Unit 6 International Trade

Basic concepts of international trade Basic practices of international trade Language associated with trade

Part I Basic Concepts 1. Definition international trade: the exchange of goods

and services across national boundaries/borders.

2. Major participants in international trade— the buyer that purchases the products (importer)— the seller that provides the products (exporter)— banks that facilitate the payment of the

transaction

Part I Basic Concepts 3. Classification– import vs. export (directions of the

movement of commodity traded)– tangible trade vs. intangible trade1) tangible trade: the exchange of tangible

goods (to carry out importing/exporting customs formalities)

2) intangible trade: the exchange of intangible goods, such as services and intellectual property rights

– direct trade vs. indirect trade1) direct trade: the producing country sells th

e goods directly to the consuming country. (transit country, transit trade, transit duty)

2) indirect trade: the producing country sells the goods to a third country first and then the third country resells the goods to the consuming country. (middleman, entrepot trade)

4. Policies

Manchesterism (free trade policy) It is aimed to assure that the market is fre

e to function in an unconstrained manner by eliminating the restrictions or removing the barriers to effective operation of “invisible hand” of the market and the goods is traded freely between nations to increase the wealth of both the buying and the selling nations.

4. Policies

Protectionism (protective trade policy) It means a trade policy by which a

government sets up controls over its import trade for the purpose of protecting its economy (esp. agriculture and infant industries) from foreign competition and provides preferential treatment and subsidies to its exporters or exporting firms.

Important terms

absolute advantage comparative advantage natural advantage climate conditions, access to certain natural res

ources, or availability of an abundant labour force

acquired advantage advantage in product or process technology factors of production/productive factors international division of labour

Important terms

labour-intensive capital-intensive land-intensive technology-intensive economies of scale (ES) specialization specialize in

5. Trade barriers

Tariff barriers A tariff is a tax (duty) levied on a product when it

crosses national boundaries. It is the most common type of trade control.

Purposes:– revenue tariff: to generate fiscal revenue– protective tariff: to weaken the competitive power

of the imported goods Types: import duty; export duty; transit duty

Tariff barriers Methods of assessment:– specific tariff or duty 从量税 : a fixed amount of

duty per physical unit of the imported product, say $100 per imported auto

– ad valorem tariff or duty 从价税 : a fixed percentage of the total value of the imported goods, e.g. 10%, 30%

– compound tariff or duty 混合税 : a combination of the above two types of duties

– alternative tariff or duty 选择税 : Both a specific duty and an ad valorem duty are prescribed for a product, with the requirement that the more onerous one shall apply.

Tariff barriers

Special duties:– countervailing duties (CVD): taxes assessed to

counter the effects of subsidies provided by foreign governments to goods exported to the importing country. Subsidies cause the price of such merchandise to become artificially low, which may cause economic “injury” to manufacturers in the importing country.

Tariff barriers

Special duties:– anti-dumping duties (ADD): taxes assessed on i

mported goods that are sold in the importing country at a price less than normal value. Normal value is determined as the price the product is normally sold at in the domestic market of the exporting country or in a third country, or the constructed value ( 推定价值 )which is based on the cost of production, selling, general and administrative expense, and the normal profits.

Words duty put/slap ~ on (a product or goods) increase/raise/put up ~ lower/cut/reduce ~ pay/avoid/evade ~ tax impose/introduce/levy/put ~ on (a product) pay/avoid/escape/evade ~ collect ~ deduct ~

5. Trade barriers

Non-tariff barriers (NTBs)– NTBs are restrictions to imports but not in the

usual form of a tariff.– Their use has risen sharply after the WTO rules

led to a very significant reduction in tariff use.– NTBs usually refer to government requirements

for licenses, permits, or significant amounts of paperwork in order to allow imports into its country.

– “gray area” in international trade

Non-tariff barriers (NTBs) Major forms:– import quota: a limit to the quantities or money

values of a particular product that can be exported to the quota-enacting country.

