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4. FOREIGN TRADE

4.1 INTRODUCTION

Foreign trade consists of buying or selling goods to or from other countries.

In this process three parts can be identified:

Exporter Goods Importer

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✓ Exporter: a person or company that sells goods to another country.
✓ Importer: a person or company that buys goods from another country.
✓ Goods: all objects capable of being imported or exported.

Foreign trade is key to shaping the country’s national economy. It is described as the
number of imports and exports from one place to another that affect the trade balance.

There are several factors involved in a company's decision to enter the foreign market.
The first one is the globalization of competitors. The position in the market is crucial for
having many customers, and for that reason a company needs to reach the foreign
market before its competitors.

Secondly is customer demand, because customers often demand the products that do
not come from the country where the company is located.

Leaving customers aside, the company may want to grow internationally, such as in
emerging markets. Finally, there are governments in some countries that are looking for
capital investments, technology, etc. which give incentives, loans or use of properties to
companies that fit their needs.

Exporting seeks profits through the sale of products or services to foreign markets. This
sale is characterized by having clients outside the country where the supplier’s company
is located.

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4.2 TYPES OF EXPORTS

There are two types of exports: direct and indirect.

▪ Direct export: is carried out with no intermediaries. Thus, it is necessary that

people working in the company support the process by frequently travelling
abroad. This type of export implies that a company is able to handle all the tasks
of international agreements and has a good network of contacts to offer and sell
its product or service.
▪ Indirect export: is carried out through an intermediary; agent, or agency that is
in charge of exporting the product or service. Several export agents can be
identified. First, and the most common, is the merchant-exporter who takes on
all risks and sells independently on the international market. A second example
of an intermediary would be the export corridor; in this case it is the
manufacturer who takes risks when it comes to maintaining more control over
his product. Finally, there are export agents who, in addition to putting the
producer in touch with the customer, are also in charge of searching for
international financing, shipments and distribution.

4.3 EXPORT BARRIERS

They are obstacles that hinder or prevent the entry of possible producers into a market.
Below you will find various types of export barriers:

1. Internal barriers - domestic: imposed by the country to which you want to export the
goods. They are intended to help the manufacturers that reside in the country and
supply the domestic market. Three systems can be distinguished:

▪ Anti-dumping duties: the product is sold at a lower price to customers of the

importing country than the one offered on the market of the exporting country.
▪ Countervailing duties: the State subsidizes specific goods allowing their export
at a reduced price. The State establishes a rate to avoid this unfair competition.
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▪ Restrictions on movement of goods: the States can restrict the movement of
certain kinds of goods, exports or imports, establishing temporary quotas.
The possible disadvantages of this barrier:

- Insufficient production capacity.

- Absence of administrative staff.
- The export carried out by untrained staff.
2. Internal barriers - foreign: the ones presented by foreign countries.

- Logistics problems in transport and shipment.

- Problems with loans and delays.
- Problems with providing technical advice and service to the client.
3. External barriers - domestic: the ones imposed by the external environment of the
company.

- High financing costs.

- Lack of investment.
- Excessive documentation for exporting procedures.
4. External barriers - foreign

- Differences between tastes or preferences of consumers.

- Different protocols.
- Difficulty finding a competent supplier.
- Problems with distribution channels.
- Imposition of tariff barriers by foreign governments.
- High competition.

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4.4 DUTIES/TARIFFS

A tariff is a tax imposed on the goods imported by a nation, according to the rate
specified for the type of product. As we have seen, tariff barriers are used to restrict
trade.

There are different types of tariffs:

▪ Specific tariff: for each unit of merchandise a certain amount of tariff is paid,
regardless of the value of the goods.
▪ Ad valorem tariff: a percentage is charged of the value of the goods. In the
European Union this tariff represents approximately 90% of the total number of
tariffs.
▪ Common external tariff: it is used among member countries that form a
community. All countries within the community adopt a common external tariff
in trade with third countries. There is a tariff structure established for each
economic sector of member countries.
▪ Protectionist tariff: it is used to intentionally inflate the prices of an imported
product to protect the domestic industry from foreign competition.
▪ Mixed-combined tariff: it consists of a specific tariff and an Ad valorem tariff.
Tariffs are aimed at:

✓ Lowering imports and improving the position of the country's trade balance.
✓ Generating income.
✓ Protecting domestic production.
✓ Protecting and promoting industry.

