Unit Four
International Trade Foundations
Objectives
 Get the students to be familiar with the
concepts of international trade.
 Cultivate the students’ ability of problem
solving.
 Help the students overcome the vocabulary
barrier in reading.
Section A
Introduction
International trade is the activity that one country and
region exchange goods，technologies and services
with other countries and regions. It includes not only
international trade and foreign manufacturing, but
also comprises the growing services industry in areas
such as transportations, tourism, banking, advertising,
construction, retailing, wholesaling and mass
communications. It includes all business transactions
that involve two or more countries.
Pre-reading
 Before reading the following passage, answer
these questions:
 1. What do you think are the characteristics of
international trade?
 2. Have you known any forms of international
trade?
Text Birdview of International Trade
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International trade is just like any other trade
except that it crosses international boundary lines. To
be more exact, it is the exchange of goods and
services across national borders. In most countries, it
represents a significant part of Gross Domestic
Product (GDP). While international trade has been
present throughout much of history, its economic,
social, and political importance have increased in
recent centuries, mainly because of industrialization,
advanced transportation, globalization, transnational
corporations. In fact, it is probably the increasing
prevalence of international trade that is usually meant
by the term “globalization”.
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Although there are usually few trade
restrictions within countries, international
trade is usually regulated by governmental
quotas and restrictions, and often taxed by
tariffs. Tariffs are usually on imports, but
sometimes countries may impose export
tariffs or subsidies. All of these are called
trade barriers. If a government removes all
trade barriers, a condition of free trade exists.
A government that implements a protectionist
policy establishes trade barriers.
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In general，import and export transactions may be
carried out in various ways and forms according to
the international trade requirements. First, trade can
be carried out according to Trade Agreement, Trade
and Payment Agreement, Exchange of Goods and
Payment Agreement, etc., signed between the
governments concerned. Then, the export and import
trade may be made according to the terms and
conditions of the sales contract concluded between
the parties concerned. A lot of export/import trade
transactions are carried out in this way in China today.
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Besides, there are some other ways of dealing in
international trade.
 Barter Trade All imports are to be made against a
corresponding value of exports.
 Compensation Trade Payment of imports (chiefly
machinery and equipment for a factory) is to be made
by products of the particular factory during certain
years of its production according to the agreement.
 Processing Trade Imports of raw materials, packing
materials, etc. are to be re-exported after processing
or manufacture according to the agreement.
 Consignment Trade An exporter exported
goods (the consignor) to an import abroad
(the consignee) and the latter made payment
only after the goods have been sold. A certain
percentage of commission for the importer
and other agreed expenses are deducted
from the sale proceeds according to the
agreement. This mode is chiefly used to start
exports of goods of new designs, new
production or invention, new brands, etc.
 Exclusive Sales Agreement The exporter may sign
an exclusive sales agreement with an importer
abroad. He may also set up his own branch office
and employ his own sales organization abroad. He
may act through a subsidiary company which is
established under the laws of the foreign country in
question. Or, he may combine with other traders in a
joint selling organization (or joint venture), a
consortium or an export group.
 Agency Arrangements The exporter enters into
direct relations with the customers abroad, by means
of a contract procured and conducted on behalf of the
exporter by a representative who resides abroad and
is not his employee. The remuneration of the
representative or independent agent is usually based
upon a commission on the purchase price of the
exports.
 Invitation for Bid or Tender When enterprises,
utilities as well as governments are in need of certain
materials, products or planning to build a project, they
often invite people to bid. With the development of
foreign trade, more and more kinds of business are
involved in this type of trading, ranging from
contracting a big project to importing a kind of
commodities.
 Trade Fairs Export / import trade may be possible
through commodity exchange at international fairs.
e.g., Guangzhou Fair: The Chinese Export
Commodities Fair is held twice a year in the City of
Guangzhou. The spring session of the fair lasts from
April 15 to May 5 and the autumn session from
October 15 to November 5.
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When it comes to the international trade, there are
two important principles we must pay attention to --absolute advantage and comparative advantage.
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The principle of absolute advantage states that
one nation is more efficient than another in the
production of one commodity but is less efficient than
the other nation in producing a second commodity,
then both nations can gain benefits by each engaging
in the production of the commodity of its absolute
advantage and exchange part of its output with the
other nation for the commodity of its absolute
disadvantage. By this way, resources are used in the
most efficient way and output of both commodities
will rise.
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According to the law of comparative advantage,
there is still a basis for mutually beneficial trade even
if one nation is less efficient than the other nations in
the production of both commodities. The first nation
should concentrate on producing and export those
commodities in which its absolute disadvantage is
smallest (the commodity of its comparative
advantage) and import the commodities in which its
absolute disadvantage is greatest (the commodity of
its comparative disadvantage).
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Finally，let's clarify some important terms about international
trade:
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Import vs. export Normally, every nation’s foreign trade
comprises both imports and exports, classified by the directions
of the movement of commodity traded. Buy in commodity from
another country is import and sell out commodities to another
country is export.
 Favorable balance trade vs. unfavorable balance of trade when
nations export more than they import, they have a favorable
balance of trade. When they import more than they export, an
unfavorable balance of trade exists.
