019 - pre-term exam
Basic terms of economy and trade
Concepts that form the basis of all economic theory:
Rare and selection
no society can provide everything its people want
resources are limited
our needs generally exceed the resources available
rarity is the necessity of choice
Opportunity Costs (OC)
This is the value of what these resources could bring if they were used in the best
alternative way.
For example, growing cotton in New York makes no sense, because sacrificing valuable
land to produce something of limited value compared to other more profitable land use
areas. The amount of this “victim” affects the value of the products produced. If cotton
was grown in NewYork, the price would be enormously high.
6
Basic terms of economy and trade
Distribution and incentives
Our needs exceed the available supply of goods and services, we have to decide
how to redistribute this limited quantity.
In centrally planned economies, the authorities try to make decisions and
(re)divide.
In market economies, price is a mechanism, dollars are the key stimulus. If the
reward (price) not offered for a particular product increases, that reward provides
an incentive to produce more of that product.
Example: Australian wool growers who pulled wool from the market in an attempt
to raise prices.
7
Basic terms of economy and trade
Laws of supply and demand
The law of supply
The relationship between the quantity that sellers want to sell over a certain
period of time (the quantity offered) and the price
The offer can be expressed mathematically in functional form as
Qs = f (price, other factors constant)
The law of demand
The relationship between price and the amount of product that people want to
buy.
Mathematically, the demanded quantity of price functions, other factors are
considered constant:
Qd = f (price, other factors constant)
8
Basic terms of economy and trade
Equilibrium price
Price at which the demand corresponds to the quantity offered
Rising product prices usually cause a decline in demand
Rising prices are a signal for manufacturers to deliver more and for consumers
to demand less
Falling prices signal to producers to deliver less and to consumers to demand
more
9
Basic terms of economy and trade
GDP, GNP – economic growth, measure of world output
HDI
Economic development = economic growth+ structural changes
Development = economic development+ non-economic changes in
society
World Economy
10
International trade
International trade leads to the interconnection of the world
economy as a whole.
The reason for international trade:
differences in production conditions
differences in production costs
differences in consumer taste
11
Main outline of the theme
Why is it beneficial for countries to engage in international
trade?
Who controls international trade?
Why is global trade important?
What is a trade war?
What is the contribution of global trade to GDP? link
15
Division of theories
16
Theories of IT – crucial changers
dynamic development in the 1970s
shocks to decolonization processes in the world
increasing competitiveness
oil crisis
the collapse of the Bretton Woods system - USD is no longer
tied to gold
economic slowdown in the world
issues of economic and policy interconnection
17
Classical country-based theories,
liberalist theories
Mercantilism - a view of the trade "we against them", the profit
of another country is a loss for our country
18
Mercantilism: 16th - 18th Century
The first purely economic approach, policy
Colonial expansion, mining, international trade
GB, France, also Netherland, Central Europe and Scandinavia
Thomas Mun the English merchant (1571–1641)
J.B. Colbert French minister of finance Louis XIV, colbertism
The wealth of a nation depends on the accumulation of
precious metals in the economy
19
Mercantilism: 16th - 18th Century
The theory says that a country should have a trade surplus
Maximize exports through subsidies
Minimize imports through customs and quota
David Hume (1752): a sustained trade surplus will have an
impact on money supply and this trade surplus will disappear
in the long run.
20
Mercantilism
Maximizing exports and minimizing imports sees no advantage
in the increased volume of trade
Such wealth, according to its proponents, gives the country
economic and political power
The government intervenes to achieve a surplus in exports.
To get more wealth through:
Limiting imports through trade barriers
Promoting exports through government subsidies
In the long term, mercantilism weakens the country and
enriches only a few layers:
The king, exporters, domestic producers wealth growth
Other entities (households) decline in wealth as domestic products
remain expensive
21
Mercantilism
Favorable trade balance required (more exports than imports)
Government policies emphasize export
Continuous influx of gold
Unfair and unbalanced trade
22
Absolute advantage (classical economics)
Adam Smith: The Wealth of Nations, 1776
Founder of (political) economics
Father of free trade
24
Absolute advantage
It benefits both countries in engaging in mutual trade.
Product output increases as a result of specialization and trade.
Free trade
International division of labor
Specialization where there is an absolute advantage.
25
Example 1, absolute advantage
Why trade between countries is useful?
26
Example 1, absolute advantage -
explanation
Cotton and silk are produced in both countries.
Producing unit quantities of cotton in the US requires 25 hours of
work, but China requires 50 hours of work. Thus, cotton production
is more expensive in China.
Production of silk unit costs 80 US working hours and only 40
hours in China.
China has an absolute advantage over the US in silk production, but
the United States has an absolute advantage in cotton production.
Thus, the United States will prefer to import silk rather than
produce it and export cotton to China.
China has a cost disadvantage in cotton production and a cost
advantage in silk production. So China will trade silk for cotton.
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Scenario 2: What if the following
conditions exist?
The cost of both products is lower in Australia than in the US.
One country, Australia, has an absolute cost advantage in the
production of both cotton and wool. The US has nothing to offer
Australia,Australia sees nothing cheaper in the US than it would
be at home. At least that's what it looks like.
29
Comparative advantage
A country has a comparative advantage when it produces goods with
lower alternative costs (compared to the best possible other
alternative) than another country.
31
Comparative advantage: US view
US labor cost per unit is higher than in Australia for both cotton
and wool.
The cost ratio for the US is the inverse cost ratio of Australia, so it
would be 10: 9 or 10/9 for cotton production and 12: 8 or 12/8 for
wool production.
If we divide by 10: 9, we get 1.1, which suggests that cotton
production costs the United States about 1.1 times as much as
Australia. Then by dividing 12: 8 we get the number 1.5, which
suggests that the United States producing wool costs about 1.5
times what Australia.
It follows that the US has the least cost disadvantage in cotton
production.
33
View of the real world business
?: What is the fundamental reason for trade, which is given
by the theories of absolute and comparative advantage?
34
View of the real world business
Obviously, government officials do not sit over cost data to
decide what their country should specialize in production and
then trade.
