copyright © 2003 pearson education, inc.slide 23-1 preparation of international trade transactions

Copyright © 2003 Pearson Education, Inc. Slide 23-1

Preparation of international trade transactions

The realization of some foreign trade transaction consists of the following basic stages:1. Preparation to the conclusion of an agreement (treaty)2. Conclusion of an agreement (treaty) on the certain terms3. Execution of agreement: preparation of goods to delivery, supplying of the goods to the customer, receiving of goods and payment for goods

The most essential part of realization of foreign trade transaction is the stage of preparation to the conclusion of an agreement.

This stage includes search and choice of suitable partner-contractor, establishment of contacts with potential sellers or customers, conduct of preliminary negotiations.

Defining possible contractors, an exporter or importer proceed to the establishment of contacts with them.

In the process of preparation of foreign trade transaction the different ways of establishment of contacts can be used with potential contractors: advertisement campaign in mass medias, direction of catalogues to potential customers′ addresses, boulevards (avenues), commercial proposals and etc.

However the most importance in practice of international trade has the methods of establishment of contacts with potential partners on the basis of direct relations. The partners can chose one of next variants:

- to direct commercial proposals (offer) directly to one or a few possible customers; - to accept and confirm the order of customer;

- to direct to the customer commercial proposal in reply to his inquiry with pointing of the future agreement′s concrete terms;- to take part in auctions by presentation of tender to auction′s organizers;

- to direct to the possible customer a business letter with information about intentions to enter into negotiations concerning the conclusion of a concrete transaction;- to direct agreement′s form to the known customer as a result of coordination of agreement′s terms on phone, by the teletype, telex, e-mail or on the basis of preceding agreements.


For IWS was Information about: Transaction . Contract (prices, term of payment) Exchange quotations. Auctions’ costs. Bringing prices over during realization of settling of

export and imported prices. (The solution of the task)

International Trade Transactions Learning Objectives

• Learn how international trade alters both the supply chain and general value chain of the domestic firm, thereby beginning the globalization process in the trade phase

• Consider what the key elements of an import or export transaction are in business

• Discover how the three key documents in import/export – letter of credit, the draft, and bill of lading – combine to finance both the transaction and manage its risk

.

International Trade Transactions Trade financing shares a number of common

characteristics with traditional value chain activities conducted by all firms• All companies must search out suppliers for

goods and services

• Must determine if supplier can provide products at required specifications and quality

• All must be at an acceptable price and delivered in a timely manner

International Trade Transactions

Domestic Supplier(US)

Domestic Buyer(US)

Canadian Buyer(Calgary, Alberta)

Mexican Supplier(Monterey, MX)

Trident Corp. (Los Angeles)

US$

US$

Mexican Pesos

Canadian $

Goods & Services Flow from Supplier to Trident to Buyer

Goods & Services Flow from Supplier to Trident to Buyer

Financing Trade: The Flow of Goods and the Flow of Funds

.

International TradeTransactions

This is a new customer which Trident has no historical business relationship with

Requires:

1. A contract

2. Protection against non-payment

This is a Long-term customer with which there is an established relationship of trust and performance

Requires:

1. A contract

2. Possible protection against non-payment

This is a foreign subsidiary of Trident, a business unit of Trident Corporation

Requires:

1. No contract

2. No protection against non-payment

Trident as an Exporter

Affiliated Partyприсоединённая

Unaffiliated KnownParty

Unaffiliated Unknown Party

Самостоятельная

Importer is…

Elements of an Import/Export Transaction

Each individual export sales transaction covers three basic elements: description of goods, prices, and documents regarding shipping and delivery instructions

Contracts – an import/export transaction is by definition a contractual exchange between parties in two countries that may have different legal systems, monies (сумма денег), languages, religions, or units of measure (единицы измерения)

Prices – price quotations can be a major source of confusion; terms in the contract should conform to published catalogues


Documents – documentation covers a variety of issues of particular importance; these typically include• Bills of lading (B/L) – is issued to the exporter by a

common carrier transporting the merchandise• Commercial invoice – is issued by the exporter and

contains a precise description of the merchandise. Unit prices, financial terms of sale, and amount due from the importer are indicated such as “FOB” (free on board), “FAS” (free alongside), “CFR” (cost & freight), or “CIF” (cost, insurance, freight)

FAS – FREE ALONGSIDE SHIP (… named port of shipment)

The Seller delivers the goods to the origin port. From that point, the Buyer bears all costs and risks of loss or damage.

FOB – FREE ON BOARD (… named port of shipment)

The Seller delivers the goods on board the ship and clears the goods for export. From that point, the Buyer bears all costs and risks of loss or damage.

CFR – COST AND FREIGHT (… named port of destination)

The Seller clears the goods for export and pays the costs of moving the goods to destination. The Buyer bears all risks of loss or damage.

CIF – COST INSURANCE AND FREIGHT (… named port of destination)

The Seller clears the goods for export and pays the costs of moving the goods to the port of destination. The Buyer bears all risks of loss or damage. The Seller,

however, purchases the cargo insurance.


