International Trade and Commercial Contract - Essay Example

Name: Instructor: Course: Date: International Trade. International Trade. International trade is the exchange of goods and services between nations. It gives rise to the world economy where, demand, supply, and prices are affected by global events (Gaisford and Kerr 45). Similarly, the fluctuation cost of labor across nations influences international trade, as companies have to pay more money to enhance production. Moreover, international trade provides opportunities to nations and consumers on the goods and services which are not available in their mother countries. This is because almost every product can be found in the international market ranging from spare parts, food to currencies. International market also offers services such as transportation, banking, and consultation. International market involves export and import and entails nation’s current account in the balance of payments. Therefore, international trade provides various opportunities to both foreign and domestic companies as discussed in the subsequent paragraphs. International trade is very effective in allowing rich nations use their technology, labor, and capital resources effectively (Gaisford and Kerr 45). Some nations are blessed with different assets and natural resources such as labor, land, and technology hence produce more goods effectively. This is beneficial across the globe since these nations are able to sale their products cheaply since they incur minimal cost in production. Nations which cannot efficiently produce items can obtain such items in another country through trade. Because of this, the two nations will specialize in international trade. Similarly, all economic theories view international trade to be enhancing efficiency (Carr 120). It adds the productive capacity of all the participating nations and enhances efficiency because of comparative advantage. Additionally, international trade brings efficiency through taking advantage of the increasing returns (Carr 120). As nations open up to the international market, it widens opportunities to both foreign and domestic market as more goods are exchanged. Moreover, international trade is based on comparative advantage which benefits small nations than big nations (Carr 128). This is because benefits of comparative advantages are proportional to the difference in world market prices and relative prices prevailing in the domestic market without trade. The larger the difference, the larger the advantage a country earns from trade and vice versa. Therefore, small nations have the likelihood of finding relative prices in the world market which differs from the home markets. International trade is also important because it promotes dynamism and innovation within the economic sphere (Gaisford and Kerr 89). This is evidenced through the improved productivity and quality of goods by nations such as United States because of Japan competition pressure. Nations which have closed international trade are inefficient and are protected. Therefore, such nations are underdeveloped since they bar participating in trade with other nations to steer their economic growth. Similarly, nations which are closed for international trade are the poorest in the world since they don't exchange trade ideas and obtain goods from other nations. Contrary, countries with less international trade barriers have increased share of exports and imports in their economies hence tends to grow faster (Gaisford and Kerr 99). Statistics from World Bank states that 24 developing nations which became integrated in the world economy in the early 1980s and 1990s have gained higher income growth, better schooling and increased life expectancy (Carr 140). Similarly, they have increased their per capita income to half the world population as it grew by averagely 5% in 1990s (Carr 140). Therefore, opening to the international market through participating in trade is of great benefit to third-world countries which still have growth opportunities. Commercial Contract Commercial contracts are legally binding agreements between parties where they are obliged to restrain or do certain things (Elcin 23). They can be written, verbal or implied in formal or informal manner. They take place in all manner of business such as wages, employee safety, hiring, and lease among others. In commercial contracts, breaching occurs when either party fails to live to the agreements. However, requirements for a legal contract must be filled in order to make it valid. Some of the requirements are discussed in the subsequent paragraphs. First, a valid commercial contact must have an agreement (Elcin 28). Any commercial contract must have an offer and acceptance. This implies that the parties in the transaction must be in agreement regarding the material elements of the contract. The agreement may be in relation to the much paid, sold, or delivered, when to deliver services or goods. Both parties have to come into agreement before accepting the contact. Secondly, each of the parties must give something in exchange (Elcin 43). This means each of the parties must give up something they had a right over. This may be in terms of money, services or goods among others or refrain from doing something they had a right of doing. Commercial contact may be in terms of leasing a house hence the property owner will have to give up the house for money. The exchange may be in different models depending on the parties and the subject of their contact. Thirdly, the parties must be willing to enter into a contract (Saintier 150). This means that both parties must know that they are entering a contract, and it will be binding. It requires either or both parties to be sober and understand the terms of the contract to avoid latter confusion and denials. Similarly, both parties must understand