State Exam Business Operations Print (1)

7/28/2019 State Exam Business Operations Print (1)

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International Business Operations

Question 1Commercial methods, definitions, types, factors of selection, commercial inter-links, sales and

purchase relations, contracts on exclusive purchase, commercial representation, commission merchantcontract, piggybacking, direct export

If we are talking about international business, we assume business to enter foreign market.What are the reasons for doing that?

Need/want to increase sales economies of scale (if we are manufacturing big amountswe are saving costs)

Gain new marketsDiversification of markets in order to lower risksTax advantages (some countries have lower taxes-why not to go there?)Usage of comparative advantages that certain country offers (China has cheap labor

cost-why not to go there?)What are negatives for going abroad?

Economical environment is different (political, legal, economical, cultural..)Foreign market is too far awayRisks (political risks, war risk, boycott Danish vs. Arabian, currency risks)

Methods of entering foreign market

What influence us when we are choosing commercial method?Nature of goods

Capital goods we use direct business methodo no third party is coming to relation between seller and buyer o only one purchase contracto raw materials, energy - often Commodity Exchange

Consumer products we usually use indirect business methodo enter others (mediators), conclusion of several purchase contractso eg.: manufacturer - exporter - agent - wholesale -the final consumer o food, textiles, consumer engineering goodsBusiness and political conditions

Commercial policy = tools which are used to promote the interests of the state in thecommercial area (for the movement of goods at international level)

CR does not have its own - a common EU trade policyIf the commercial policy is damaging a sector lobbyingContractual instrumentsCommercial ContractsTrade agreements


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Payment AgreementOther (agreement on double taxation ,...)Autonomous toolsTariff tools

Import surchargesImport deposits

non-tariff toolsA total ban on the import / exportQuantitative restrictions, ...

The nature of the marketInfrastructureTransport ServicesDistribution channelsStorage ServicesBanking ServicesManagement of receivablesInsurance ServicesInformation ServicesCultural differences ...

Nature of business partnerslegal informationBusiness type - the complicated, often more credibleGuaranteePersons authorized to act on behalf of Commercial Register Tax Identification signsFinancial InformationSolvency - payment practiceReliabilityImageMarket PositionContactsrating (Standard & Poor's, Moody's, Fitch)

Efficiency of business operations - the relationship to priceEffect targeted loss of profit (loss - to penetrate the market, obtain market position, etc.)Costs associated with the implementation of transactionsDirect trading costs - linked to realization of specific operations - transport, storage, etc.Indirect business costs - cannot be quantified for a particular operation - such as

marketing, PR, participation in trade fairs, ...Cost circulation - associated with fiscal policy - customs duties, taxes (excise, VAT)

FOREIGN INTERMEDIARIES/DISTRIBUTORS

Intermediaries are individuals that are buying goods/services (from foreign company) on their account and name and re-sell them at their domestic market. The reward for them is margin (differencebetween price of purchase and sale). Distributors can be distinguished from agents as distributors buy thegoods in their own name, than re-sell them at prices which they have some liberty to set. Distributorship isfrequently based on a contract which grants the distributor exclusivity for a specific territory.

Suitable for small and medium size companies for which the export-import matters are not themain issue

Advantages


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- Lower costs, elimination of risk from international trade, possibility to sell at foreignmarkets that would be too costly to go their directly

Disadvantages- No direct contact with customer, no control over marketing strategy, no control over

prices

Exclusive distributorship-buyer and seller set certain territory and products they write general agreement of exclusive

distributorship (each orders are that according standard sales contract)-disadvantages: if we choose bad distributor

AGENCY

COMMERCIAL REPRESENTATION/AGENT/AGENCY

Agent is an independent person or legal entity which acts on behalf of another (principal) for thelong term.Before we conclude contract with agent we should be careful and determine: where exactly is he

going to work, on which basis, for how much. We should be informed about his relationship to other companies (our competitors).

Non-exclusive representationRepresentation (boss) may use services of other agents and sales representative (agent) may

also represent another person (boss) and so on. It is necessary for their work or respect the conditionsset by representation (boss) and followed its instructions. Representatives also have an importantinformative function. Agent is paid by commission-usually depends on realization of transactions thatagent made (% of sales). Agent should cover his/her costs (if contract does not say anything else) and isnot responsible for contract. If he/she is responsible, than he/she (agent) has to be givendelcredere=reward for taking liabilities of third party.

