International Trade

Basic
International Trade Basic

• International Business in Changing Global Environment

• Methods of Payment in International Trade
• Negotiating the Price
• Bill of Lading
• Shipping Terms for International Trade
• Pro-forma Invoice
• Increasing the Sales
• Why are we not getting any orders?
• Order processing and shipment
 International Business in
Changing Global Environment
Worldwide changes and developments give the new dimensions to economic development in the
political and business arena. Some of the major development are:
1. The increased potential of a United States-Canada-Mexico free trade region through the North
American Free Trade Agreement (NAFTA)
2. The emergence of the European Union with 27 member countries and around 480 million
people.
3. Continental economic efforts to help rebuild Russia and the other countries of the former Soviet
Union.
4. The continued economic power of Japan in the Pacific Rim and renewed progress of Chine.
5. Four Tigers of Hong Kong, Taiwan, South Korea, and Singapore
6. 6. Southeast Asian countries of Malaysia, Thailand, Indonesia, and Vietnam.
International Business in
Changing Global Environment

In international business, capital is no longer the key success factor. International

business success greatly depends on human factors

Human side of international business

• Communication
• Motivation
• Leadership
Methods of Payment In
International Trade

• Cash-in-Advance
• Letter of Credits
• Documentary Collections
• Open Account
Cash-In-Advance

• With cash-in-advance payment terms, the exporter can avoid credit risk because
payment is received before the ownership of the goods is transferred.
• Wire transfers/ telegraphic transfer and credit cards are the most commonly used
cash-in-advance options available to exporters.
• However, requiring payment in advance is the least attractive option for the buyer,
because it creates cash-flow problems. Foreign buyers are also concerned that the
goods may not be sent if payment is made in advance. Thus, exporters who insist
on this payment method as their sole manner of doing business may lose to
competitors who offer more attractive payment terms.
Letter of Credit

• Letters of credit (LCs) are one of the most secure instruments available to
international traders.
• An LC is a commitment by a bank on behalf of the buyer that payment will be
made to the exporter, provided that the terms and conditions stated in the LC
have been met, as verified through the presentation of all required documents. The
buyer pays his or her bank to render this service. An LC is useful when reliable credit
information about a foreign buyer is difficult to obtain, but the exporter is satisfied
with the creditworthiness of the buyer’s foreign bank. An LC also protects the buyer
because no payment obligation arises until the goods have been shipped or
delivered as promised.
Letter of Credit
Types of Letter of Credit
1. Irrevocable and revocable letters of credit
2. Confirmed and unconfirmed letters of credit
3. Transferable letters of credit
4. Standby letters of credit
5. Revolving letters of credit
6. Back-to-back letters of credit
 Types of Letter of Credit
1. Irrevocable and revocable letters of credit
• A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for
any reason.
• An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees.
Irrevocable letters of credit provide more security than revocable ones.

2. Confirmed and unconfirmed letters of credit

• When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank.
The seller will usually want a bank in their country to check that the letter of credit is valid.
• For extra security, the seller may require the letter of credit to be ‘confirmed’ by the bank that checks it. By
confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails
to make it. So a confirmed letter of credit provides more security than an unconfirmed one.
Types of Letter of Credit

3. Transferable letters of credit

A transferable letter of credit can be passed from one ‘beneficiary’ (person receiving payment) to
others. They’re commonly used when intermediaries are involved in a transaction.
4. Standby letters of credit
A standby letter of credit is an assurance from a bank that a buyer is able to pay a seller. The seller
doesn’t expect to have to draw on the letter of credit to get paid.
5. Revolving letters of credit
A single revolving letter of credit can cover several transactions between the same buyer and seller.
6. Back-to-back letters of credit
Back-to-back letters of credit may be used when an intermediary is involved but a transferable
letter of credit is unsuitable.
Documentary Collection
• A documentary collection (D/C) is a transaction whereby the exporter entrusts the
collection of a payment to the remitting bank (exporter’s bank), which sends
documents to a collecting bank (importer’s bank), along with instructions for payment.
• Funds are received from the importer and remitted to the exporter through the banks
involved in the collection in exchange for those documents. D/Cs involve using a draft
that requires the importer to pay the face amount either at sight (document against
payment) or on a specified date (document against acceptance). The draft gives
instructions that specify the documents required for the transfer of title to the goods.
• Although banks do act as facilitators for their clients, D/Cs offer no verification process
and limited recourse in the event of non-payment.
• Drafts are generally less expensive than LCs.
Document Against Payment
• In this method of payment, the exporter ships the goods to his buyer and send his
draft (bill of exchange) with the necessary export documents through his bank. The
exporter bank then sends the documents to the corresponding bank in the buyer’s
country.
• The bank of importer asks the importer to pay the draft and release the documents.
If the buyer pays the amount, then bank handover the document to the buyer and
if the buyer does not make the payment, the bank will not handover the
documents to buyer and exporter will suffer loss
Document Against Acceptance
• This is the most unsecured method of payment in export trade.
• In this method of payment, exporter send the documents to his buyer through his
bank. The buyer’s bank handover the documents to the buyer only upon :
• Acceptance which implies that he agrees to pay the amount of draft (bill of exchange)
• After expiry of the period of credit (or usance period). The maximum usance period is
180 days.

