Methods of foreign trade

Methods of foreign trade Foreign trade in Russia may successfully be carried on direct between Russian enterprises and foreign firms and indirect through middlemen. Nowadays manufacturing enterprises have the right to sign contracts with foreign companies direct through their own import-export departments. Also, joint enterprises are being set up to manufacture products for sale in this country and in third countries. Currently, foreign firms can participate in

Russian market in a number of ways. These include direct sales, trade through agents, production cooperation, the signing of licensing agreements, the creation of joint ventures. Direct sales. The most common means of doing business with Russia is through straight sales of foreign goods in exchange for foreign currency or countertrade. Countertrade is a term which denotes various methods of linking two export operations.

In a countertrade transactions the Seller agrees to take full or partial payment in goods. One of the main reasons of countertrade existence in the world is a big foreign debts of most Latin America, some Africa and Asian countries and their inability to repay them. So the rapid development of countertrade result from their inability to pay for the imports because of lack of hard currency without which they can’t successfully expand their national economies and increase

exports. Countertrade is not the most desirable form of international trade. It is not in harmony with the concept of an open, cash-based trading system, besides countertrade replaces the pressures of competition and market forces with reciprocity, protection and price setting. In spite of this general objection, in practice countertrade is an international business method of growing importance. There are 2 types of contracts for countertrade:

1. Contracts of sale and of barter 2. Framework agreement Normal dealings in international trade are carried out by contracts of sale where the sale of goods means an exchange of goods for money. But if the contract provides for an exchange of goods for goods or services, it is not a contract of sale in the legal sense, but it is a barter. In American law, however, a contract of barter is also a contract of sale.

The contract of barter is assimilated to the contract of sale, as far as the terms implied by the law into the contract are concerned. The property in the goods, supplied in a barter by each party to the other, passes when the parties intend it to pass. A written contract of sale is made out in the form of a document signed both by the Buyers and the Sellers. When there is no necessity of introducing special terms and conditions into the contract of sale, business

people use standard forms of contracts containing the following articles: 1. Naming of the Parties 2. Subject of the contract and volume of delivery 3. Prices and the total value of the contract (including terms of delivery) 4. Time (dates) of delivery 5. Terms of payment 6. Transportation of goods 7. The Sellers’ guarantees (the quality of goods) 8. Sanctions and compensation for damage 9.

Insurance 10. Force majeure circumstances 11. Arbitration 12. General provisions Also, there may be standard General Conditions which form an integral part of the contract and are either printed on the reverse side of the contract or at the foot of the face of the contract or attached to it. Normally it is advisable to conclude а framework agreement, within which the individual countertrade

transactions shall operate. But sometimes in a long-term or major construction contract it is usual to build the countertrade provisions, e.g. the buy-back clauses, into the main contract without concluding a framework agreement. The framework agreement should contain a clear definition of the mutual obligations of the parties. The countertraded goods should be specified and it should be provided whether their value should be ascertained on a FOB or CIF basis.

If the exporter intends to realize the countertrade proceeds at once by an open factoring arrangement, the factor should be a party to the framework agreement. The framework agreement often contains penalty provisions for nonperformance of the countertrade obligations by the exporter. A choice of law clause and an arbitration clause should be provided. Sometimes the framework agreement takes the form of a letter of intent, but this is unsatisfactory

because a letter of intent is not enforceable in law. The forms which countertrade transactions assume are infinite and vary from country to country and from case to case. But some types of countertrade transactions can be discerned: • reciprocal sales agreement or counter deliveries. The reciprocal sales agreement under which the export seller enters into a separate contract with the overseas buyer whereby the export seller purchases certain specific

goods from the buyer. Two variants of reciprocal sales agreements exist. In the first the obligation of the export seller to enter into the countersale is laid down in the framework agreement and the two contracts of sale are entirely independent of each other. In the second variant, the export sale is conditional on the export seller entering into, or possibly performing, the countersale. • barter is an exchange of goods for goods or services.

This term is employed loosely in commercial circles. It is sometimes used - incorrectly - for all types of countertrade, irrespective of the legal nature of the arrangements made by the parties. Here again, two types can be distinguished. In the true barter, there is a simple exchange and no value is placed on the goods exchanged. In the second type, some value is put on the exchanged goods.

It is obvious that in commercial transactions only the valued barter is used. • buy-back agreement. This kind of arrangement is made in mining, oil exploration or other major export transactions. The contractor who carries out the work agrees that the purchase price be paid in full or partly by his purchase after installation. The buy-back terms will often contain a most favoured customer (m.f.c.) clause, according to which the seller of the produce will grant the contractor (the buyer) the most

favourable price which he charges another customer purchasing goods on comparable conditions. Sometimes the exporter may find it difficult to turn the countertraded goods into money in consequence of exchange control restrictions or other trade barriers which exist between various countries, and it may be necessary for him to engage in a complicated swap transaction involving a third country in order to obtain the consideration due to him for the export sale.

ECGD cover is not available for a countertrade transaction except in the case of a reciprocal sales agreement under which the ordinary export sale is unconnected with the countersale. Some of these additional risks can be reduced or avoided if the exporter enters into a factoring agreement with a confirming house, broker, bank or other finance institution. Now let’s return to the question of indirect sales.