• Insurance documents – must be as specified in the contract of sale and must be issued by insurance companies or their agents. Insurance must be of types and for risks specified in the letter of credit

• Consular invoices – issued in the exporting country by the consulate of the importing country to provide customs information and statistics for that country and to help prevent false declarations of value

• Packing lists – may be required so that the contents of containers can be identified, either for customs purposes or for importer identification of the contents of separate containers


Shipping deadline – most importers insist on a specified deadline or time interval by which the shipment will be made

Payment instructions – which of the parties, exporter or importer, is to pay such charges as freight, insurance, import duties, handling fees, taxes, etc., must be carefully specified in the sales contract

Packaging and marking – depending on the nature of the goods, proper packaging may be critical to preserving and protecting items being shipped


Warranties, Guarantees, and inspection – assurances regarding the performance or qualities demonstrated by the goods from the exporter may also be included in the sales contract• Included in documents may be certificates of analysis

required to ascertain that certain specifications such as weight, purity, or sanitation have been met

International Trade Risks

Price

Quote

request

Export

contract

signed

Goods

are

shipped

Documents

are

accepted

Goods

are

received

Cash

settlement

of the

transaction

Negotiation Backlog

Documents are

presented

Financing Period

Time and Events

The Trade Transaction Timeline

Key Documents The three key documents that have been crafted over time to

protect all parties involved in a trade transaction are the letter of credit, draft, and bill of lading

These serve to determine who bears the financial loss if one of the parties defaults at any time• Risk of non-completion – once both parties agree to terms, they

each want assurance that other party will complete its portion of the transaction

• Financing the trade – some is required typically so parties must secure financing through a bank which acts as an intermediary utilizing the three key documents

Key Documents Letter of Credit (L/C) is a bank’s conditional promise to pay

issued by a bank at the request of an importer in which the bank promises to pay an exporter upon presentation of documents specified in the L/C

The essence of an L/C is the promise of the issuing bank to pay against specified documents, which means that certain elements must be present for the bank• Issuing bank must receive a fee for issuing L/C• Bank’s L/C must contain specified maturity date• Bank’s commitment must have stated maximum amount• Bank’s obligation must arise only on presentation of specific

documents and bank cannot be called on for disputed items• Bank’s customer must have unqualified obligation to reimburse

bank on same condition of bank’s payment

Key Documents

Commercial L/C’s are classified as follows• Irrevocable Vs. Revocable – irrevocable letters of

credit are non-cancelable while its opposite can be cancelled at any time

• Confirmed Vs. Unconfirmed – An L/C issued by one bank can be confirmed by another bank

Advantages of L/Cs are that it reduces risk of default and a confirmed L/C helps secure financing

Disadvantages of L/Cs are the fees charged and that the L/C reduces the available credit of the importer

Lines of Credit

The relationship between the issuing bank and the exporter is governed by the terms of the letter of credit, issued by that bank

The relationship between the importer and the issuing bank is governed by the terms of the application and agreement for the letter of credit

Beneficiary (exporter)

Applicant (importer)

Issuing Bank

The relationship between the importer and the exporter is governed by the sales contract

Key Documents A draft, sometimes called a bill of exchange (B/E), is

the instrument normally used in international commerce to effect payment• It is a written order by an exporter instructing an

importer or its agent to pay a specified amount at a specified time

• The party initiating the draft is the maker, drawer, or originator while the counterpart is the drawee

• In a commercial transaction where the buyer is the drawee it is a trade draft, or the buyer’s bank when it is called a bank draft

Key Documents

If properly drawn, drafts can become negotiable instruments• As such they provide a convenient instrument for

financing the international movement of merchandise

• To become a negotiable instrument, there are four requirements

– Must be written and signed by buyer

– Must contain unconditional promise to pay

– Must be payable on demand or at a fixed date

– Must be payable to bearer

Key Documents

Types of drafts include• Sight drafts which is payable on presentation to the

drawee

• Time drafts, also called usance draft, allows a delay in payment. It is presented to the drawee who accepts it with a promise to pay at some later date

– When a time draft is drawn on a bank, it becomes a banker’s acceptance

– When drawn on a business firm it becomes a trade acceptance

Key Documents Banker’s Acceptance

• When a draft is accepted by a bank, it becomes a banker’s acceptance

• Example: Acceptance of $100,000 for exporter

Face amount of acceptance $100,000

Less 1.5% p.a. commission for 6 months - 750

Amount received by exporter in 6 months $ 99,250

Less 7% p.a. discount rate for 6 months - 3,500

Amount received by exporter at once $95,750

• Exporter may discount the acceptance note in order to receive the funds up-front

Key Documents

Bill of Lading (B/L) is issued to the exporter by a common carrier transporting the merchandise• It serves the purpose of being a receipt, a contract and

a document of title– As a receipt the B/L indicates that the carrier has

received the merchandise

– As a contract the B/L indicates the obligation of the carrier to provide certain transportation

– As a document of title, the B/L is used to obtain payment or written promise of payment before the merchandise is released to the importer

