Benefits of International Trade
Benefits of International Trade
Benefits of International Trade
Dumping
Dumping is usually interpreted as selling goods overseas below the home price of
identical goods after allowing for transport and other additional costs, which
means, when importer brings goods to other countries, they import with lower
price. For example,
A local producer sells daily necessities at the price of 10~20, the cost of
production is 10 to 15, so he generates a profit of 5~10 on each head month.
However, a foreign producer came to the market and open RM2 shop here as
they bought in large amount of items so they get cheaper price as well as started
to sell cheaper, as a result she will lose all her customer to the foreign producer
and eventually she goes broke and close her business.
Trade Embargo
Trade Embargo is government actions that terminate the free flow of trade and
goods services or ideas imposed for adversarial and political purposes. You
cannot simply import items unless you have the license. For example, you cannot
open Macdonald, if you don’t have the license to open Mac Donald in Malaysia or
when we go airline, the food need to be treat by a special process which need to go
through food safety, inspection services and so on, so only 2 or 3 specialized
companies will be given licenses to bring the food. Other than that if
Macdonald is restricted in certain areas, you will get caught if you open
Macdonald secretly in that areas.
Protectionism – disadvantages
1) Prevents countries enjoying the benefits from abroad
2) Might invites harming from foreign governments
3) Protects inefficient local industries
Disadvantages of Protectionism
When countries open their borders to allow imports freely and without restrictions
this may lead to excessive purchase of imports over domestics productions money
spent on imports equates to spending that leaks out of the domestic economy
preventing further growth of the country.
Furthermore, domestic firms seeing loss of business will be forced to lay off workers
adding to unemployment in the country the damage of excessive imports to an
economy is especially harmful when unemployment that results in major part of
economy causing massive unemployment to occur and worsening poverty excessive
imports also cause domestic market to become dominated by foreign firms and in
the long run locals are forced to pay higher prices with lesser choice.
For example, when countries do not enact Protectionism, customers
will more likely to purchase foreign products over domestics’
products since there are no restrictions and domestic firm will need
to terminate their workers to maintain their business as they don’t
have much income to pay the salary of workers.
Furthermore, it will be tougher for domestic firms to survive as they
will need to compete with a lot of foreign firms.
Benefits of Protectionisms:
1. Protecting domestic manufacturing from foreign competition.
Country to protect their domestic industries and protect their own labor employment,
levy customs duties on imported goods or the permits, make imports less competitive,
domestic similar products relative competitiveness, ensure that part of the domestic
market, and protect their own industry and related industries
4. Protectionism can cause a retaliation reaction from other nations, ruining vital
relationships between nations.
A clear example of this would be the relationship between USA and China, when the
US put boundaries on the Chinese tires , China retaliated by putting up barriers
against different U.S. goods such as their chicken. This kind of hostility between
nations decreases the specialization between two nations, eventually damaging the
economy.
Types of Risks
• Credit risk
Risks are inherent in credit transactions; more so in international business.
International business is invariably riskier than the domestic trade. Credit risk.
is not the same whether one sells the goods in domestic market or in foreign
market. Success, in international business depends, largely, on the ability of
the exporters to give credit to importers on tree competitive and favorable
terms.
• Export business has become highly risky as selling on credit has become very
common. Importers are sought after so it is but natural they dictate terms as
there are many exporters competing for the cake of international trade.
Insolvency rate is on the increase. Balance of payment difficulties has severely
affected the capacity of many countries to pay the import price. However,
offering credit has become unavoidable to the exporters to face competition.
Two issues stand before the exporters:
• (i) The exporter must have sufficient funds to offer credit to the buyers
abroad and
• (ii) The exporter should be prepared to take credit risks.
• Sovereign risk
Political/sovereign risk refers to the complications that buyer or seller may
expose due to unfavourable political decisions or political changes that may
vary the expected outcome of an outstanding contract. Examples of
political/sovereign risk are changes in fiscal/monetary policy, war, riots,
terrorism, trade embargoes, etc.
• Transit risk
Transit risk is the risk of goods being damaged during shipment from the
place of origin to the place of destination. Failure in addressing transit risk
may result in heavy replacement cost or performance risk.
• Documentary risk
• Documentation risk is the risk of non-conformance to specific documentation
requirements under a sales contract or documentary credit. Failure in fulfillin
g documentation requirements may result in seller’s inability or delay in obtai
ning payment for goods delivered or service rendered.