Indirect sales is a supplying goods through middlemen such as: 1. associations and firms of the Ministry of Foreign Economic Relations 2. agents and distributors 3. commodity exchange Manufactures may choose to deal in their goods through intermediaries. It often depends on the kind of merchandise and market available.

The associations of the Ministry of Foreign Economic Relations still deal in raw materials such as oil, gas and some foodstuffs and consumer goods, as well as carry out all kinds of construction work (joint ventures at home and turn-key factories and works abroad). 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.

The manufacturing works may set up joint-stock companies in foreign countries and deal in their goods through them. The advantages of this method of trade are the following: 1) They know the market and market fluctuations better. 2) They have their own warehouses in their countries. 3) They may always have the goods and spare parts in stock.

4) They often have facilities to process the goods additionally if necessary, to sort them out and pack. 5) They have a wide well-established marketing network. Commodity Exchanges are centers in commodity markets, where all dealing are either in actuals or in futures. A trader in actuals may deal in spot (immediate delivery) or inforword supplies (delivery sometimes ahead). A trader in future contract to buy or sell standardized class of commodity at a stated price

at some fixed time in future. Commodity exchanges deal in raw materials and some items of produce, such as cotton, wheat, vegetable oils, etc. as these goods can be accurately graded and the grades practically remain unchanged every year. The goods are bought and sold at commodity exchanges according to grades or standards and on the basis of standard contract terms. And commodity exchanges are called accordingly: the

Wheat Exchange, the Metal Exchange and so on. Nowadays Commodity Exchanges are losing their role as markets of physical goods and are becoming mainly futures exchanges where deals are chiefly made for speculation purposes or for hedging. Big companies in Great Britain have their own network of distributive organizations to sell their goods at home and abroad. But smaller companies prefer doing their business abroad through intermediaries:

agents and distributors. Commission agent sells the goods in his name and for his principal’s account. Consignment agent pays duties and taxes as well as for obtaining the import licence. Also, he may have to provide technical advice and after-sales service to customers. Agency agreement should include in detail all the duties and obligations to be undertaken by both parties. It is necessary to distinguish clearly between the

Agent and the Distributor. The essential difference is that whereas the commercial Agent is engaged in the negotiation with customers about a contract for the sale of goods on behalf of a principal and for his account for which the Agent reserves an agreed commission. The Distributor operates on his own account as an independent purchaser for sale of the Supplier's products, getting his remuneration from whatever profit he may make out of these sales.

The appointment of a sole and exclusive Distributor of his products in a foreign country can and usually does hold considerable advantages for the Supplier. Where the Distributor is a specialist trader, his knowledge of local trading conditions and possession of a distributive network in a given territory will be of invaluable assistance to a Supplier wishing to enter into or expand in that market.

The relations between the Distributor and the Supplier are determined by a distributorship agreement (contract), stating that the Supplier grants to the Distributor the sole and exclusive right to purchase from the Supplier certain specified goods for sale in a given territory. Agency agreements are usually concluded for terms of 3 or 5 years, while distributorship agreements

are signed for longer periods of up to 7 years, after which the matter can be reviewed with the intention of prolonging its effect. One more way of indirect sales is fairs and exhibitions. They help principals to promote their products and they provide them with trade halls. They make contracts on principals behave. The Rassian International Fair is a mixture of commercial center (with its own balance shirt).

It holds seminar courses, contracts are signed, deals are made, and meetings are held. Foreign economic restructuring in Russia has effected the contract of foreign trade, banking system and the role of the Russian enterprise in the economy. The main points of the foreign trade reform are: • enterprises now have the right to conduct foreign trade • industrial enterprises are allowed to maintain currency bank accounts • greater emphases is

made on exports and world marketing technique • inward investments by means of joint ventures is encouraged One of the most acute problems facing Russian economy externally and internally is non-convertibility of the rouble which is a serious handicap in relations with its trade counterparts. The Economic reform sets a task to made the rouble convertible. Russian enterprises have a right to set up joint ventures on the

Russian territory with foreign firms. A joint venture can be created between any number of foreign and Russian enterprises. A joint venture has limited liability. It should be self-supporting and self-financing. It may be set up in any branch of the economy: agriculture, industry, trade, service sector etc. A foreign participant may repatriate his share of profit abroad. The main features of interest to the Russian participant are: • to satisfy the requirements for the

domestic market • to attract foreign technology and foreign management experience If the parties want to form a partnership a protocol of Intent is normally signed. A joint venture becomes a juridical person after it has been registered with the Ministry of Finance. The foundation documents include the Agreement between partners on the establishment of a joint venture and the

Statute of a joint venture. The Feasibility Study is jointly prepared by the partners involved. It covers the objective of a company, the working capital, the product to be manufactured, the marketing possibilities, the technical back-up of a project. Only after registration the company may open a bank account and conclude agreements and contracts in its own name. A joint venture must be managed by a

Board of Directors represented by Russian and foreign participants. The Board of Directors sets out the strategy of a company. A joint venture is obliged to establish a reserve fund of 25% of the value of the authorized fund. It is formed by way of annual deductions from the profits of a joint venture. The research and development fund is created to develop production.

It is viewed as reinvestment and is tax deductible. All the other funds created by a joint venture are taxed. After deductions have been made to the funds, the rest of the profit is divided between the partners in proportion to the share of the authorized fund belonging to the individual participant. Profits may be transferred from Russia to foreign countries in cash or by way of import substitution.

A joint venture is a legal person.