– subsidy: a government payment to a domestic product or industry or a domestic exporting firm. (helping to compete against low-cost foreign imports and to gain export markets)

– import license: a document required and issued by some governments authorizing the importation of specified goods into their countries.

Non-tariff barriers (NTBs)– “voluntary” export restriction (VER): a quota

imposed by the exporting country on its domestic firms’ exports to the importing country, typically at the request of the importing country. (the limitation on auto exports to USA enforced by Japan in 1981)

– customs valuation: import duties and other charges can be levied on the basis of a decreed value of goods that is valued by the customs. This practice is a means to avoid fraud in the declared import price. The customs of the importing country may raise the dutiable price of the imports arbitrarily in order to restrict the import.

Non-tariff barriers (NTBs)– technical barriers to trade (TBT): strict regulations

of products and various measures referring to product characteristics such as quality, safety or dimensions, packaging, marking and labeling requirements as they apply to a product. All these can bring rising cost or excessive trouble to the exporter/importer and thereby lead to the reduction of the import. (green barrier)

technical regulations (to protect health, life, environment…) product characteristics requirements

6. Basic principles of WTO system

Non-discrimination: the MFN treatment and the national treatment principle

Free trade: lowering trade barriers Fair competition Special and differential treatment to developing

countries: to provide developing countries special rights and exemptions from certain obligations

Transparency

Important terms balance of trade: the total of a country’s exports minus it

s imports 贸易差额，贸易平衡 favourable balance of trade (trade surplus) unfavourable balance of trade (trade deficit) barter trade: the direct exchange of goods for goods embargo: a prohibition upon exports or imports, either wi

th respect to specific products or countries export processing zone bonded warehouse/area p.47 Vocabulary

Part II Practices of international trade

1. Trade terms – the language of foreign trade2. International transportation & insurance3. International payments & settlements4. International trade contracts

1. Trade terms price terms/delivery terms

Standardized terms used in international trade contracts which define the trade contract responsibilities and liabilities between the buyer and the seller.

Key elements of international trade contracts, since they tell the parties what to do with respect to:

– delivery terms (carriages of the goods from the seller to the buyer and division of costs and risks between the parties)

– price terms (stipulating what are included in the price the buyer paid to the seller, e.g. cost, freight, insurance, export and import clearance fees, etc.)

– delivery obligation (what documents should the seller provide, e.g. B/L, insurance policy, etc.)

Role of trade terms To simplify the process of negotiation To simplify the paper-work of preparation for

the contract To save time and cost of the transaction

Incoterms

Incoterms (International Commercial Terms) is a set of uniform rules published by ICC for the interpretation of trade terms most commonly used in international trade.

Incoterms was published in 1936 (Incoterms 1936). Amendments and additions were later made in 1953, 1967, 1976, 1980, 1990 and presently 2000 in order to bring the rules in line with current international trade practices.

Incoterms 2000Group EDeparture

EXW Ex Works

Group FMain carriage unpaid

FCA Free CarrierFAS Free Alongside ShipFOB Free on Board

Group CMain carriage paid

CFR Cost and FreightCIF Cost, Insurance and FreightCPT Carriage Paid toCIP Carriage and Insurance Paid to

Incoterms 2000

Group DArrival

DAF Delivered at FrontierDES Delivered EX ShipDEQ Delivered EX QuayDDU Delivered Duty UnpaidDDP Delivered Duty Paid

Incoterms 2000 Group E — EXW– The seller fulfills his obligation to deliver when he has

made the goods available to the buyer at his premises or another named place (i.e., works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle.

– The buyer bears all costs and risks involved in taking the goods from the seller’s premises to the desired destination.

– It represents the minimum obligation for the seller.– It can be used for any mode of transportation.Case: USD10 per set EX Works Dongguan

Incoterms 2000 Group F — FCA, FAS, FOB– The seller has the duty to deliver the

goods to the carrier’s place and the freight from the place of delivering goods to the port or place of destination is paid by the buyer.

