Commerce · Lesson 3

Balance of trade and payments, procedures, documents, customs and ports

JAMBWAECNECO

What the syllabus asks

JAMB: 4 Trade (b) Foreign trade: basic issues in foreign trade (balance of trade, balance of payments and counter trade); procedures and documents used in export, import and entrepôt trade; barriers to international trade; role of Customs and Excise Authorities and Ports Authority in foreign trade

WAEC: Foreign trade (meaning, reasons, branches; advantages and disadvantages; balance of trade and balance of payments; procedures and documents of import, export and entrepôt trade; barriers; Customs and Ports authorities; bonded warehouses; free trade zones)

NECO: Foreign trade (meaning, reasons, branches; advantages and disadvantages; balance of trade and balance of payments; procedures and documents of import, export and entrepôt trade; barriers; Customs and Ports authorities; bonded warehouses; free trade zones)

What you will learn

Define foreign trade and identify its branches.
Explain the reasons for foreign trade and its advantages and disadvantages.
Distinguish between visible and invisible trade.
Calculate and interpret the balance of trade, balance of payments and terms of trade.
Explain counter trade and its forms.
Identify barriers to international trade and reasons for protection.
Describe the procedures of import, export and entrepôt trade in Nigeria.
Explain the purpose of the main documents used in foreign trade.
State the functions of the Nigeria Customs Service and the Nigerian Ports Authority.
Explain bonded warehouses and free trade zones.

Key points

Foreign trade is exchange between countries; branches are import, export and entrepôt trade.
Reasons: unequal resources, climate, skills and technology, comparative advantage, surplus production.
Visible trade is goods; invisible trade is services such as shipping, insurance, banking and tourism.
Balance of trade = visible exports − visible imports; it can be favourable or unfavourable.
Balance of payments: current account, capital and financial account, official financing; always balances overall.
Terms of trade = export price index ÷ import price index × 100; above 100 favourable.
Counter trade: barter, counter-purchase, buy-back, offset, switch trading; saves foreign exchange.
Barriers: tariffs (ad valorem, specific), quotas, embargoes, exchange control, licensing, red tape; natural barriers too.
Reasons for protection: infant industry, balance of payments, revenue, anti-dumping, jobs, safety, self-sufficiency.
Import procedure: registration, enquiry and proforma, permits, Form M, indent and payment, shipping documents, PAAR, clearing, release.
Export procedure: NEPC certificate, domiciliary account, NXP form, inspection and certificates, shipping note, mate’s receipt, bill of lading.
Bill of lading: receipt, evidence of contract, document of title. Airway bill is not a document of title.
Bonded warehouse: dutiable goods stored without paying duty until removed; drawback refunds duty on re-exports.
Customs: revenue, anti-smuggling, prohibitions, statistics, bonded warehouses. Excise duty is on local goods.
NPA (began operations 1955): port facilities, dredging, pilotage, regulation of terminals, port dues.

Start here: Meaning, reasons and branches of foreign trade

Foreign trade is the exchange of goods and services between countries. When Nigeria sells crude oil, cocoa or sesame seeds to other countries and buys machinery, wheat or medicines from them, it is engaged in foreign trade. Unlike home trade, foreign trade involves different currencies, laws, languages and customs barriers.

Reasons for foreign trade

Uneven distribution of natural resources. Nigeria has crude oil and natural gas; other countries have other minerals or more arable land.
Differences in climate. Cocoa grows well in the humid south of Nigeria but not in Europe; wheat grows better in temperate lands.
Differences in skills, technology and capital. Some countries make advanced machines, aircraft or medicines more cheaply because of experience and capital.
Comparative advantage. Even if one country can produce everything more efficiently, both gain if each specialises in what it produces at the lowest opportunity cost and exchanges.
Surplus production. A country exports what it produces beyond local needs.
Wider choice and higher living standards.
Political and economic relations between countries, including regional agreements.

Branches

Figure 1 shows the three branches:

Import trade: buying from abroad, e.g. Nigeria importing wheat, vehicles and pharmaceuticals.
Export trade: selling abroad, e.g. crude oil, liquefied natural gas, cocoa, cashew, sesame, urea fertiliser.
Entrepôt (re-export) trade: importing goods in order to re-export them, often after sorting, grading, repacking or blending. A port that specialises in this is an entrepôt; Singapore, Dubai and Rotterdam are classic examples.

Visible and invisible trade

Visible trade is trade in goods that can be seen and recorded by customs. Invisible trade is trade in services: shipping and air freight, insurance, banking, tourism, education abroad, consultancy and the transfer of money. When a Nigerian student pays fees to a university abroad, it is an invisible import for Nigeria; when a foreign tourist spends money in Calabar, it is an invisible export.

Worked example 3.1 (JAMB-style)

Payment by a Nigerian firm to a foreign shipping line is an example of

A. visible import B. visible export C. invisible import D. invisible export

Answer: C. It is payment for a service bought from abroad, so money flows out: an invisible import.

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Practice questions

1. Foreign trade is trade

between countries
within a country
between states of Nigeria
between retailers

Show answer

A: between countries
Also called international trade.

2. Entrepôt trade means

exporting raw materials only
trading within ECOWAS only
selling below cost
importing goods in order to re-export them

Show answer

D: importing goods in order to re-export them
Re-export trade.

3. The balance of trade is the difference between

invisible exports and imports
capital inflows and outflows
visible exports and visible imports
all receipts and payments

Show answer

C: visible exports and visible imports
Balance of payments includes invisibles and capital items.

4. Visible exports ₦9 000 000; visible imports ₦7 500 000. The balance of trade is

zero
favourable by ₦1 500 000
unfavourable by ₦1 500 000
₦16 500 000

Show answer

B: favourable by ₦1 500 000
₦9 000 000 − ₦7 500 000 = ₦1 500 000 surplus.

5. Which is an invisible export for Nigeria?

Shipping services sold to foreigners by a Nigerian firm
Crude oil sold abroad
Cocoa sold to Europe
Imported cars

Show answer

A: Shipping services sold to foreigners by a Nigerian firm
Services are invisibles.

Key words

Foreign trade: Exchange of goods and services between two or more countries; also international or external trade.
Import trade: Buying goods and services from other countries.
Export trade: Selling goods and services to other countries.
Entrepôt trade: Importing goods in order to re-export them, sometimes after sorting, grading or repacking; also re-export trade.
Visible trade: Trade in physical goods.
Invisible trade: Trade in services such as shipping, insurance, banking and tourism.
Balance of trade: The difference between the value of visible exports and visible imports in a period.
Balance of payments: A systematic record of all economic transactions between residents of a country and the rest of the world in a period.
Counter trade: Exchange of goods for goods between countries, wholly or partly without money payment.
Terms of trade: The rate at which a country’s exports exchange for its imports, measured as index of export prices ÷ index of import prices × 100.
Tariff: A tax or customs duty on imported (or exported) goods.
Quota: A limit on the quantity or value of a good that may be imported in a period.

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