Key Documents

Characteristics of the Bill of Lading• A straight B/L provides that the carrier deliver the

merchandise to the designated consignee only

• An order B/L directs the carrier to deliver the goods to the order of a designated party, usually the shipper

• A B/L is usually made payable to the order of the exporter

Documentation in TypicalTrade Transaction

Example: Assume Trident receives order from Canadian buyer; Trident will export financed under L/C requiring a bill of lading with exporter collecting a time draft accepted by Canadian buyer’s bank• The Canadian buyer places order with Trident

• Trident agrees to ship under L/C

• Canadian buyer applies to bank (Northland Bank) for L/C to be issued in favor of Trident for merchandise

• Northland Bank issues L/C in favor of Trident and sends it to Southland Bank (Trident’s bank)


• Trident ships the goods to the Canadian buyer

• Trident prepares a time draft and presents it to Southland Bank. The draft is drawn on Northland Bank with required documents including bill of lading

• Trident endorses the order bill of lading in blank so that title to goods goes with holder of documents – Southland Bank

• Southland Bank presents draft and documents to Northland Bank for acceptance, Northland accepts and promises to pay draft at maturity – 60 days


• Northland Bank returns accepted draft to Southland Bank; Southland Bank could ask for discounted draft receiving funds today

• Southland Bank, now having a banker’s acceptance, may sell the acceptance in the open market or it may hold the acceptance in its own portfolio

• If Southland Bank had kept the acceptance, it would transfer the proceeds less commission to Trident



• Northland Bank notifies Canadian buyer of arrival of documents; Canadian buyer signs note to pay Northern Bank for the merchandise in 60 days

• After 60 days, Northland Bank receives payment from Canadian buyer

• On same day, holder of matured acceptance presents it for payment and receives it face value; it may be presented at Northland Bank or returned to Southland Bank for collection through normal bank channels


Steps in Typical Trade Transaction

Trident(exporter)

Canadian Buyer(importer)

1. Canadian Buyer orders goods

2. Trident agrees to fill order

Northland Bank

3. Canadian buyer arranges L/C with bank

Southland Bank

4. Northland Bank sends L/C to Southland Bank

5. Southland advises Trident of the L/C

6. Trident ships goods to Canadian buyer

7. Trident presents draft & documents to its bank

8. Southland presents draft & documents to Northland

9. Northland accepts draft, promising to pay in 60 days and returns acceptance to Southland

Public Investor10. Southland sells acceptance

to investor

11. Southland pays Trident

12. Northland obtains Canadian buyer’s note and releases shipment

13. Canadian buyer pays bank

14. Investor presents acceptance for payment


Government Programs to Help Finance Exports

Export Credit Insurance• Provides assurance to the exporter or the exporter’s

bank that an insurer will pay should the foreign customer default

• In the US the Foreign Credit Insurance Association (FCIA) provides this type of insurance

Export-Import Bank• Known as the Eximbank, it facilitates the financing of

US exports through various loan guarantee and insurance programs


Summary of Learning Objectives

International trade takes place between three categories of relationships: unaffiliated unknown parties, unaffiliated known parties, and affiliated parties

Trade transactions between affiliated parties typically do not require contractual arrangements or external financing. Trade transactions between unaffiliated parties typically do as well as some type of external financing such as letters of credit



Over many years, established procedures have arisen to finance international trade. The basic procedure rests on the interrelationship between three key documents, the L/C, the draft, and the bill of lading

Variations in each type of the three documents provide a variety of ways to accommodate any type of transaction

In the simplest transaction, in which all three documents are used, an importer applies for and receives a L/C from its bank



In the L/C, the bank substitutes its credit for that of the importer and promises to pay if certain documents are submitted to the bank. The exporter may now rely on the promise of the bank rather than that of the importer

The exporter typically ships on an order bill of lading, attaches the bill of lading to a draft ordering payment from the importer’s bank and presents these documents, plus any additional documents, through its own bank to the importer’s bank



If the documents are in order, the importer’s bank either pays the draft (sight draft) or accepts the draft (time draft). In the latter case, payment is at a future date. At this step the importer’s bank acquires title to the merchandise through the bill of lading and releases it to the importer against a promise to pay

If a sight draft is used, the exporter is paid at once, if a time draft is used the exporter receives the accepted draft, now a banker’s acceptance, back from the bank and holds it until maturity or sells it at a discount


Summary of Learning Objectives Total costs of an exporter entering a foreign market include the

transaction costs of trade financing, import/export duties and the costs of foreign market penetration which includes distribution, inventory and transportation expenses

Export credit insurance provides assurance to exporters that insurance will pay should importer default

In the US, the Foreign Credit Insurance Association provides this insurance

The Eximbank is an independent agency established to stimulate and facilitate the foreign trade of the US

copyright © 2003 pearson education, inc.slide 23-1 preparation of international trade transactions

Documents

task slide

risk slide

trade phase

preparation of goods

concrete transaction

export transaction

establishment of contacts

potential customers