WEEK 2
The Roles of International Financial Intermediary
Sources of Information
1) To facilitate a safe or guaranteed trading, both sellers and buyers are easy
to get status enquiries from banks on either party before the trade takes
place.
2) It is important for banks to provide trade information to both sellers and
buyers in order to ensure a safe, quality and good trade.
3) In this case, banks play a middleman role in assisting both sellers and
buyers.
Document Processor
1) International trade involves huge amount of documents, such as
commercial documents and financial documents.
2) Hence, banks act as the intermediary party to process the documents.
Banks do the transfer of documents or services from a party to another.
3) Banks have the responsibility to validate the documents received.
Payments Receiver and Processor
1) Bank acts as a party to facilitate payment between trading partners.
2) It sends payments request to the buyer or importer (upon request of seller
to the bank) or to collect payment on behalf of the exporter
3) When payment received, banks will credit the amount into the seller or
exporter’s account.
Sources of Financing
1) It is important for the exporter to receive full payments when the goods
services have reached the importers.
2) In the case that the importers take longer time to pay, the exporters whom
need cash urgently may face financial issues.
3) Thus, these exporting companies may seek help from banks.
Risk Advisor
1) To advise and assist both exporters and importers in risk exposure faced
in international trade
2) A win-win situation between the bank’s customer and the bank, where
both parties wish to be in secured position, especially in international
trade.
Supplier of Foreign Currency
1) Assist both the exporters and importers in exchanging the home currency
to foreign currency or vice versa.
2) The exchange process may be benefited to either an exporter or importer
depending upon the type of currency that is specified for trade settlement.
3) In this case, a bank is prepared to carry out either type of currency
conversion. For example, a conversion of Ringgit into foreign currency or
a conversion of foreign currency into Ringgit.
WEEK 3
Methods of payment for international transaction
1. Open account (payment after deliver)
- An arrangement between buyer and seller whereby the goods are
manufactured and delivered before payment is made
- Usually used when the parties have been trading with each other for many
years. Trust has been built up
- Also used when trade occurs between a parent company to its subsidiary
- Most common method for companies to trade with new client
- Direct dealing between exporters and importers
To importer
Advantages:
- The buyer pays for the goods or services only when they are received
- Payment is subject to political, legal or economic situations in the buyer’s
country
Diadvantages:
- Low negotiation power of shipment
- No control of quality of goods
To exporter
Advantages:
- Save time and lengthy documentary process and no incurs extra charges
- Enhances competitiveness in global marketing
Diadvantages:
- Delay of payment
- Problem in cash flow
To bank
Advantages:
- zero exposure because no complicated documentation
Diadvantages:
- Bank earn no commission as official documents are issued
To importer
Advantages:
- Buyer may able to negotiate for a discount in prices
- Guarantee of receive of the desired goods
Disadvantages:
- Negative impact on cashflow
To exporter
Advantages:
- seller can have immediate use of funds
- payment received in advance, enhance cash flow
Disadvantages:
- fees incurred in entering advance payment bond
To bank
Advantages:
- Generate fees. Bank earn from setting up advance payment bond
Disadvantages:
- Importer may have insufficient funds to make advance payment therefore
banks have to face the risk
To importer
Advantages:
- Payment may be deffered until the arrival of goods
- Documentary collection is relatively cheaper than documentary credit
- The buyer may have opportunity to inspect the documents prior to making
payment
Disadvantages:
- Obligation to pay before inspection/release the goods
To exporter
Advantages:
- documentary collection is generally uncomplicated and inexpensive
compared to a documentary credit
- more secure as title of the goods release upon payment
Disadvantages:
- timeline consideration in payment collection
To bank
Advantages:
- generate fees from collections procedures
Disadvantages:
- low income fees generate as both sides are trading based on instructions
given to the banks
To importer
Advantages:
- The buyer’s creditworthiness is enhanced with a bank willing to issue a
documentary credit for his account.
- Payment is only made by the bank upon the seller’s fulfilment of the terms
and conditions of the credit.
Disadvantages:
- Possibility of having forged documents by the exporter upon payment
collection
- No guarantees if the goods same with the one importer order
- Fews bank expenses that need to pay
To exporter:
Advantages:
- The Bank acts as a trusted third party to guarantee payment if the seller
can fulfil the terms
and conditions of the credit.
- Title of the goods (ownership) is retained by the seller or bank until
payment or acceptance of documents by the buyer.