Instead, it is the very desire of individuals to make money that
determines the structure of international trade.
It is the desire to make a profit that determines which
countries specialize in the production of what goods and then
trades with other countries.
35
Example
Suzanne from the US visits England and finds that wool is relatively
cheap compared to US prices, while cotton is relatively high in England.
What will she do?
She decides to buy some cotton in the US, sends it to England and
sells it at relatively higher English prices.
With his profits from the cotton transaction, he buys wool in England,
takes it to the US and sells it at relatively higher US prices.
It buys cheap and sells expensive, buys in a country where goods are
cheap, and sells in a country where goods are more expensive.
Trade Theory Heckscher Ohlin Theory plus the Leonteif Paradox, 7 min
https://www.youtube.com/watch?v=bpKACOG_t_Q
38
Criticism and extension of H-O Theory
This model offers poor real world predictions and
international trade
Capitalization is not given naturally. Capital consists of goods
produced in production (often imported from abroad)
In this sense, capital is internationally mobile and is the result of past
economic activity.
Other unrealistic assumptions
Naturally equipped with capital, homogeneous capital, identical
production function (countries have the same technology, the same
production, etc.)
Samuelson extension: Samuelson has added various other real-
world factors (customs…) to increase the model's predictive
power.
39
Limitations of classical theory
Free trade expands the world “cake” for
products/services
Limitations
Simple world (two countries, two products)
No transport costs
No price differences at sources
Resources are immobile among countries
Constant range returns
Each country has a fixed supply of resources
Full employment
40
Limitations of Classical Theory vs.
The real world
Many countries and many goods
Shipping costs may decrease with specialization
Prices in individual countries are affected by exchange
rates
Resources can move from country to country:
labor (Mexico to US),
capital (FDI)
Full employment assumes a fully efficient use of resources
41
Post-war theories of international
trade/New trade theories
It discusses the benefits of specialization where significant
economies of scale occur.
Specialization increases output, the possibility of increasing economies of
scale
In many sectors, there are often few profitable firms
Therefore, first mover advantage companies will develop economies
of scale and create barriers to market entry for other firms.
Japan and microchip production
Commercial aerospace industry is another excellent example (Boieng,
Airbus)
The new trade theory does not contradict the comparative
advantage theory, but instead identifies the source of the
comparative advantage.
Human capital is essential - a comparative advantage arises from
differences in human capital between countries.
Post-war theories of international
trade
a) Stage of technological approaches (1960s–1980s)
Theory of similarity in the demand structure (Linden,
1961)
The structure of domestic demand is similar to that of international
demand
Companies behave accordingly and will export products that are
successful in the domestic market
Not only address the state as a whole, but also takes into account
individual companies – microeconomy
Technology gap theory (Posner, 1961)
Export of the most sophisticated products (have a technological
edge over other countries) keep this edge thanks to profit from
export (they re-invest the profit back to the development) and can
be hardly caught up with.
Innovation plays a key role for exports
Product Life-Cycle Theory (PLC)
Raymond Vernon, 1960´s
Products undergo a cycle:
Implementation: probably in developed countries
Growth: sales growth, production slowly starting abroad
Maturity: standardized product, price is more competitive. Changes in
the comparative advantage encourage the transfer of production to
developing countries.
Decrease: most production in developing countries.
44
45
46
PLC
It deals with the life cycle of a typical “new product” and its impact
on international trade
Developed in response to H-O model failure in the US
It focuses on industrial goods
48
Stage: Maturation of the product
At this stage, some general standards for a given product and
its characteristics begin to emerge, and a mass production
technique is introduced.
With further standardization in the production process,
economies of scale begin to be realized.
This characteristic contradicts the H-O model and Ricardo, whose
theories assume constant returns from the range
In addition, foreign demand for the product is increasing, but it
is mainly associated with other developed countries because
the product satisfies the demand in high-income countries.
This increase in external demand (coupled with economies of
scale) leads to a business model where the United States
exports the product to other high-income countries.
49
Stage: Maturation of the product
Once US companies sell to other high-income countries, they
can begin to evaluate the opportunities to produce abroad (in
addition to production in the United States)
If cost conditions are favorable (ie, that production abroad
costs less than production at home plus shipping costs), then
US firms will tend to invest in production facilities in other
developed countries.
If this happens, there will be a reduction in the export of US-
produced products. The plant in France will then supply goods
not only to France but also to other European countries.
Therefore, the initial increase in US exports is followed by a
decline in US exports and a likely decrease in US production
of the goods in question.
50
A note on aspects of PCT relocation
Unlike H-O Theory or Ricardo, he recognizes that capital is
mobile internationally
This feature is in line with the very high amount of foreign
income earned by US firms in Western Europe during the
1960s and 1970s
Later, Japanese companies investing in the rapidly developing
countries of Asia (China, South Korea, Taiwan)
51
Maturation of the product
Vernon also states that at this stage of maturation, the product
may eventually start to flow from Western Europe to the
United States.
Why?
If capital is more internationally mobile than labor, then the
price of capital in individual countries is unlikely to differ as
much as the price of labor.
Thus, if the relative prices of products are significantly
influenced by labor costs, and these are lower in Europe than
in the United States, Europe may be able to get below the cost
of production in the United States.
Comments: Remember that Vernon's theory was written in
1966, today it is less true that European labor costs would be
lower than in the United States.
52
Stage: Product standardization
At this time, the characteristics of the product itself and the
manufacturing process are generally well known, the product is
known to consumers and the manufacturing process is known
to producers.
Production can move to developing countries.
Why?
Labor costs
Developed countries engaged in the introduction of other products
Thus, trade develops so that the United States and other
developed countries can import product from developing
countries.
53
Phases overview
Most new products in the 20th Century were originally designed for
and produced in the US.
US firms kept production close to the market
To minimize the risk of introducing new products
Demand is not yet based on price (new product), the cost of production is
not yet a question
Limited initial demand in other developed countries
Initially, exports are more profitable than production abroad.