– Critical points coincide: the point for division of costs is the same as the point for division of risk.

Incoterms 2000 Group F — FCA, FAS, FOBFCA– The seller delivers the goods cleared for export

to the carrier (or the person) nominated by the buyer at the named place.

– If delivery occurs at the seller’s premises, the seller is responsible for loading; if delivery occurs at any other place, the seller is not responsible for unloading.

– It can be used for any mode of transportation including multimodal transport.

Incoterms 2000FOB– The seller has the duty to deliver the goods

across the ship’s rail at the named port of shipment.

– The seller clears the goods for export.– The buyer has to bear all costs and risks of loss

of or damage to the goods from the point when the goods have passed the rail of the ship.

– It can be used only for sea or inland waterway transport.

Case: US$18 per piece FOB Guangzhou

Incoterms 2000FOB: practices– When the ship’s rail serves no practical purpose,

such as in the case of roll-on/roll-off or container transport, the FCA term is more appropriate.

– The buyer arranges the ship for the shipment of the goods. The seller sometimes also make the contract with the carrier at the buyer’s risk and expense on the buyer’s behalf.

– loading charges (trimming, stowing): liner (including); charter party (excluding, clarifying in the contract)

Incoterms 2000 Group C — CFR, CIF, CPT, CIP– The seller has the duty not only to deliver the

goods to a place or point in his country but also to be responsible for arranging the carriage of the goods from the place of delivery to the place or point of destination at his own expense.

– Critical points: the point for division of costs (i.e. place of destination) is different from the point for division of risk (i.e. place of shipment).

CFR– The seller delivers when the goods pass the ship’s rail in the

port of shipment.– The seller pays the costs and freight necessary to bring the

goods to the named port of destination, but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.

– The seller clears the goods for export.– The seller arranges the charter party or rent the shipping

space.– It can be used only for sea or inland waterway transport.– discharge/unloading charges: liner (including); charter party

(excluding, negotiating)– The buyer effects the insurance (the seller gives timely

notice)Case: US$12.5 per carton CFR New York

CIF– The seller delivers when the goods pass the ship’s rail in the

port of shipment.– The seller pays the costs and freight necessary to bring the

goods to the named port of destination, but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.

– The seller clears the goods for export. – The seller has to procure marine insurance against the

buyer’s risk of loss of or damage to the goods during the carriage. (The seller contracts for insurance on minimum cover and pays the insurance premium.)

– It can be used only for sea or inland waterway transport.

CPT & CIP– CFR: When the ship’s rail serves no practical

purpose, such as in the case of roll-on/roll-off or container transport, the CPT term is more appropriate.

– CIF: When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container transport, the CIP term is more appropriate.

– The risks transfer to the buyer from the seller when the goods are delivered to the international carrier.

– Used for many mode of transportation.

Incoterms 2000 Group D — DAF, DES, DEQ, DDU, DDP– The seller has the responsibility for the arrival of

the goods at the agreed place or point of destination at the border or within the importer’s country.

– The seller bears all risks and costs in transporting the goods.

– Contracts under D terms mean arrival contracts. (Contracts under F & C terms are shipment contracts.)

How to select a trade term the mode of transportation: sea and inland waterway transport only: FAS,

FOB, CFR, CIF, DES, DEQ the mode of payment other factors: the time of delivery, the

customs formalities, the possible risks of loss of or damage to the goods during the transportation

Variations of Incoterms In practice, the parties often add words to an

Incoterm to seek further precision than the term could offer, e.g. FOB Liner terms, FOB Under Tackle, FOB Stowed, FOB Trimmed…

Since Incoterms 2000 gives no guidance whatsoever of such additions, the parties are strongly advised to clarify the exact meanings of those added terms otherwise serious problems might arise.