Exclusive representationBoss/representation cannot use other agent in a given area for a given range of trades. Agent

cannot represent others in that given area.Representation (boss) can make business without the assistance of an exclusive agent but

he/she is obliged to pay commission for these transactions to exclusive agent (as if it was done by agenthimself). It is considered that it was entitled to a representative due to constant work, processing on themarket. This commission is described as recognition commission. Contract for exclusive representationcreates a close link between representatives and represented, and representatives request it, in particular in those areas where the representation associated with such investments in the service network, or if arepresentative of the company is bound by a majority of its activities and life depends on it.

If boss (representation) wants to terminate contract with agent they has give him/her reward for finding customers (establishing market, informing, goodwill...).

Brokerage contract- single activity, usually at the stock exchange- when we want to test our potential agent COMMISION MERCHANT CONTRACTIs made by commission merchant/broker/agent and committer/principal. Principal pays to

commission merchant for this service (it is called commission).Commission merchant concludes contract on his own name, but on account and risks of principal.

Advantage of using commission merchant is the ability to control prices (he sells for prices given byprincipal), using goodwill of comm. merchant, his business contacts and distribution channels.

Disadvantage might be too much autonomy, freedom of commission merchant and the fact thatcompany is not using corporate image in foreign markets.


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How commission contract differs from brokerage contractCommission merchant commits himself directly for making a particular contract, while the broker

is committed to mediate only the opportunity for making contract.MANDATE CONTRACTMandate contract is concluded between mandatory and mandant (client). Mandatory is obliged to

arrange some business matter for mandant/client (on clients account and name). Client pays tomandatory for his service.

Mandate contract is concluded only between entrepreneurs and has lot of similarities withcommission merchant contract. The biggest difference: mandatory acts on name of mandant.

PIGGYBACKINGCooperation of more companies from the same field of business in exporting.Typically large and well-known company gives to smaller company their foreign distribution

channels (small company is paying for it). Advantages for small companies- Ability to use the name and experience of large company (it provides also lots of

marketing and logistics activities for small companies) Advantages for large companies- Able to offer its customer a complete range of products (that gets from small companies

also)- Payment gained from small companiesDisadvantages for large companies- Piggyback can be inconvenient if small firms are not able to properly and on time supply

the required quantity of goods, since it could damage their image (large companies works under their ownname)

Disadvantages for small companies- Pressure of their stronger partners (they want lower prices, unfavorable payment terms,great demands on the quality of supplies and logistics.

In some cases, piggyback is used as a form of inter-firm cooperation by large companies (notonly large with small).

Their main motive is cost savings (they might use and finance together sales network or provideservices on the foreign market).

DIRECT EXPORTDirect sales methods are mostly used in exporting of machinery, manufacturing equipment or

complete industrial plants. Deliveries of these products are very complicated and are associated with theneed to provide a wide range of professional services. That is the reason why is required presence of manufacturer in foreign markets.

When we use direct sales method we have to have good technical and business knowledge. This

has usually positive effect on building business relations. The advantage is the possibility to control over the implementation of their marketing strategy in international markets. Exporter should also have higher prices (therefore profit) because he is providing the entire implementation (exporter bears all the costsand risks).

Question 2

Delivery terms, notion of delivery terms and their functions, Incoterms 2000, relation of delivery term to other elements of commercial contract

Delivery term Describes transfer of the subject of purchase and sales place, time and wayAn agreement in a contract between a buyer and seller about when goods will be

delivered, how they will be paid for etc

Location and time of transition costs related to the deliveryLocation and time of shifting the risk of loss or damageOther contractual obligations - providing transport, packaging, customs clearance,

insurance

Relation of delivery term to other elements of commercial contractInfluences purchase price the more we want the more we have to pay (e.g. EXW is for

us as a buyer the cheapest term)


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Incoterms 2000International interpretative rules, it is not generally binding legal normThe International Chamber of Commerce in ParisThe first version in 1936, has since upgraded several times, currently the latest from

2000, is preparing for further innovation in 2010All versions are still valid, you can use any of themIn order to by used, it has to be written in contractEach rule has 2 elements:

o Marked the r ule that is used, 3 capital letters (e.g. CIF) o Location

Contain a summary of obligations of the seller and the buyer it describes mostly rules of how they share the costs associated with transport and the risks