With the growth of demand in developed countries
Production is moving here
With the expansion of demand everywhere else in the world
The product becomes standardized
Production moves to areas with low production costs (developing
countries)
The product is now imported to the US and developed countries
54
PLC: summary
Thus, PCT assumes a dynamic comparative advantage, since
the production and export of a product is shifting from one
country to another throughout the product life cycle.
First, the product is exported by the innovative country, but
then production is transferred to other developed countries
and finally settled in developing countries.
The above-mentioned look at the product history describes
this development in general.
55
PLC: practical examples
Electronics, such as televisions, have been an important export item
in the United States for many years, but Europe, and especially Japan, has
emerged as competitors over time, which has dramatically reduced US
market share.
In a less distant time, Japan became threatened by South Korea and other
Asian manufacturers
The textile and clothing industry is another example where developing
countries (notably China, Taiwan, South Korea and Singapore) have become
major suppliers on the world market and have started to replace the
United States and Japan.
The automotive industry and its exports have also relatively moved from
the United States and Europe to Japan and later to countries such as South
Korea and Malaysia
This dynamic comparative advantage, together with mobility factor and
economies of scale, make life cycle theory an attractive alternative to the
H-O model.
56
Post-war theories of international
trade
b) The second half of 1980s
The economies of scale concept
The element first in production of a particular good or specialization in
a particular field may acquire a competitive scope – a competitive
advantage through increased experience and advancement in the field
the competitive scope may be maintained in long term
Differences in human capital (Peter Kenen)
Human qualities and knowledge - hardly transferable
Cannot be traded
Countries with the most human capital - countries with the highest gains
Geographic concept (Paul Krugman)
Natural concentrations occur in an economy in international trade, in
other words, a high-tech industry is attracted by another high-tech
industry. Highly developed and underdeveloped areas will arise.
Post-war theories of international
trade - Alternative theory of
international trade, before WWII
a) Theory of children's branches (Friedrich List,
Germany); Friedrich List, The National System of Political
Economy [1841]
In the early stages they experience difficulty or are totally
unable to compete with established foreign competitors
Governments sometimes have the urge to support the
development of these sectors, ie to protect the domestic
sectors at their stages - usually through tariffs and quotas
Problem: when to stop supporting; lower pressure on
efficiency (companies get used to support); moral hazard -
even those who are not entitled may require subsidies
USA, Germany (before and after the WWII)
Post-war theories of international
trade - Alternative theory of
international trade, before WWII
b) Disproportionality theory (Werner Sombart,
Germany)
Which stated that the downswing of the economy is
explained by the growing disproportionality between the
organic and the anorganic sector of the economy.
IT as weak side of the economy
self-sufficiency – strong economy (Germany, 1930´s)
Coming to the level of the theory of autarchy
Post-war theories of international
trade - Alternative theory of
international trade, after WWII
c) Poor Growth Theory (Jagdish Bhagwati, India)
Economic growth may result in a worse situation than before
growth
Companies in developing countries do not respond to the
decline in world prices according to neoclassical rational
behavior.
It seeks to compensate for the fall in world prices by
increasing production and increasing exports, leading to a
further fall in prices (poverty circle)
Post-war theories of international
trade - Alternative theory of
international trade, after WWII
d) Theory of peripheral economy (Raul Prebish,
Argentina)
Center vs. periphery (developed vs. developing countries)
Industrial product prices (with higher added value) are rising
faster than prices of raw materials and staple foods
This leads to worsening terms of trade
Decolonization just in political way
62
63
Economic aspects of
international trade
1) determinants of trade, 2) foreign trade policy instruments
By way of implementation:
– autonomous
existence of interdependence
– contractual
Regions:
• the most – Asia, Pacific, Europe, central Asia
• relatively less – North and South America, South Asia and Caribic
• minimal - Middle East, North and Sub-Saharan Africa
Quotas
Quota – quantitative limit
Quota types:
• Direction of movement – import, export
• Form – absolute, relative (tariff rate, …)
Types:
Financial – direct subsidy, raw-material price subsidy, subsidized insurance and
interest rates, ….
Non-financial – trade diplomacy, export award, ….
Bilateral contractual instruments
• Trade agreement (governmental)
preamble + merit + protocol (procedures) + annexes
Merit part is formalized to standard clauses (most-favoured nation, national
treatment, reciprocial)
National protection
• Some sectors are considered critical for national defense (eg
certain metals, food, transport)
• Industries that are really necessary for national security should
be protected from foreign competition, if this is the only way
to ensure their existence.
Immature industries
• Countries sometimes justify protecting new industries
that need time to become competitive with the rest of the
world.
• An alternative is to subsidize these industries, allowing
them to demand lower prices due to their cost of
production.
• New industries need time to get started
• Build effective relationships with other companies
• Business learning curves
• Increase production volume until economies of scale appear
• It should be temporary but often difficult to remove.
Strategic trade policy
• Utilizing trade restrictions or subsidies to enable lower-cost
domestic firms to achieve a greater share of the world market
• Increasing economies of scale: costs per unit of production
decrease as production increases
Trade agreements
• Unilateral: the country will remove its constraints on its own
• Multilateral: countries will reduce / remove trade restrictions
along with other countries
• NAFTA - multilateral trade agreement
• In 1993, it reduced trade barriers between the US, Mexico and Canada
Effects of foreign trade policy
Two primary effects:
• “Trade creation” occurs when low-cost producers within the
FTA replace high-cost domestic producers
• Consumers in Member States can receive goods at lower prices than
would be available at home
• “Trade diversion” occurs when high-cost domestic producers
within the FTA replace low-cost external producers.
• Economic efficiency on a global scale is limited as production is
shifting to high-cost producers
But economists believe that free trade is usually a much better policy!