2. International transportation & InsuranceMajor modes of international transportation Ocean transportation: convenient; low freight charges

1. Liner transport (suitable for general cargo of small quantity)

“the four fixed”: fixed sailing date, fixed route, fixed ports to call at, and fixed freight rates

different standards for calculating freight: W: calculated per metric ton on weight (weight ton) M: calculated per cubic meter on measurement of the cargo

(measurement ton 尺码吨 ) W/M: weight or measurement ton, subject to the higher one Ad Val.: based on the price or value of the cargo

Major modes of international transportation Ocean transportation2. Charter transport charter party between the charterer and the sh

ip owner suitable for bulk cargo 散装货 of large quantit

y, such as grain, coals, crude oil and raw timber

time charter 定期租船 voyage charter 定程租船

Major modes of international transportation

Rail transportAir transportRoad transport Inland waterway transportPipeline transport

Major modes of international transportation

Container transport & International multimodal transport

carrying goods in containers suitable for ocean, rail, air and multimodal transport

FCL: Full Container Load 整箱货 The goods carried in a container is owned by the same consignor.

Container yard (CY) 堆场 LCL: Less than Container Load 拼箱货 CFS: Container Freight Station 集装箱货运站 door to door service

Major transport documents

Bill of Lading (B/L) receipt for the goods evidence of the contract for carriage (between the shipper

and the carrier) document of title to the goodsTypes: on board (shipped) B/L & received for shipment B/L– The first is issued after the goods have been loaded on board

the designated vessel. – The second is issued before the goods are loaded on board

and does not indicate the name of vessel and “On Board”.

Bill of Lading (B/L)

clean B/L & unclean B/L– The first is issued for goods which appear to be

in good condition, carrying no unfavorable remarks by the carrier.

– When the goods are received in apparent damaged condition by the carrier for shipment, he will note the damage on the B/L, such as “…packages in damaged condition”, “iron strap loose or missing”, etc.

Bill of Lading (B/L) straight B/L & order B/L & blank B/L– In a straight B/L, the consignee is named

specially, thus only the named consignee is entitled to take delivery of the cargo. (non-negotiable/non-transferable)

– In an order B/L, “To order” or “To the order of…” is filled in the column of “Consignee”. It means the goods are consigned to the order of consignor or a named person. (negotiable/transferable with endorsement)

– In a blank B/L, there is blank or the words “To bearer” filled in the column of “Consignee”. It could be transferable without endorsement.

Bill of Lading (B/L) direct B/L & transshipment B/L & through B/L– The first means the goods are shipped from the

shipment port directly to the destination port.– The second means the goods have to be

transshipped at an international port as there is no direct service between the port of shipment and the port of destination.

– The third is issued by the first carrier covering the whole carriage of the goods from the port of shipment to the final destination when two or more modes of transportation are involved.

Bill of Lading (B/L) liner B/L & charter party B/L– The first is issued by a liner company when the liner transport

is used.– The second is issued when the charter transport is used, and

is often used together with the charter party or a copy of it.

long form B/L & short form B/L– The first is more detailed with shipping contract clauses on

the back of the page.– The second only has the major contents on the face.

Other documents sea/ocean waybill receipt for the goods evidence of the contract for carriage (between th

e shipper and the carrier) not a document of title to the goods (non-negotia

ble) air waybill (non-negotiable) international combined rail waybill (non-negot

iable) 国际铁路联运运单 multimodal transport document (MTD): it may

be or may not be negotiable in practice.

Words consignment [C/U] consigned goods consignor 托运人 shipper 托运人 consignee 收货人 carrier 承运人 shipment [C/U] forwarder/forwarding agent/freight forwarder 货运代理商（人） bearer 持票人 freight to collect 运费到付 freight prepaid 运费预付

Cargo transportation insurance Key words– insurer 承保人，保险商– underwriter– insurance broker– (the) insured – claimant– insurance amount– insurance coverage/cover– insurance premium

Losses (Averages)– total loss Actual total loss means the whole lot of the

consignment has been lost or damaged or found valueless upon the arrival at the port of destination.