- Documentary credit operations are guided by recognised international
rules and practices
Disadvantages:
- Lot documents involve (fulfill the L/C)
- No guarantee on timely payment
To bank:
Advantages:
- The issuing bank earn from administrative fees
Disadvantages:
- Dispute arises between banks and importers
- Default risk by importers
Compensation Trade
Compensation trade is a form of barter in which one of the flows is partly in goods
and partly in hard currency. In a compensation trade, the obligations are laid down in
a single commercial contract and the countertrade is done through an incoming
investment repaid from the revenues generated by that investment. The ‘original’
seller may negotiate settlement in the form of partially cash and remaining are goods,
while some compensation deals are full exchanges of goods (called as total
compensation trade).
Total compensation
Total compensation is similar to a barter trade. In total compensation,
1. The goods being exchanged are valued in currency terms and
2. Here is a remittance of currency as between the two parties.
For example, once the counterparty has shipped the goods to original seller, the seller
will send a remittance of the agreed amount to a named bank and the sum will be held
in a special bank account called an escrow account. (An escrow account is a
temporary pass through account held by a third party during the process of a
transaction between two parties). Thereafter, when the original seller has shipped his
goods to the counterparty, he will claim the sum due to him from the banker that is
maintain the escrow account.
Part compensation
Under a part compensation, the original seller negotiates on the basis that, from the
counterparty, settlement will be partly in the forms of goods and partly in cash. The
settlement similar to total compensation except that the cash receipt is split. Part of the
amount will go to the original seller and part will be held in escrow account for the
counterparty to claim back at a later date.
Buyback
Under the buyback agreement, the seller supplies plant, equipment or technology and
agrees to buy goods produced with that plant, or equipment as payment. Typically,
the Buyback trades are of much longer term and also of larger amounts. The seller of
equipment can receive a part of the payment in the shape of products produced by that
equipment and the remaining amount in the shape of cash.
For example, National Textiles Corporation of India signed a buy back agreement of
Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The
buyback ratio was 75% textile produce from these looms and the remaining was in
cash.
--Industry Co-operation
--Offsets
Offset is the type of countertrade, which is mostly related to very high value of
exports and medium to high technology capital goods supplied by a multinational
corporations or a major manufacturer. It may be in many forms such as co-production,
license production, subcontractor production, technology transfer, overseas
investment, research and development, technical assistance and training, or patent
agreements etc. Offset activity can be divided into two main categories direct and
indirect:
The offset is said to be direct when some components of the item sold are to be
manufactured within the buyer’s country and that the seller agrees to buy those
components to use them in-house.
The offset is said to be indirect when the buyer requires the seller to enter into a long
term industrial or other co-operation and investment, but this co-operation or
investment is not related to goods supplied by the seller.
The benefits of offset agreement is that the importing country can save the foreign
exchange on high value imports, avoid an increase in foreign debt, increase local
employment, introduce state of the art technology in local industries, reduce
dependence on foreign suppliers, and increase the level of foreign investment.
Offset has been popular among the governments all over the world, as they have been
purchasing heavy military equipments, but now it is gaining momentum in other
sectors also. Typically, offsets deals are common in defense, aerospace and
telecommunications sectors and also the local content “offset” is usually not more
than 20% to 30% of the deal value.
WEEK 4
CHARACTERISTICS OF A DOCUMENTARY COLLECTION
Applicability
Recommended for use in established trade relationships, in stable export markets
and for transactions involving ocean shipments
Risk
Riskier for the exporter, though D/C terms are more convenient and cheaper than an
LC to the importer
Pros
- Bank assistance in obtaining payment
- The process is simple, fast, and less costly than LCs
Cons
- Banks’ role is limited and they do not guarantee payment
- Banks do not verify the accuracy of the documents
1) The buyer (importer) and seller (exporter) agree on the terms of sale, shipping
dates, etc., and that payment will be made on a documentary collection basis.
2) The exporter, through a freight forwarder, arranges for the delivery of goods to
the port/airport of departure.
3) The forwarder delivers the goods to the point of departure and prepares the
necessary documentation based on instructions received from the exporter.
4) Export documents and instructions are delivered to the exporter's bank by either
the exporter or the freight forwarder.
5) Following the instructions of the exporter, the bank processes the documents and
forwards them to the buyer's bank.
6) The buyer's bank, on receipt of documents, contacts the buyer and requests
payment or acceptance of the trade draft.
7) After payment or acceptance of the draft, documents are released to the buyer,
who utilizes them to pick up the merchandise.
8) The buyer's bank remits funds to the seller's bank or advises that the draft has
been accepted.
9) On receipt of good funds, seller's bank credits the account of the exporter.