Video spot
• Trump's Trade War (full film) | FRONTLINE, 55 min. https://www.youtube.com/watch?v=4_xQ5JisFuo
• Exports and Imports | Protectionism, Tariffs and Who Benefits From Them, 9 min.
https://www.youtube.com/watch?v=Ny6kCk2Q6So
• How do tariffs work? | CNBC Explains, 5 min. https://www.youtube.com/watch?v=LKCMnCZyxiQ
• Explaining Economic Integration, 2 min. https://www.youtube.com/watch?v=e0ZBw9N6UBs
• Free trade defence instruments, 1 min. https://www.youtube.com/watch?v=zQ_Jf6HqWjc
• Trade wars, explained, 5 min. https://www.youtube.com/watch?v=Iwa3vLoeNmQ
Patrik Kubát
https://www.weforum.org/agenda/2015/10/a-new-way-of-visualising-world-trade/
The most important centers of international trade?
▪ USA
▪ Japan
▪ EU
▪ China
1. Direct
▪ Customs duty
▪ Quotas
2. Indirect
▪ Regulatory measures
▪ Hygiene limits
▪ Conditions of origin and marking
▪ Protection against unfair competition
▪ Customs procedures
▪ Discrimination in tenders
Managing global trade flows
Customs duty
Definition: duty is the amount in domestic currency that is collected by
the government from the owner of the goods when it crosses national
borders
Impact of duties:
▪ Protective effect, duties protect the domestic economy
▪ Fiscal effect, duties have impact on the state budget (less significant
today)
Developed countries: industrial duty is between 2.5 and 4%, developing
countries much more, e.g. China 10-50%, Mexico 17-35%
Managing global trade flows
Natural
Tariff
Nontariff
Barriers complicate the development of export
▪ Insufficient finances
▪ Insufficient knowledge
▪ Missing links on foreign market
▪ Unspecified export targets
▪ Lack of capital
▪ Lack of production capacity
▪ Lack of foreign distribution channels
▪ Focusing managers on emerging markets
Economic sanctions
▪ commercial and financial penalties
▪ to accomplish some purpose of the initiator
▪ generally aim to change the behavior of elites in the target
country/territory
▪ may include various forms of trade barriers, tariffs, and restrictions on
financial transactions
Economic sanctions as embargo
▪ more severe sanction - no-fly zone and/or naval blockade
▪ the type of repression in international relations
▪ extreme means of diplomatic pressure
Overview of EU legislation in the field of
international trade
1. Customs code of European community - The Union Customs Code (UCC)
2. Act of the European Community customs regulation execution
European Community Customs Code
▪ The Combined Nomenclature (CN) is the EU's eight-digit coding system, comprising
the HS codes with further EU subdivisions. It both serves the EU's common customs
tariff and provides statistics for trade inside the EU and between the EU and the rest
of the world.
▪ The Integrated Tariff (TARIC) provides information on all trade policy and tariff
measures applicable to specific goods in the EU (e.g. temporary suspension of
duties, antidumping duties, etc). It comprises the eight-digit code of the combined
nomenclature plus two additional digits (TARIC subheadings).
https://trade.ec.europa.eu/tradehelp/
TARIC - Tariff Integre de la Communautee
▪ It is an information database containing all the data and information a
company needs to make export / import decisions
▪ Available for free on the Internet
▪ https://ec.europa.eu/taxation_customs/business/calculation-customs-
duties/what-is-common-customs-tariff/taric_en
EU product classification system
Tariff Codes
All products are classified under a tariff code that carries information on:
▪ duty rates and other levies on imports and exports
▪ any applicable protective measures (e.g. anti-dumping)
▪ external trade statistics
▪ import and export formalities and other non-tariff requirements
Transit procedure
▪ NCTS (New Computerized Transit System)
▪ It is a system of electronic customs declaration and its processing,
which allows the declaration of transit within the Community
electronically.
▪ Used by all EU and EFTA members
▪ Trade facilitation between EU (or EFTA) countries and third countries
▪ Note: A paper declaration is only permitted when the transit declaration
cannot be made in the NCTS system or for travelers with goods above
duty-free limits.
What is INTRASTAT?
▪ A system for collecting statistics on trade in goods between EU countries.
▪ Business must report trade data across EU borders:
▪ Goods dispatched: if the total annual value exceeds EUR 200 000
▪ Goods delivered: if the total value exceeds EUR 120 000
▪ At national level, responsibility for INTRASTAT lies with the national statistical
office, which cooperates with the national customs office.
Relevant sources of trade barriers (websites)
▪ Customs Administration of the Czech Republic
https://www.celnisprava.cz/en/Pages/default.aspx
▪ Czech Statistical Office https://www.czso.cz/csu/czso/home
▪ INTRASTAT www.czso.cz
▪ Market access database https://madb.europa.eu/madb/
▪ European legislation https://eur-lex.europa.eu/browse/summaries.html
▪ World's customs organization http://www.wcoomd.org/
▪ https://resourcetrade.earth/data?year=2016&importer=97&units=value
▪ https://comtrade.un.org/
Economic openness
International Trade, FBE Brno, 8/11/2019
Patrik Kubát
The degree to which nondomestic transactions (imports
and exports) take place and affect the size and growth of
a national economy.
The openness consists in involving the national economy
in international economic relations, which are
represented by the movement of goods between
residents of different national economies.
The degree of openness is usually expressed as the ratio
of exports to GDP (%).