• The disadvantage of this term is it allow buyer to take delivery of the goods before
making the payment.
Open Account
• An open account transaction is a sale where the goods are shipped and delivered
before payment is due, which is usually in 30 to 90 days.
• Obviously, this option is the most advantageous option to the importer in terms of cash
flow and cost, but it is consequently the highest risk option for an exporter.
• Because of intense competition in export markets, foreign buyers often press exporters
for open account terms since the extension of credit by the seller to the buyer is more
common abroad.
• Therefore, exporters who are reluctant to extend credit may lose a sale to their
competitors.
• However, the exporter can offer competitive open account terms while substantially
mitigating the risk of non-payment by using of one or more of the appropriate trade
finance techniques, such as export credit insurance.
Comparison between Type of
Payments
Comparison between Type of
Payments
Cash-in- Letter of Credit Documentary Open Account
Advance Collection
Time of Payment Before shipment When shipment On presentation As agreed upon
is made of draft
Good available After payment After payment After payment Before payment
to buyers
Risk to exporter None Very little – None Disposal of Relies on buyer
unpaid goods to paid as
agreed upon
Risk to importer Relies on Assured Relies on None
exporter to ship shipment but exporter to ship
goods as relies on goods as
ordered exporter to ship described in the
goods as documents
described in the
documents
Negotiating the Price

Tips in price negotiation…

• Never offer the lowest price at the first quotation
• No buyer will consider the price offered is cheap. They will always bargain to get
cheaper price
• Never give the buyer options you don’t want them to select
• Do not make assumptions
Bill of Lading

• A bill of lading is a legal document between the shipper of goods and the carrier
detailing the type, quantity and destination of the goods being carried. The bill of
lading also serves as a receipt of shipment when the goods are delivered at the
predetermined destination. This document must accompany the shipped goods,
no matter the form of transportation, and must be signed by an authorized
representative from the carrier, shipper and receiver.
Bill of Lading

• Ocean Bill of Lading

A non-negotiable ocean bill of lading allows the buyer to receive the goods upon
showing identification. If the bill is deemed negotiable, then the buyer will be required
to pay the shipper for the products and meet any of the seller's other conditions. An
ocean bill of lading allows the shipper to move goods across international waters.
• Inland Bill of Lading
If the goods are to be initially shipped over land, an additional document, known as an
"inland bill of lading", will be required. The inland bill only allows the materials to reach
the shore, while the ocean bill allows them to be transported overseas.
Bill of Lading
Master Bill of Lading House Bill of Lading
Issued by the actual carrier, such as MSC, Maersk, Yang Ming Issued by the forwarder company, such as XYZ Forwarding
Lines, etc. Ltd, etc.

Signed either by the carrier or an agent of the carrier. Signed by the forwarding company without any agency
Issued on a pre-printed form of an actual carrier's bill of indication of the carrier.
lading.

Always subject to Hague Rules, The Hague-Visby Rules and Issued on a pre-printed form of a forwarder company's bill of
US COGSA (US Carriage of Goods by Sea Act 1936. ) etc. lading.
May or may not be subject to Hague Rules, The Hague-Visby
Rules and US COGSA (US Carriage of Goods by Sea Act
1936. ) etc.
States the terms and conditions of the carriage, as a result States the terms and conditions of the forwarding company,
consignee may have protection in case the goods are as a result consignee will not be having a legal protection in
damaged or lost in transit. case the goods are damaged or lost in transit.