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4.5 NON-TARIFF BARRIERS

Non-tariff barriers are those that are not described in the context of a tariff, but have
the same goal: to prevent the free flow of goods between countries. We can distinguish
between two types:

▪ Direct: these are the quantitative restrictions on import, such as automatic

licenses, import quotas, discretionary licenses, minimum prices, top prices, etc.

▪ Indirect: these are the measures of domestic industry protection aimed at

boosting exports and restricting the entry of foreign goods into the domestic
market.

The types of non-tariff barriers are:

▪ Rules of origin: are the regulations that establish the criteria for the
determination of the origin of goods. These standards are one of the most
important components of the Free Trade Agreements.

▪ Technical standards: are government regulations essential for protecting public

health, the environment and consumer rights. The countries that apply them try
to prevent third countries from exporting hazardous waste or substances to the
region.

These standards are technical specifications that determine the characteristics of

a product according to dimensions, ingredients, quality, performance or safety.
The products intended for sale must meet these requirements.

▪ Sanitary regulations: are imposed to protect human, animal and plant health.
The institutions involved in these regulations are:

- Ministry of agriculture: responsible for granting licences for fish and

molluscs.

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- ICA: its function is to provide clearance certificates for animals, fruit and
flowers, veterinary pharmaceuticals and bovine equipment.
- Ministry of Environment, Housing and Territorial Development: in charge
of the species of the Tropical Animal and Vegetable Kingdom,
endangered species and their by-products.
- Ministry of Mines and Energy: responsible for the certificate of capital
goods of oil companies, gold, silver, platinum and radioactive products.
- Ministry of Social Protection: responsible for giving the green light to
pharmaceutical products and cosmetology.
Some of the requirements needed for the control of pests, diseases and toxic animals:

- Laboratory Tests
- Certifications issued by government entities
- Inspections of the production process
- Control and inspection of the use of pesticides and fertilizers
- Compliance with quarantine periods

▪ Import licensing: authorizations or special permits that are given so that the
product can be imported. Thanks to this, the flow of imports can be regulated
and limited.
The WTO (World Trade Organization) includes “the Agreement on Import
Licensing Procedures” which says that import licensing should be simple and
transparent.

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4.6 CUSTOMS REGIMES

When goods arrive in the customs territory of the Community, they are assigned to a
specific customs regime depending on the needs, destination or objectives of the
importer or the exporter. That assignment may not take place immediately at the time
of the entry of the goods as they can be stored for a certain period, between 20 and 45
days, in authorized customs enclosures.

There are different customs destinations for the goods that arrive. Among these we
should highlight:

▪ Free zone: a part of the customs territory of the Union designated by Member
States. Within this special area goods can be introduced free of import duties,
other charges and commercial policy measures until they are assigned to
another customs procedure or re-exported. Article 171, first point of the
Community Customs Code indicates that "there shall be no limit to the length of
time goods may remain in free zones of free warehouses", although it is
indicated in the second point that “for certain goods referred to in Article 166
(b) which are covered by the common agricultural policy, specific time limits may
be imposed in accordance with the committee procedure”.
▪ Re-export: the exit of non-EU goods from the customs territory of the EU. Those
goods have been previously temporarily imported or placed in a customs
warehouse. Re-exportation will entail the application of the formalities laid
down for the departure of the goods, including commercial policy measures. In
the event that re-exportation is subject to the presentation of a declaration for
it, the existing provisions for the final export, namely the exportation carried out
in a standard manner by any exporting company, will be applied.
▪ Destruction and abandonment: in all cases it exempts the interested parties
from the payment entitlements, but not from the fines and surcharges that they
have incurred if, deducting the expenses of filing and customs duties, the surplus