140
2 basic options:
- low rate - large internal market (developed countries)
- high costs and low competitiveness on
world markets (underdeveloped countries)
- high rate - small internal market
- narrow production specialization, mainly due
to natural conditions
- newly industrialized countries, often through
government support
141
indicators to measure
degree of openness = characterizes the intensity of the economy's
involvement in commercial transactions
- distinguished according to the country of destination and the origin
of goods
- per capita exports or exports converted to GDP
shape of openness - differentiate between countries of destination and origin
of goods
- territorial structure - foreign business partners of the given
economy
- commodity structure - distinguished by the character of trade flows
- composition of exports and imports by groups of goods
and services
affectiveness of openness
142
classification of trade in goods
a) SITC (Standard International Trade Clasification), 5-digit code
10 sections:
0 food and live animals
1 drinks and tobacco
2 raw materials - excluding fuel
3 fuel
4 animal and vegetable fats
5 chemicals
6 industrial products of material abilities
7 machinery and transport equipment
8 different industrial products
9 commodities and traded goods not elsewhere classified
143
classification of trade in goods
b) HS (Harmonised system)
- classification managed by the World Customs Organization (WCO)
- can classify 98% of traded goods into more than 5,000 commodity groups
- 10 classes and 6 subgroups = 6-digit code
- used by most countries when creating customs duty tariffs
c) CN (Combined Nomenclature)
- used by EU countries for foreign trade analysis and customs classification of goods
- Extended version of HS, code extended by two more digits
- 10 classes and 8 subgroups = 8-digit code
d) TARIC
144
classification of trade in services
a) ISIC (International Standard Industrial Classification)
138 activities that have the character of a service
it is not widely used in practice
145
Another indicators
Affectiveness of openness - measures the expediency of engaging the
economy in international trade and seeks to quantify the benefits of
international cooperation
a) Terms of trade (TT)
indicator of real terms of trade
evaluation of the development of foreign trade results for the domestic
economy
share of export and import price indices
146
Another indicators
b) Transformation effect
the ability of the economy to appreciate imported raw materials, the calculated
figure means value added, reported in USD per capita
imports include raw materials except fuels and fuels
for export - chemicals, industrial products of a material nature, machinery and
transport equipment,
various industrial products
c) Kilogram export price
quality indicator of the market value of exports (imports) of products of a
particular sector (branch) of individual countries, is usually reported in
USD per 1 kg and the higher the price per kg, the better result
147
Openness index
the ratio of country's total trade, the sum
of exports plus imports, to the country's gross domestic product
= (Exports + Imports)/(Gross Domestic Product)
https://www.theglobaleconomy.com/rankings/trade_openness/
148
The Global Index of Economic Openness, 2,5 min.
https://www.youtube.com/watch?v=BuR_u038ZrQ
Xi Jinping: Openness is solution for global economic problems
https://www.youtube.com/watch?v=SFzYWuWXJRk
Trade Liberalization and Development | Development Economics, 8 min.
https://www.youtube.com/watch?v=VJTwT0YvoEM
America’s Exceptional Economy (Episode 1), 7 min.
https://www.youtube.com/watch?v=GTWHRNxFTMc
What is an HS code?, 2 min. https://www.youtube.com/watch?v=2TIMhZd4ccw
International Trade and Supply Chains, 3,5 min.
https://www.youtube.com/watch?v=Bblo8_B32Co
Terms of Trade (2019 Update), 8 min. https://www.youtube.com/watch?v=KrGvEhMMTNE
149
Sources
PALÁT, M., PEPRNÝ, A. and TWEREFOU, D. K. International trade, Brno:
Mendel University in Brno, 2013. ISBN 978-80-7375-814-1.
Britannica. https://www.britannica.com/topic/economic-openness
150
Economic balance
Patr
External and internal balance
Int.: price stability, full employment in the
economic sense and equilibrium rate of GDP
growth
Ext.: assessed primarily according to the state
Economic balance of payments
The internal and external balance of the country
balance are interrelated
Trade balance
Payment balance
export import balance
111 billion CZK 120 billion CZK –9 billion CZK
Horizontal
structure Trade balance = export – import
A. Current
account
The capital account records, for example,
transactions related to trade in intangible assets
(trademarks, patents), forgiveness of
Payment balance receivables, etc.
Horizontal
structure
B. Capital
account
direct investment – DDI, FDI
portfolio investment - equity securities and equity
investment
Payment balance
financial derivatives - forwards, futures and options
other investments - borrowing and lending of credit
Horizontal
structure
C. Financial
account
Payment balance D. Balance of errors and omissions,
exchange rate differences
Horizontal Balance of errors and omissions, exchange rate
structure differences include any inaccuracies in the
records, methodological problems, exchange
rate differences, etc.
DaE E. Change in foreign reserves
Foreign reserves include gold, special drawing
rights, foreign exchange, etc.
Each transaction is recorded twice in the
balance of payments as credit item (+)
and as a debit item (−)
Payment balance a double entry book
Vertical
structure
RISKS AND FINANCIAL ASPECTS Intern
OF INTERNATIONAL TRADE
International trade is more prone to
Enterprises conduct business in a less-known
environment - more difficult to understand t
and effect in such an environment (e.g. cha
Differences in language, culture and religio
b) Financial risk - payment risk, market risk (currency, interest rate, price)
c) Business risk - risk associated with all business processes and activities
(innovation, product design, marketing, human resource management,
administration, documentation, transport
All economic, political, legal, financial and social aspects that affect business in
an international environment
Key questions:
- How to identify key risk factors for country risk?
- How to predict them in the future?
- Which country risk factors are important and which less?
- How to compare countries' riskiness?
Everything is relative!
a) COUNTRY RISK
COUNTRY RISK ANALYSIS
•Switch trade - A company sells another firm its commitment to make a purchase in a given
country
Exporter - may transfer its obligation to pay to the importer to a third party known as a switch
trader
Switch trade adds to a counter-buying trade a third party that agrees to accept the commitment
of one of the parties
e.g. when the exporter agrees with the counter-buyer to complete the original sale
•Buyback - The company builds a factory abroad and takes a certain percentage of its
production as a partial payment under the contract
•Compensation deal - means an agreement on reciprocal purchases of certain goods between
the exporter and the importer
Treated by a single contract, this exchange of goods can (but does not have to) take place
simultaneously
Etc.
Any unexpected changes in
the value of the assets and
liabilities of an
internationally active
company
b) FINANCIAL RISKS
PROTECTION AGAINST THE
RISK OF NON-PAYMENT
Customer financial health control
Appropriate financial instruments
Liability insurance (insurance companies)
Monitoring and monitoring of commitments
Discount offers at early payment
Determining the maximum amount of debt for different types of customers
Compensation
Advanced forms of financing (factoring, forfeiting)
And also various simple procedures like:
Calling the customer or customers or suppliers of our customer
Studying customer annual report
Request to prove good financial health of the customer's business
EXAMPLE OF MARKET RISKS
Ex. Exchange rate changes
A Japanese computer manufacturer will sell 1000 PCs to a German
retailer for 500 EUR/pc. The agreed payment currency is EUR and the
amount must be paid in 30 days
What happens if the EUR depreciates against the yen within 30 days?