Constructive total loss might occur if the cargo is not actually lost, but is so seriously damaged as to make the goods no longer any use for the purpose for which they were originally intended.

Averages: partial loss– particular average 单独海损 A particular consignment is partially damaged; i

t is a partial loss which is suffered by the one whose goods are partly lost or damaged.

Other interests in the voyage do not contribute to the partial recovery of the one suffering the loss.

Averages: partial loss– general average 共同海损 a loss that affects all cargo interests on the ship

and the ship itself. It is in use when both the ship and the consign

ments on board are endangered and the captain, for the safety of the ship and the consignment on board, intentionally and reasonably does some sacrifices or makes some expenses.

Ocean marine insurance under CIC (China Insurance Clause)

Basic marine insurance coverage– purchased individually Additional marine insurance coverage– purchased with a basic insurance coverage

goods factors transport factors cost factors

Ocean marine insurance under CIC (China Insurance Clause)

Basic marine insurance coverage– FPA (Free From Particular Average) 平安险 It covers mainly total loss and general average. – WA (WPA) (With Average/With Particular Avera

ge) 水渍险 Aside from the risks covered under FPA conditi

ons, the insurance of WA also covers partial losses of the insured goods caused by heavy weather, lightning, tsunami, earthquake and/or flood.

Basic marine insurance coverage

– All Risks 一切险 Aside from the risks covered under the FPA a

nd WA conditions, the insurance of All Risks also covers the loss of or damage to the insured goods whether partial or total, arising from extraneous risks during transit.

All Risks cover FPA + WA + General Additional Risks

Additional risks coverage General additional risks– theft, pilferage, and non-delivery (T.P.N.D.) – fresh water and/or rain damage 淡水雨淋险– shortage 短量险– intermixture and contamination 混杂、玷污险– leakage 渗漏险– clash and breakage 碰损、破碎险– taint of odour 串味险– sweat and heating 受潮受热险– hook damage 钩损险– breakage of packing 包装破碎险– rust 锈损险

Additional risks coverage special additional risks– war risks– strike risks– failure to delivery 交货不到险– rejection 拒收险– on deck 舱面险– import duty 进口关税险– aflatoxin 黄曲霉素险– fire risk extension clause for shortage of carg

o at destination in Hong Kong, including Kowloon or Macao (FREC)

Case study Suppose that you are selling glassware to Brit

ain on the basis of CIF, you have the following alternatives:

FPA plus Breakage Risk WA plus Breakage Risk All Risks plus SRCC (strike, riot, civil commot

ion 罢工、暴动、民变险 )

Kinds of insurance policies insurance policy– containing all the details concerning the

goods, coverage, premium and the insured value

insurance certificate– simplified version open policy– providing all the goods shipped by the

insured while the policy is in effect. (duration)

Insurance clause in the sales contract Under CIF & CIP terms: “Insurance: To be covered by the seller for

110% of total invoice value against All Risks and War Risk, as per and subject to the relevant ocean marine cargo clauses of PICC dated 1/1/1981.”

Under FOB ... “Insurance: To be covered by the buyer.”

Key words ICC: Institute Cargo Clauses 伦敦保险业协会《协会货物条款》 the Lloyd’s 投保：– insure sth. against (fire)– cover/effect/purchase/take out/arrange insura

nce franchise lodge/make a claim

3. International payments

Key factors determining the payment method– the business relationship between the seller

and the buyer– the nature of the goods– industry norms– the distance between the seller and the buyer– the potential for currency fluctuation– political and economic stability in both the

exporting and the importing countries

Instruments of payment Bill of Exchange (Draft)– a bill (order) signed by the drawer, requiring the

entrusted payer (drawee) to make unconditional payment in a fixed amount at the sight of the bill or on a fixed date to the payee or the holder.