what they are doing. Most States hold and chose members who enter into a contract to avoid luring under 18 years into signing contracts. Fourthly, the party involved in the signing of the contract must be willing to enter a contract without being forced (Saintier 150). One should not enter a contract against the will or misled to signing the contract. This implies that no one enters on behalf of the other as terms and conditions imply to the person who sign. Its nature of binding makes it essential for the concerned party to sign it since they understands it better. Similarly, one is free to leave a contract before agreeing in case he or she feels that there was a mistake on what was to be bought. Lastly, there must be legality of the subject matter. This implies that the transaction which is the subject must be an activity, goods, services which is lawful, permitted and recognize (Saintier 155). Singing or entering into a commercial contract with an illegal subject may put the parties in trouble because of trespassing the law. Moreover, there are different forms of business contracts which parties can get involved in. They may be implemented to establish terms of legal business transaction. Some of the examples of commercial contracts include sale of goods, provision of services, use of intellectual property right, rights to disclose private information and lease or purchase of property (Saintier 180). Letter of Credit Letter of credit is a guarantee from a financial institution or bank stating that a particular seller will receive payments from a certain buyer. It is a guarantee from the bank that the seller will receive some amount of money within a specified period (Credit Research Foundation 2). For the financial institution to guarantee the money, the bank requires meeting the strict measures placed. It may require certain documents such as shipping information to offer proof. Businesses use letter of credit for different purposes with the common one being a buyer from another country purchasing products from a seller in another country Credit Research Foundation 3). The seller may ask the buyer to provide a letter of credit which guarantees payments for the goods. Therefore, it has advantages to the seller as discussed in the subsequent paragraphs. Asking the letter of credit gives the seller surety of receiving the money in time and full (Mugasha 217). Letter of credit is one of the secure methods of making payments for exports once they meet all conditions. Nonpayment risk is transferred from the seller to the banks since they issue the guaranteeing note. On the other hand, the buyer also enjoys an advantage when transacting using letter of credit. For instance, buyers are guaranteed that the seller will honor the deal and provide documentary proofs (Mugasha 217). This is important in settling purchasing transaction since both parties are guaranteed of payment and delivery of services or goods. However, the use of letter of credit has some disadvantages which the parties need to consider when resorting to it as a means of payments. For instance, both parties should be aware of additional charges involved. This is because financial institutions make charges in producing those (Bertrams 89). Therefore, it is important for the seller or buyer to weight the option of security against the cost incurred. Similarly, the seller should be aware that payments are received on conditions that measures and terms of the letter of credit are met. The seller will have to produce a documentary proof of the supply and selling of goods or services (Bertrams 95). Because of this, use of letter of credit is characterized by delays and other problems related to administration. After discussing the above advantages and disadvantages of using the letter of credit in making purchase, it is important for exporter to consider different factors before accepting payments through letter of credit. Some of the important factors to consider are outlined below (Bertrams 89). Legal matters: the exporter should consider legal requirements for a letter of credit in case the exporting country requires them. Cost: the exporter should weigh the cost of the letter of credit with a value of purchase to justify the bank charges and extra cost. Similarly, there should be a determination on who pays for the cost. Available advice and guidance: one should seek advice from the financial institutions offering letter of credit and recommendation on when to use it. This should link and compare with advices from credit insurers who insist on using it. Customer’s credit worth: the seller should check the buyer’s track record and establish the credit worth. This will be essential in minimizing risk which may be encountered. In conclusion, letter of credit is very important in sealing the deals and making payments between buyers and sellers taking part in the international trade. It guarantees payments of goods and at the same time ensuring completion of the transaction. However, the exporter needs to consider the related factors before accepting letter of credit since it is costly due to bank charges on issuance. Meeting these costs may reduce the seller’s profit. Works Cited. Bertrams, Roeland. Bank Guarantees in International trade. Mason: Cengage, 2004. Print. Carr, Indira. International trade law. Mason: Cengage, 2010. Print. Credit Research Foundation. Understanding and using letters of credit. 1999. Web. 2014. Elcin, Mert. The applicable law to international commercial contacts. New Jersey: Willey, 2010. Print. Gaisford, James and Kerr William. Handbook on International Trade Policy. London: Routledge, 2007. Print. Mugasha, Agasha. The law of letters of credit and bank guarantees. New York: Springer, 2003. Print. Saintier, Severine. Commercial contracts law: translantic and perspectives. New York: Springer, 2013. Print. Read More