 Visible trade vs. invisible trade Visible trade involves the import
and export of goods and merchandise, while invisible one
involves the exchange of services between nations.
 Direct trade vs. indirect trade Direct trade means that the
producing country sells the goods directly to the consuming
country. However, the goods may be shipped directly or
indirectly from the producing country to the consuming country.
If the goods are shipped through a third country, the third
country is referred to as a transit country. To the transit country,
such a transaction is transit trade and may be imposed a transit
duty. Indirect trade means that the producing country sells the
goods to a third country first and then the third country resells
them to the consuming country. To the third country, this is
entrepot trade. Entrepot trade is usually carried out by a
middleman in the third country but the goods are shipped
directly from the producing country to the consuming country in
normal cases.
Post-reading
Answer the questions on the text.
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1. What is international trade?
2. What accounts for the increasing prevalence of international
trade ?
3. What are trade barriers? In what case does a government
establish trade barriers?
4. What are the ways of dealing in international trade
mentioned in the text?
5. When are people invited to bid as a type of trading?
6. Is it popular to carry out export/import trade transactions
through commodity exchange at international fairs in China
today?
7. What are two important principles in the international trade?
8. What is favorable balance trade?
9. Do you think invisible trade plays an important role in
international trade? Why?
10. What are the differences between direct trade and indirect
trade?
Section B Reading Skills
Strategies to identify unknown words
 Recognizing Words through Prefixes
 Recognizing Words through Suffixes
Speed Reading Task
 Let’s have a glimpse of terms in international
trade. Use techniques for speed reading to
find out the answers to Exercise 1 as quickly
as possible.
True or false
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KEY: TFFT TFFT
1. _____ International Commercial Terms (INCOTERMS) are a set of
internationally agreed trade terms, which are the short terms or
abbreviations used to explain the price composition and determine
the responsibilities, expenses and risks borne by two parties as well
as their rights and obligations accordingly.
2. _____ Among others, today Incoterms 1936 is most widely used
since it was first published in 1936 by the International Chamber of
Commerce.
3._____ Among the 13 terms in Incoterms 2000, six terms, FOB, CFR,
CIF, FCA, CPT, and DAF are commonly used in practice.
4. _____ It would be best for importers to refrain from dealing in the
term EXW.
5. _____ According to FCA, buyer is responsible for the main
carriage/freight, cargo insurance and other costs and risks.
6. _____ According to FOB, seller is responsible for the main
carriage/freight, cargo insurance and other costs and risks.
7. _____ According to CFR, buyer is responsible for the delivery of
goods to the named port of destination.
8. _____ According to CIF, the seller is responsible for the cargo
insurance and delivery of goods to the named port of destination
(discharge) .
Section C
Case Study
Task
 Apply the theory of the two important
principles in international trade, absolute
advantage and comparative advantage, to
the following cases.
First, a numerical example of absolute advantage is
shown in the table below:
Table 1 Output per Man-hour of Labor
Country
Textiles
Perfume
France
10 yards
30 bottles
Australia
30 yards
15bottles
 The table shows that France per man-hour of labor
time produces 30 bottles of perfume, while Australia
only 15 bottles. On the other hand, Australia
produces 30 yards of textiles, but France 10
yards.Thus, France has an absolute advantage over
Australia in the production of perfume, whereas
Australia has an absolute advantage over France in
the production of textiles.
 Discuss in groups：In this case, what is your
suggestions on the trade between the two nations?
Then, let’s focus on the illustration of comparative
advantage. Assume that France can produce both
textiles and perfume more efficiently than Australia.
Table 2 Output per Man-hour of Labor
Country
Textiles
Perfume
France
30 yards
60 bottles
Australia
15 yards
20 bottles
 In table 2, France has an absolute advantage in the
production of both textiles and perfume over Australia.
A man-hour of French labor is more efficient in the
production of textiles and perfume than that in
Australia. On the other hand, Australia has an
absolute disadvantage in the production of both
textiles and perfume with respect to France, but since
its absolute disadvantage is smaller in textiles (2:1)
than perfume (3:1), Australia has a comparative
advantage in textiles.
 Discuss in groups：In what way can tradehe be
mutually beneficial to the two nations ?
Notes
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1. Gross Domestic Product (GDP) 国内生产总值
2. Barter Trade 易货贸易
3. Compensation Trade 补偿贸易
4. Processing Trade 加工贸易
5. Consignment Trade 寄售贸易
6. Exclusive Sales Agreement 包销协议
7. Agency Arrangements 代理协议
8. Invitation for Bid or Tender 招标
9. Trade Fairs 贸易交易会
10. absolute advantage and comparative advantage 绝对优势和比较优
势
11. Favorable balance trade vs. unfavorable balance of trade 贸易顺差
和贸易逆差
12. Visible trade vs. invisible trade 有形贸易和无形贸易
13. Direct trade vs. indirect trade 直接贸易和间接贸易
14. transit country过境国；transit trade 过境贸易； transit duty 过境税
15. entrepot trade 转口贸易