– transferable with endorsement– issue/draw a draft honour/dishonour a draft– presentation– acceptance– sight draft/demand draft & time draft/usance draft– banker’s draft & commercial draft

Sight 20

Pay to the order of $

Dollars

To

At January 5 08

ABC Exporter 8,020.00

Eight Thousand Twenty Dollars and 00/100

Standard Chartered Bank

New York, NY

ABC Exporter

DRAFT

Drawn under Documentary Credit No. M0491110NS00616, of theStandard Chartered Bank, Seoul, Korea, dated September 17, 2007

Endorse the back!

Instruments of payment Promissory note – an instrument written and issued by a drawer,

promising to pay unconditionally a fixed amount of money to a payee or bearer at the sight of the instrument.

Check– an instrument issued by a drawer, at the sight

of which the check deposit bank or other financial institutions unconditionally pay the fixed amount to the payee or bearer.

Settlement on commercial credit payment in advance/advance payment– greatest security for the seller and greatest risk for the b

uyer open account 赊帐方式– an agreement between the buyer and the seller whereb

y the goods are manufactured and delivered before payment is required.

remittance – a bank (the remitting bank), at the request of its custom

er (the remitter), transfers a certain sum of money to its oversea branch or correspondent bank (the paying bank) instructing them to pay to a named person or corporation (the payee or beneficiary) domiciled in the country.

Settlement on commercial credit remittance 1. M/T: mail transfer means the remittance by air

mail.2. T/T: telegraphic transfer refers to the remittanc

e by cable, telex, or SWIFT (Society for Worldwide Interbank Financial Telecommunication 全球银行金融电讯协会 )

3. D/D: remittance by banker’s demand draft (the remitting bank draws a demand draft on the paying bank at the request of remitter, and the remitter himself sends the draft to the payee and the payee then presents this draft to the paying bank for payment)

Settlement on commercial credit collection– the seller entrusts a bank to collect payment

from the buyer through the bank’s branch or correspondent bank in the buyer’s country.

– clean collection: without accompanied by commercial documents, such as invoice, B/L, insurance policy

– documentary collection1. D/P: documents against payment2. D/A: documents against acceptance

Settlement on commercial credit collection– parties related to a collection principal: creditor (the seller) 委托人 drawee: payer (debtor) remitting bank 托收行 collecting bank 代收行 presenting bank

Who Should Take the Risk?

Pre-PayPre-Pay

LetterLetterofof

CreditCredit

DocumentsDocumentsAgainstAgainstPaymentPayment

DocumentsDocumentsAgainstAgainst

AcceptanceAcceptanceOpenOpen

AccountAccount

???Buyer TakesAll the Risk

Seller TakesAll the Risk

Settlement on bank credit Letter of Credit (L/C)– a written undertaking issued by a bank (the issuing bank) to

the seller (the beneficiary) at the request and in accordance with the instruction of the buyer (the applicant) to effect payment (i.e. by making a payment, or by accepting or negotiating bills of exchange) up to a stated sum of money, within a prescribed time limit and against stipulated documents.

Guaranteed by the issuing bank’s creditworthiness (the issuing bank undertakes to effect payment)

Self-sufficient instrument: the L/C is issued on the basis of the sales contract but independent of it.

Dealing with documents: under a L/C, banks deal with documents other than goods.

WHY HAVE A LETTER OF CREDIT?

IF I SHIP GOODS,WILL YOU PAY?

IF I PAY, WILL YOUSHIP THE GOODS?