What impact will this change have on a German buyer?
What impact will this change have on the Japanese seller?
EXAMPLE OF MARKET RISKS
Answer
What impact will this change have on a German buyer?
The German buyer pays 500 EUR / pc to the Japanese seller as
agreed
c) BUSINESS RISKS
•Documentation: experienced staff
Systematic monitoring of possible risks
External assistance
•Pricing and calculation: Knowledge of cost
damage caused by war conflict and war instability – only material losses
insured
TWO WAYS/SCHEMES OF INSURANCE
A) Continental insurance
principle of universality
1) Against All Risks (AAR)
2) Insurance including special accident WPA (With Particular Average)
3) FPA (Free of Particular Average) insurance
https://www.tlclogistics.lt/en/cargo-insurance-on-the-basis-of-institute-cargo-clauses-i
conditions/
BUSINESS RISK, BLUNDERS
Examples of two major business mistakes
Patrik
WHAT IS NEW?
New Zealand ranked the second most peaceful country in the world
https://www.nzherald.co.nz/travel/news/article.cfm?c_id=7&objectid=12242095&fbclid=IwAR1STktemqJy6ww
64EhM0U_UrOUPiAIt1cmSoqracY
The Western Balkan states want to create a zone of free movement and
https://www.lidovky.cz/svet/staty-zapadniho-balkanu-chteji-vytvorit-zonu-volneho-pohybu-a-
obchodu.A191110_181759_ln_zahranici_ele
Slovaks turn moratorium into election polls for 50 days before elections
https://echo24.cz/a/SFPCk/slovaci-meni-moratorium-na-volebni-pruzkumy-na-50-dni-pred-
volbami?fbclid=IwAR2xOq1SWuyqBZ6yIPN9IoXuqQnB9pb_iBehywHOc0BWBeWFKKJDI05fj6I
INTERNATIONAL ORGANIZATIONS AND
COOPERATION
•deepening integration processes
•today's integration processes are based on economic issues
•concept of integration - especially for forms and processes of connecting, merging
of originally isolated or separate units into a single and internally unified system,
which creates a new whole
•dynamic concept of integration
•static concept of integration
•informal integration
•formal integration
•disintegration
functionalism
= allows for integration between member states that is practical for
cooperation in well-defined areas, with the participation of a minimal
institutional apparatus
•the states are first connected by economic ties, political integration can follow
•free market forces, space for market functioning
•„spill-over effect‟ - mutual cooperation expands a number of areas for
possible cooperation
THEORETICAL CONCEPTS OF INTEGRATION
intergovernmentalism
•it allows governments to work together in different areas while maintaining their
sovereignty
•keeping transnational institutions to a minimum
•the opposite of the federalist approach
ECONOMIC INTEGRATION
The degree of economic integration can be categorized into seven stage
•Preferential trading area
•Free-trade area
•Customs union
•Single market
•Economic union
•Economic and monetary union
•Complete economic integration
ADVANTAGES OF INTERGOVERNMENTAL
AGREEMENT/ECONOMIC INTEGRATION
Competition
Economies of scale
Improved Market Efficiency
Increased foreign direct investment
Trade Effects
DISDVANTAGES OF INTERGOVERNMENTAL
AGREEMENT/ECONOMIC INTEGRATION
Concessions
Interdependence
Loss of Sovereignty
Regionalism vs. Multinationalism
UNITED NATIONS (UN)
the largest international organizations
membership - 192 members (2008)
verifies agreements: international law, international security, economic
development, social progress, human rights, world peace
financing - according to the country's ability to pay (USA 22%, Japan
16%)
voluntary contributions
UNITED NATIONS (UN)
administrative authorities:
General Assembly - hl. deciding authority (similar to Parliament)
the Security Council - Peace and Security Resolutions
Economic and Social Council - promoting international economic and social
cooperation and development
Secretariat (headed by the Secretary-General) - UN studies, information and
information services
International Court of Justice - an excellent judicial body
Includes:
•International Bank for Reconstruction and Development (1945) -
Provided commercial loans to countries that were recovering their
economies after World War II, especially in Western Europe and
Eastern Europe. Asia (Japan, Korea, Taiwan). It assists moderate and
poor (but solvent) countries in economic growth.
WORLD BANK
•International Development Association (1960) - provides
grants or long-term interest-free loans to the poorest
countries:
•interest-free loans
•grants and programs that promote economic growth,
reduce inequalities and increase welfare
•the money was often used by other elites for other
purposes
INTEGRATION
GROUPINGS Explaining Econo
https://www.youtu
THE NORTH AMERICAN FREE TRADE
AGREEMENT (NAFTA)
a trilateral trade bloc in North America
1994
superseded Canada – United States
Free Trade Agreement (CUSFTA), 1987
one of the largest trade blocs by GDP
Trump, 2017 - sought to replace
NAFTA
September 2018 - USMCA
UNITED STATES–MEXICO–CANADA AGREEMENT
(USMCA)
renegotiation of the North American Free Trade Agreement (NAFTA); sometimes referred
as "New NAFTA" - it is meant to supersede
November 2018
side event of the 2018 G20 Summit
last 16 years
Mexico (June 19, 2019)
https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement
between
FREE TRADE AREA
OF THE
AMERICAS (FTAA)
•began with the Summit of the
Americas in Miami, Florida, on
December 11, 1994; 34
countries
•2001, 2003, 2005, 2012
•the project is never realized
•instead of FTAA it offers a
number of bilateral agreements
between individual states on the
American continent.
Dominican Republic– Central America
Free Trade Agreement (CAFTA-DR)
Union of South American Nations
(UNASUR)
Andean Community (Comunidad
Andina, CAN)
Caribbean Community (CARICOM)
Bolivarian Alliance for the Peoples of
Our America (ALBA)
PACIFIC ALLIANCE
•2012
•Chile, Colombia, Mexico, Peru
•Candidates Associate Members
(Australia, Canada, New Zealand, Singapore)
•Observers (60)
The Pacific Pumas (The Pacific Pumas: An Emerging Model for Emerging Markets)
MILA, 2010, stock exchange
EL MERCADO COMÚN DEL SUR (MERCOSUR)
What is Mercosur?