States actual carrier's bill of lading number. States forwarder company's bill of lading number.
Shipping Terms for International
Trade

• FAS – Free Alongside Ship

The seller delivers when the goods are placed alongside the buyer's vessel at the
named port of shipment. This means that the buyer has to bear all costs and risks of
loss of or damage to the goods from that moment. The FAS term requires the seller to
clear the goods for export. However, if the parties wish the buyer to clear the goods
for export, this should be made clear by adding explicit wording to this effect in the
contract of sale. This term should be used only for non-containerized seafreight and
inland waterway transport.
Shipping Terms for International
Trade

• FOB – Free on Board

Under FOB terms the seller bears all costs and risks up to the point the goods are
loaded on board the vessel. The seller must also arrange for export clearance. The
buyer pays cost of marine freight transportation, bill of lading fees, insurance,
unloading and transportation cost from the arrival port to destination. FOB should
only be used for non-containerized seafreight and inland waterway transport.
However, FOB is still used for all modes of transport despite the contractual risks that
this can introduce.
Shipping Terms for International
Trade

• CFR – Cost and Freight

The seller pays for the carriage of the goods up to the named port of destination. Risk
transfers to buyer when the goods have been loaded on board the ship in the
country of Export. The Shipper is responsible for origin costs including export
clearance and freight costs for carriage to named port. The shipper is not responsible
for delivery to the final destination from the port (generally the buyer's facilities), or for
buying insurance. If the buyer does require the seller to obtain insurance, the
Incoterm CIF should be considered. CFR should only be used for non-containerized
seafreight and inland waterway transport.
Shipping Terms for International
Trade

• CIF – Cost, Insurance & Freight

This term is broadly similar to the above CFR term, with the exception that the seller is
required to obtain insurance for the goods while in transit to the named port of
destination. CIF requires the seller to insure the goods for 110% of their value under at
least the minimum cover of the Institute Cargo Clauses of the Institute of London
Underwriters (which would be Institute Cargo Clauses (C)), or any similar set of
clauses. The policy should be in the same currency as the contract. CIF should only
be used for non-containerized seafreight.
Shipping Terms for International
Trade
Pro-forma Invoice
• A pro-forma invoice is a preliminary bill of sale sent to buyers in advance of a shipment or
delivery of goods. Typically, it gives a description of the purchased items and notes the cost
along with other important information, such as shipping weight and transport charges. Pro-
forma invoices are often used for customs purposes on imports.
• A pro-forma invoice differs from a simple price quotation in that it is usually considered a
binding agreement, despite the fact that, like a price quote, the terms of sale are subject to
change. A wide variety of businesses in virtually all industries use pro-forma invoices.
Pro-forma Invoice
• Most pro-forma invoices provide the buyer with a precise sale price. It includes any
commissions or fees, such as applicable taxes or shipping costs. Though the pro-forma invoice
may be subject to change, it serves as a good faith estimate to avoid exposing the buyer to
any unexpected charges once the transaction has fully completed.
• A pro-forma invoice may be sent prior to the shipment of any agreed-upon deliverables, or
along with the shipped items. While it does contain exact details regarding the costs
associated with the sale, it does not serve as an official invoice upon which a payment must be
made.
Pro-forma Invoice
Pro-forma Invoice VS Commercial Invoice
• Generally, if the sale has already been completed, a commercial invoice is used as a record of
the sale. In comparison, a pro-forma invoice may be used when a transaction is not officially
complete. This can apply to instances where full payment is not due until certain goods are
received, as dictated by any other sales contracts between the buyer and seller businesses.

• A traditional commercial invoice requires a large amount of data, including information about
both the buyer and seller, descriptions, quantities and values for all items being shipped, and
the location of the purchase.
• A pro-forma invoice requires significantly less information. This generally must include enough to
allow for required duties to be determined and a general examination of the included goods.
If a pro-forma invoice is used, a commercial invoice is required to be presented within 120
days.
Increasing the Sales

How to increase the sales of your products…

• Attract your customer… professionally
• Make the deal during site-visit by customer
• Make the customer think that the business is profitable
• Don’t be afraid to start with small order
Why are we not getting any orders?
• Communication barriers
• No urgency from the buyer sides
• Can’t get the customer’s trust
• Different purchasing style
• Buyers are not satisfied with the quality of the products
• No product standard
Order processing and shipment

• Monitoring of production
• Provide status report
• Inspection and report service
• Keep the buyer updated
• Arrange for shipment
• Preparation of the documentations
• After sales services
References
• Trade Finance Guide, US Department of Commerce, International Trade
Administration
• Letters of Credit for Importers and Exporters. Retrieved from
https://www.gov.uk/guidance/letters-of-credit-for-importers-and-exporters
• Shipping Terms Explained. Retrieved from https://www.wwcf.com.au/Shipping-
Terms
• Pro-Forma Invoice. Retrieved from http://www.investopedia.com/terms/p/pro-
forma-invoice.asp
• Katavić, Ivica, International Business In Changing Global Environment (March
24, 2013). Available at
SSRN: https://ssrn.com/abstract=2238652 or http://dx.doi.org/10.2139/ssrn.22386
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Thank you