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of the product of the sale of the merchandise does not cover the amount of the
fines and surcharges indicated.
▪ Customs: goods can benefit from an economic customs procedure through the
request and the subsequent concession by the General Secretary of Foreign
Trade or the customs authorities (Department of Customs and Excise Taxes).
- Free practice: the release for free circulation is the only administrative
procedure required before introducing a foreign good to the community
market. It is an operation of great importance, since it grants the customs
status of community goods to the merchandise coming from third countries.
From this moment on, goods can move freely through the community,
without customs duties, quantitative restrictions or taxes of equivalent
effect. "Released for consumption" goods will be considered those external
goods introduced into the Community customs territory that have been
released for free circulation and meet the indirect taxes (VAT and excise
duties) in one of the Member States. This Member State may be different
from the one in which the release for free circulation was carried out.
- Transit: a customs regime applicable to international intra-community
transport of non-EU goods and international transport of all types of goods
between the countries of the EU and Andorra and between the countries of
the EU and the EFTA countries. Like the TIR customs regime, the Community
Transit has as its main objective the simplification of customs procedures.
The Community Transit allows the use of any means of transport (maritime,
air or land). Before starting the Community Transit, the carrier must present
the bank guarantee to the customs office of exit so as to guarantee the
correct use of the regime. There are guarantees for travel or global
guarantees (for a set of journeys). ASTIC, on behalf of its partner carriers,
may also present global guarantees (guarantee pass). Unlike the TIR Regime,
in Community Transit by road, goods can travel in normal vehicles (no
Certificate of Agreement is required). Likewise, and unlike the TIR regime,
the seal at the Customs Office of exit is optional. At the customs offices of

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departure, transit and arrival, the carrier must present the so-called T
Document for its completion. In these customs there is no physical inspection
of the merchandise, only the addition of new seals.

- Customs warehouse: a public customs warehouse is the one that anyone can
use to store goods. A private customs warehouse is, on the other hand,
reserved for the storage of goods by the depositary. The depositor is the
person bound by the declaration of inclusion of the goods in the regime of
customs warehouse or the one to whom the rights and obligations have been
assigned. The main benefit of introducing goods in a customs warehouse is
the lack of taxes on imports during the time that the merchandise remains in
this customs regime. The goods may stay there for an unlimited period,
except for exceptional cases and goods subject to the common agricultural
policy with specific deadlines. The operations allowed in a customs
warehouse are usual manipulations, storage of a set of goods with different
customs status, transfer of goods from one customs warehouse to another,
temporary withdrawal, and operations of inward processing traffic and
processing under customs control.
- Inward processing: refers to the introduction of non-community goods to
the CCT (Common Customs Territory) without these goods being subject to
import duties or any type of commercial policy measure, to be subsequently
transformed or perfected and exported afterwards in the form of
compensating products. This means allowing goods from third countries to
be introduced so that they can undergo processing operations. An example
of this would be sending a particular machine to the United States from
Spain. At its destination, a fault in the machine is detected and needs to be
repaired, so the machine is sent back to Spain for the purpose of being fixed
and sent back to the United States.
This type of regime uses four modalities: suspension, suspension with
equivalent compensation, prior exportation and refund.

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- Suspension: the goods are imported without paying duties, they are
perfected and the regime is finalised with the export.
- Equivalent compensation: occurs when community goods, which are
equivalent to those imported, are allowed to be used in the process
of improvement.
- Prior exportation: products manufactured from equivalent goods,
prior to import, are exported.
- Refund: means that first the customs duties are paid and later, when
the export is performed, one can claim a refund.

For each one of them, the corresponding authorization needs to be
requested, either from the General Secretariat of Foreign Trade or from the
customs supervising office, depending on the total amount of annual
operations that are to be requested. What should be stated in the
authorization are the operation of the scheme and the economic conditions.
The economic conditions should always be justified by evidence and
approved by the customs authority. There may be, for example, an
excessively high price, which prevents the subsequent sale in foreign markets
because of a lack of competitiveness, inadequate community production,
etc.
- Outward processing: an economic regime that allows exporting community
goods outside the customs territory of the European Union temporarily so
that they can undergo processing operations and then be released for free
circulation with total or partial relief from import duties.
- Exportation: all the merchandise that has to leave the customs territory is
included in the Export Customs Regime. Such a regime implies the
implementation of surveillance standards, control of trade policy measures
and customs authorities.
- Temporary importation: an economic regime that allows the import of non-
Community goods into the customs territory of the community with total or

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partial relief from import duties. These imported goods must be re-exported
outside the customs territory of the Union and are not intended to undergo
any change, except normal depreciation due to the use made of them. The
maximum term is 24 months, and it can be reduced by the customs of that
country if necessary.
- Temporary export: the exportation or the release of community goods for
free circulation outside the union. After a certain period of time, they re-
enter the customs territory of the EU in an unchanged condition. Although
the goods leave the EU on a temporary basis, the trade regime is applied as
if it was a final export, with the difference that in all the documentation that
accompanies the process it is clearly stated that it is a temporary export. The
re-importation can be carried out under the duty-free and VAT exemption
regime. This regime is also applicable to goods exported permanently and re-
imported within a period of three years, provided they have not undergone
any type of transformation.

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