Question

1. Highlight, with examples, the difference between the ‘Customs Union’ and ‘Economic Union’.

2. What is countertrade? Explain how switch trading works.

3. Making or buying decisions are of great strategic importance to firms in international trade. What are the advantages and disadvantages of such decisions?

4. What are Incoterms? Why do businesses use Incoterms? Highlight the differences in 2 categories of Incoterms 2010.

Answer 1

1. Difference between the ' Customs Union ' and ' Economic Union ' is Customs Union are formed by countries that have no trade tariffs between the countries that are part of Customs Union and impose a common duty to the countries that are external to the Customs Union. Example of Customs Union are Central American Common Market with countries of Union not imposing any tariffs or duties for exchange of goods and form a free trade area.

Economic is different from Customs Union as it is the highest stage of integration between the countries and in addition to have no trade tariffs or duties, the countries that are part of economic union have a common currency. Example is European union that has free trade area between its member nations and Euro is the currency commonly used between the countries.

2. Countertrade is exchanging goods and services in a trade transaction than paying money for the goods and services bought by a country from another country that is also paid in form of goods and services.

Switch trading works when the trade conditions between two countries do not allow the trade of a item that is purchased by the third country that trades with either of the two country to pay in exchange for buying the item that any of the two countries need to purchase from each other.

3. Advantages of making or buying decision are that they are based on reviewing the financial implications for make and buy. The other advantage is company plans strategic moves like acquisition or alliance based on the need for owning assets and technology that can help the business in long run. The make or buy decision provide a competitive advantage to the companies. The disadvantages of making or buying decision are that company is uncertain about the course of business it needs to adopt in an industry. It creates state of imbalance and uncertainty that may be unfavorable to business.

4. Incoterms are terms used in International commerce. These terms are accepted by International chambers of commerce. The use of these terms facilitates international trade and signify the risks and costs associated with them. The use of inco terms is for clarity and better understanding in International contracts but their use do not ascertain that a contract exists. Incoterms are legally and commercially accepted by government and trade bodies in International commerce.