SOLVES ISSUES OF MUTUAL MISTRUST BY USINGBANKS AS ARBITERS

NEGOTIATE L/C TERMS BEFOREENTERING A CONTRACT

Parties to a L/C applicant or opener: importer or buyer (margin) beneficiary: exporter or seller issuing bank or opening bank: advising bank 通知行 confirming bank 保兑行 negotiating bank 议付行 paying bank 付款行 accepting bank 承兑行 reimbursing bank 偿付行

Parties to a L/C

BUYER’S BANK ISSUERISSUING BANKOPENING BANKPAYING BANK

ACCEPTING BANKDRAWEE

ISSUING BANKCORRESPONDENT

ADVISING BANKCONFIRMING BANK

TRANSFERRING BANKNEGOTIATING BANKACCEPTING BANK

PAYING BANK

PARTY LETTER OF CREDIT TERM

LETTER OF CREDIT Uniform Customs and Practice for Documentary Credits (2006 Revision), International Chamberof Commerce, Publication No. 600

Contents of a L/C Statements about the credit: the name and address

of the issuing bank, the beneficiary, and the applicant; type of the credit; amount of the credit and its currency; L/C number and date of issue; expiry date and place.

Requirements on the documents:– draft– commercial invoice– shipping document (B/L)– packing list– insurance policy/certificate– certificate of origin– inspection certificate– other documents

Contents of a L/C

Descriptions about the goods transacted: name, quantity, quality, unit price, packing, shipping marks, etc.

Details of the transportation of the goods: the shipment port/place, the destination port/place, time of shipment, transshipment allowed/not allowed, partial shipment permitted/not permitted.

Other items: instructions to the advising bank or negotiating bank or paying bank, the undertaking clauses of the issuing bank…

General procedure 1. Applying for issuing a L/C in favour of the se

ller (the beneficiary) by the applicant (the buyer) — the application form

2. Issuing and advising the L/C: the issuing bank issues the L/C and transmit it

to another bank through which the L/C will be advised to the beneficiary (so that the beneficiary may make necessary preparation for shipping the goods and drafting the documents stipulated in the credit)

General procedure 3. Examining the L/C and presenting the

documents by the beneficiary– the terms and conditions of the L/C are in

accordance with those in the sales contract– to contact the applicant and request an

amendment of the L/C– to present the documents to the negotiating

bank for negotiation 4. Examining and negotiating the documents

by the negotiating bank

General procedure 5. Examining the documents and making the

payment by the issuing bank– After negotiation, the negotiating bank

presents the documents to the issuing bank for payment.

– The issuing bank examines the documents and make the payment.

– the right to recourse the beneficiary 6. Examining the documents and paying to the

issuing bank by the applicant

Some common pitfalls

L/C expired L/C overdrawn tenor incorrect draft not endorsed goods description not

as per L/C late shipment B/L not “on board” B/L not endorsed insurance coverage

not sufficient

ports incorrect freight payment not as

per L/C B/L notify party

incorrect insurance policy not

negotiable signatures not present certifications absent descriptions not

consistent

Things that stop payment under the L/C: ‘discrepancies’

clean credit– payment is made only against a draft without any shipping

documents

documentary credit– payment is made against documents representing title to

the goods and thus making the transfer o title possible revocable L/C– can be amended or cancelled at any moment by the

issuing bank without previous notice irrevocable L/C– constitutes a definite undertaking of the issuing bank and

can be amended or cancelled by the issuing bank only on condition that all parties concerned

Major types of credit

Major types of credit sight L/C– calling for payment on the presentation of the documents ei

ther with or without a sight draft

usance/time L/C– a time draft is to be drawn at any length of time (30 days, 6

0 days…) confirmed L/C– advised to the beneficiary with another bank’s confirmation

added.

unconfirmed L/C– advised to the beneficiary without adding any other bank’s

confirmation.

Major types of credit transferable L/C– the beneficiary is allowed to transfer all or part of the

proceeds/amount of the L/C to a second beneficiary. (be noted “transferable” and be transferred only once)

nontransferable L/C– the beneficiary is not allowed to transfer the proceeds of

the L/C to another.

Exercises pp.48-49 “Letters of credit”