When to Use Letters of Credit vs. Documentary Collection
Letters of credit are perhaps most useful for doing business with a person or
company that you do not know well. Buyers have the comfort of documentation
verifying the quality and characteristics of the goods before having the obligation to
pay, while sellers are guaranteed payment as long as they comply with the terms of
the letter of credit. Additionally, letters of credit are highly useful when a buyer’s
country has political or economic instability or restrictive foreign exchange controls.
For sellers, the risk of a letter of credit lies in whether the documents are drafted
perfectly. Sometimes, unethical buyers will deliberately make the documentary
requirements incredibly tedious, hoping that the documents will be noncompliant in
order to give them a better position to renegotiate their contract after the goods are
shipped. If your documents aren’t in strict compliance and you refuse to negotiate or
give them better terms, they may simply refuse to pay and cancel their contract with
you – it’s their right to do so. This gives them a lot of leverage, and gives you a big
incentive to make sure your export documents are correct before you ship them.
Method : Prepayments
• The goods will not be shipped until the buyer has paid the seller.
• Time of payment : Before shipment
• Goods available to buyers : After payment
• Risk to exporter : None
• Risk to importer : Relies completely on exporter to ship goods as ordered
PAYMENT IN ADVANCE
Least risk for exporter, highest risk for importer
• Payment made by importer prior to shipment
• Importer’s payment methods:
• Wire Transfer
• Check
• Draft
• Credit Card
• Goods are available to the importer upon delivery
• There is no risk to the exporter and no credit management is required
• The importer loses the use of funds until goods arrive and risks the exporter
not shipping goods as ordered, in partial or not at all
Time drafts (documents against acceptance) : When the shipment has been
made, the buyer accepts (signs) the presented draft.
• Time of payment : On maturity of draft
• Goods available to buyers : Before payment
• Risk to exporter : Relies on buyer to pay
• Risk to importer : Relies on exporter to ship goods as described in documents
Method : Consignments
• The exporter retains actual title to the goods that are shipped to the importer.
• Time of payment : At time of sale to third party
• Goods available to buyers : Before payment
• Risk to exporter : Allows importer to sell inventory before paying exporter
• Risk to importer : None
WEEK 5
What is a Letter of Credit?
The L/C is a document that is issued by a bank per instructions by the buyer
of the goods
This document authorizes the seller to draw a specified sum of money under
specified terms, usually the receipt by the bank of certain documents within a
given time
Payment under L/C is based on documents (not on the terms of the sale or
the physical condition of the goods)
The L/C specifies the documents required by the exporter, such as an ocean
bill of lading, consular invoice, draft and an insurance policy
Before the payment, the bank responsible for payment verifies that the
proper documents conform to the L/C requirements
Types of L/C
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 - it reduces risk of default and a confirmed L/C helps secure
financing
Disadvantages - the fees charged and that the L/C reduces the available credit
of the importer
E.g.
A middleman in Singapore contracts to supply palm oil to a buyer in India at a
certain price.
He will then turn to a supplier in Malaysia to obtain the goods at a lower price
To effect the transaction, the supplier in Malaysia wants the credit to be
opened in his favor but the middleman needs funds to comply with the
request
Accordingly, the middleman will request the buyer in India to open an
IRREVOCABLE TRANSFER CREDIT in his favor
PROCESS
1) Indian importer applies for LC from Indian bank
2) Indian bank issues LC in favour of the Indian importer and sends LC to
exporter’s Malaysian bank. Malaysian bank confirms the LC adding its promise
to that of the Indian bank to make payment under the specified conditions.
3) Malaysian bank advises canned food exporter of opening of confirm LC.
4) Canned food exporter ships durian to Indian, shipping on an order of bills
of lading and made deliverable to itself.
5) Canned food exporter draws against Indian bank according to the terms of
the LC and present draft to Malaysian bank
6) Malaysian bank presents the draft along with endorsed order bill of lading
and the documents to Indian bank.
7) Indian bank accepts the draft or pays it. Indian bank returns accepted draft
to exporter to hold to maturity.
8) At maturity, Malaysian bank collects on the draft and pays the canned food
exporter/investor who was holding the draft.
Example :
The beneficiary can claim from the issuing bank by presenting the sight bill
and other documents stipulated in the credit together with a certificate
certifying default on the part of applicant
Usually issued to the existing trade transactions using open account or
collection basis which always come with period of validity
Consignment
-Clearly, exporting on consignment is very risky as the exporter is not guaranteed any
payment and its goods are in a foreign country in the hands of an independent
distributor or agent.