4 min
https://www.youtube.com/watch?v=IduHX7XNIYw
Economic Community of West African
States (ECOWAS)
1975, Lagos, 14 members
https://aric.adb.org/integrationindicators/groupings
THE ASSOCIATION OF SOUTHEAST ASIAN
NATIONS (ASEAN)
https://w
/tratop_e
e.htm#fa
EU big three
THATS ALL
international public a
private law
• a set of legal rules governing the relations of States
and other entities and establishing the legitimate
manner of their conduct within the international
community.
• a strong integrating element of the international
community
• the aim is to ensure the peaceful existence and
smooth development of the international community
• States - the supreme body of international law
Private international law
• realized mainly within the state borders
• however, they may extend beyond the territorial and
functional area of the state - socio-legal relations with an
international element
• such a relationship has a specific national legal standard -
each state has its own private international law
limitation of rights under the purchase contract - the period is four years
International Chamber of Comme
(ICC)
• „The World Business Organization“
• is the largest, most representative business organization in the w
• 1919, Atlantic City
• NGO
• has three main activities:
• rule setting
• dispute resolution
• policy advocacy
• supports – UN, WTO, intergovernmental bodies (G20)
https://iccwbo.org/
Motto:
We make business work for everyone, every day, everywhere.
United Nations Commission on
International Trade Law
(UNCITRAL)
• responsible for helping to facilitate international trade and investment
• 1966, Vienna
• "promote the progressive harmonization and unification of
international trade law" through conventions, model laws, and other
instruments that address key areas of commerce, from dispute
resolution to the procurement and sale of goods
https://uncitral.un.org/
Summary
• Any private relationship with an international element
must be governed by the law of a particular country.
• Possibility of choice of law for a trade
• All has to be led by some law, norms, standards, customs
etc. – included at the beginning or later in the agreement
• Law at any level is for assistance of the actitivities of the
participant
• What is INTERNATIONAL TRADE LAW? What does INTERNATIONA
mean?, 6 min https://www.youtube.com/watch?v=WhtpbJdXk6w
• What global trade deals are really about (hint: it's not trade) | Ha
TEDxMidAtlantic, 11 min https://www.youtube.com/watch?v=-v3
• https://www.imf.org/external/np/exr/st/eng/index.htm
• https://uncitral.un.org/en/lpdr-accedes-un-convention-contracts
sale-goods-cisg
International trade
operations
& financing them
International contracts
• The most common type of contract is a sales contract
Attempts at legal harmonization:
• United Nations Commission on International Trade Law (UNCITRAL)
• International Chamber of Commerce (ICC) activities
• UNIDROIT = International Institute for the Unification of Private Law
Direct export
• Used in industrial marketing in export of machinery,
production equipment and capital equipment.
• Very complicated deliveries - a range of professional
services.
Piggyback
• Cooperation of several companies from the same sector in
the area of export; a large and known company usually
makes available its foreign distribution channels to smaller
companies for consideration.
• The advantage:
• SMEs - the possibility of using the name and experience of the
large company
• large company - offer a complete assortment
• The disadvantage:
• SMEs - stronger partners' pressure on low prices
• large company – if SMEs is not able to supply the required
quantities of goods duty and timely
Association of small
exporters (export alliance)
• SMEs often do not have sufficient resources or
experience in international business, but they are
interested in exporting.
• Universal economic motivation and advantages.
• The advantages: cost saving, the opportunity to reduce
export risks, a better negotiating position, the use of
image of the association, etc.
• The disadvantage may imbalance of relationships
within the association.
B. Forms of entry into foreign markets with
low capital investment
• License operations
• Franchising
• Management contracts
• Processing operations
• Production cooperation
C. Companies' capital contributions in foreign markets
• Takeover
• Merger
• Greenfield investment
• Joint venture
• Strategic alliances
Factors and assumptions for the selection of banking
operations in the foreign country trade
Documentary credits
Documentary collection
Supplier credit
Bills of exchange
I. Payment Instruments
(partial) prepayment -
payment in advance
• Rare to pay the full purchase price
• Only for certain goods or in high risk territories
• More often used to pay part of the purchase price in
advance so-called down payment
Objective: to reduce the risk of the supplier resulting
from a possible withdrawal of the buyer from the
contract
• Provide part of the funds to finance the production
of goods. Large contracts with longer delivery and
payment periods combined with delivery and loan
payment
• As a rule, custom made goods; according to
customer requirements (including investment units)
I. Payment Instruments
Documentary letter of credit
(= collateral by two banks)
• Favorite item with exporters
• Thanks to the letter of credit they get a bank obligation
to fulfill
• Banks are reputable entities and their liabilities are
more credit worthy than those of commercial
companies
• The bank (as a rule) issues a letter of credit on the
buyer's instruction (and according to its instructions),
sufficient exemption of payment for the exporter
• The exporter fulfills the contractually binding letter of
credit as soon as everything is fulfilled, the bank pays
the letter of credit (submission of all required documents during
the period of validity of the letter of credit, attestations, quality
certificates, insurance, acceptance by independent control.)
letter of credit scheme
I. Payment Instruments
Benefits of a documentary
letter of credit
• Advantages for the letter of credit (buyer): assurance that
the goods were shipped before payment, the possibility
to minimize commercial risk by setting up credit
conditions, the possibility to obtain better prices by
providing quality payment security, the seller's motivation
to deliver within the prescribed time and with conditions.
• Advantages for the letter of credit (seller): certainty of
payment for the delivery of goods or services when the
letter of credit is met; certainty that the payment of the
agreed amount is subject to compliance with conditions
known in advance; improved liquidity (the seller can
obtain cash immediately if he sells his claim to the bank -
in deferred trade); possibility of guaranteeing a quality
letter of credit to own suppliers.
I. Payment Instruments
Benefits of a documentary
letter of credit
It is characteristic that relations between
interested parties are considerably formalized:
• the letter of credit is independent of the
contract from which it originated;
• stakeholders deal with documents, not
goods;
• this baking instrument is technically
sophisticated and its use is governed by
internationally accepted rules.
I. Payment Instruments
Documentary collection
• One of the most commonly used payment instruments in
international trade, but it is also used in domestic trade
• Compared to the letter of credit - this is more advantageous
for the buyer (importer)
• Used when the seller has no doubts about the payment and
receipt of goods
• The seller hand over documents to the bank and authorizes
the bank to arrange for them to be handed over to the
buyer against payment of the purchase price.
• Beneficial especially for importers, does not tie funds in
advance
I. Payment Instruments
Documentary collection
• The importer is assured that the goods have been shipped
• Assurance to the exporter that the bank will not issue the
documents until the buyer has issued a recovery order or has met
other recovery conditions
• The bank will not issue documents even if the payment is made as
a smooth payment until it has been authorized by the sending
bank
• Better payment security than smooth payments
• Lower bank fees (compared to documentary letters of credit)
• Ease of processing, safety
I. Payment Instruments
Open account
• Open account deliveries are used in many countries, especially
advanced ones, for domestic payments.
• Technically, this is a very simple payment condition in which
the supplier sends the goods with the due date of the
purchase price on the invoice.
• It is practically an unsecured commercial loan with a relatively
very short maturity.
• Customers pay according to the customs of the given territory,
eg within thirty or sixty days from the date of issue of the
invoice.
• The payment by the buyer is made in the form of a smooth
payment according to the due date; the advantage of this
condition is low cost.
I. Payment Instruments
Smooth payments
• The most widespread form of non-cash cross-border
payment operations
• Instrument for payment of a client's obligation or a
foreign currency claim
• A distinction is made: payments from abroad,
payments abroad and payments to the recipient in the
Czech Republic (in foreign currency)
• Advantages: the simplest, fastest and cheapest (non-
documentary) international payment instrument;
considerably shorter processing and delivery times for
smooth payments compared to check delivery
I. Payment Instruments
Supplier credit
• Exporter credits are used in international trade for almost all types of goods.
• Short-term loans up to one year are required for supplies of consumer
goods, raw materials, foodstuffs as well as for serial engineering products.
• Interest on short-term loans is sometimes included in the price, sometimes
negotiated separately.
• A method of repayment of loans is always agreed.
• The most common principal repayments at certain intervals.
• For the importer advantageous - because for the goods taken usually pay
only when it is already processed, sold to another commercial intermediary,
etc.
• The exporter bears the full risk of the credit granted and therefore often tries
to hedge in an appropriate form.
TRADE SECURITY
Bank Guarantee
• It is a fairly frequently used instrument to secure liabilities in
international trade.
• Its application is very broad, it can provide both buyer and seller
obligations and thus contribute to better balance of contract
performance
• Bank guarantees can also be used against other entities, eg carriers,
customs, courts, etc.
• Guarantees may also be provided by non-banking entities such as
insurance companies or commercial firms
• However, the guarantee fulfills its purpose only if it is provided by a
credit institution
• Therefore, company warranties do not apply. business only rarely,
especially for liabilities of companies that are part of transnational
corporations (corporate branches among themselves ...)
Retention of title
• It is expressed by a special agreement in the relevant
contract.
• It is a convention under which the buyer acquires title
to the goods not by taking it over, but only by paying
the full purchase price.
• The possibility of negotiating a reservation of title until
the purchase price is paid is limited to certain types of
goods and only to those partner countries where the
law allows the negotiation of this condition.
II. Alternative methods of financing; Premature assignment of claims
Factoring
• One form of short-term financing, based on the purchase of
short-term trade receivables before their maturity
• The Factoring Company finances the receivables arising
from the supply of goods or services on a commercial credit
without any further security, based on an assessment of the
quality of the business relationship and the
creditworthiness of the customer, or suppliers
• The advantage is its great flexibility, there is no need to
complicate any approval, do extreme banking protection, it
is the assignment of a claim to a third party
II. Alternative methods of financing; Premature assignment of claims
Factoring
• The Client undertakes to assign all receivables from its
customers to factoring companies, which leads to a
fundamental change in the creditor.
• Factoring company thus becomes the new and exclusive
owner of the receivable including its accessories in order to
ensure proper and timely collection and thus prevent
problem receivables
• In case of non-compliance with the due date, there are
reminders of the due date.
II. Alternative methods of financing; Premature assignment of clai
Forfaiting
• Conclusion of an assignment agreement between the
forfaiter (bank) and the supplier
• Both parties define a specific receivable, determine the costs
associated with the purchase of the receivable, required
documentation and implementation date
• The supplier delivers his goods to a foreign customer, the
forfaiter asks the supplier for specific documentation,
verifies its validity, followed by payment of the given amount
• The bank pays a certain percentage of a certain amount and
on the due date of the receivable the bank collects the value
of the receivable directly from the customer
II. Alternative methods of financing; Premature assignment of claims
Forfaiting
• If it does not, it acts as a creditor and ensures the recovery process.
• Advantageous especially for companies supplying foreign customers
with higher value services - investment units e.g.
• Excludes risks associated with the territory, buyer, exchange rate, etc.
• Forfaiter does not directly assess the customer's risk, but rather the
risk of its bank issuing / confirming this agreement.
• After the purchase of the receivable, the bank either retains the
receivable, or sells it to someone else, to sell it on the secondary
market.
• Forfaiting costs: discount rate; fees.
• Importantly, it is a tradable subject in factoring.
II. Alternative methods of financing; Premature assignment of clai
International leasing
• Involves entities from at least two countries – more risks and
factors than in the national one.
• Differences in national legal regulations, territorial and exchange
rate risk, customs and different tax factors, etc.
• Dynamically developing method of financing - spread from the
USA in the 1960s.
• Leasing may be characterized as a special type of lease in which
the lessee (user) obtains the right to use the investment goods
for fixed fees and for a predetermined period.
• The subject is usually machinery and equipment, means of
transportation or real estate/immovable property.