It does not describe transfer of ownershipIt does not describe relations of the contractual parties to the 3rd parties (but the damage

caused by a third party yes - which party is responsible)Export customs formalities ALWAYS arranges the seller (the right to deduct VAT)13 rules divided into 4 groups:

EXW {+ the named place}Ex WorksEx means from. Works means factory, mill or warehouse, which is the seller's premises. EXW

applies to goods available only at the seller's premises. Buyer is responsible for loading the goods ontruck or container at the seller's premises, and for the subsequent costs and risks.

In practice, it is not uncommon that the seller loads the goods on truck or container at the seller'spremises without charging loading fee.

In the quotation, indicate the named place (seller's premises) after the acronym EXW, for example EXW Kobe and EXW San Antonio.

The term EXW is commonly used between the manufacturer (seller) and export-trader (buyer),and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers may use theterm Ex Factory, which means the same as Ex Works.

FCA {+ the named point of departure}Free Carrier The delivery of goods on truck, rail car or container at the specified point (depot) of departure,

which is usually the seller's premises, or a named railroad station or a named cargo terminal or into thecustody of the carrier, at seller's expense. The point (depot) at origin may or may not be a customsclearance center. Buyer is responsible for the main carriage/freight, cargo insurance and other costs andrisks.

In the air shipment, technically speaking, goods placed in the custody of an air carrier isconsidered as delivery on board the plane. In practice, many importers and exporters still use the termFOB in the air shipment.

The term FCA is also used in the RO/RO (roll on/roll off) services.In the export quotation, indicate the point of departure (loading) after the acronym FCA, for

example FCA Hong Kong and FCA Seattle.Some manufacturers may use the former terms FOT (Free On Truck) and FOR (Free On Rail) in

selling to export-traders.FAS {+ the named port of origin}Free Alongside ShipGoods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach

of its loading equipment so that they can be loaded aboard the ship, at seller's expense. Buyer isresponsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks.

In the export quotation, indicate the port of origin (loading) after the acronym FAS, for example

FAS New York and FAS Bremen.The FAS term is popular in the break-bulk shipments and with the importing countries using their own vessels.

FOB {+ the named port of origin}Free On Board The delivery of goods on board the vessel at the named port of origin (loading), at seller's

expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks.In the export quotation, indicate the port of origin (loading) after the acronym FOB, for example

FOB Vancouver and FOB Shanghai.


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Under the rules of the INCOTERMS 1990, the term FOB is used for ocean freight only. However,in practice, many importers and exporters still use the term FOB in the air freight.

In North America, the term FOB has other applications. Many buyers and sellers in Canada andthe U.S.A. dealing on the open account and consignment basis are accustomed to using the shippingterms FOB Origin and FOB Destination.

FOB Origin means the buyer is responsible for the freight and other costs and risks. FOBDestination means the seller is responsible for the freight and other costs and risks until the goods aredelivered to the buyer's premises, which may include the import customs clearance and payment of import customs duties and taxes at the buyer's country, depending on the agreement between the buyer and seller.

In international trade, avoid using the shipping terms FOB Origin and FOB Destination, which arenot part of the INCOTERMS (International Commercial Terms).

CFR {+ the named port of destination}Cost and Freight The delivery of goods to the named port of destination (discharge) at the seller's expense. Buyer

is responsible for the cargo insurance and other costs and risks. The term CFR was formerly written asC&F. Many importers and exporters worldwide still use the term C&F.

In the export quotation, indicate the port of destination (discharge) after the acronym CFR, for example CFR Karachi and CFR Alexandria.

Under the rules of the INCOTERMS 1990, the term Cost and Freight is used for ocean freightonly. However, in practice, the term Cost and Freight (C&F) is still commonly used in the air freight.

CIF {+ the named port of destination}Cost, Insurance and Freight The cargo insurance and delivery of goods to the named port of destination (discharge) at the

seller's expense. Buyer is responsible for the import customs clearance and other costs and risks.In the export quotation, indicate the port of destination (discharge) after the acronym CIF, for example CIF Pusan and CIF Singapore.

Under the rules of the INCOTERMS 1990, the term CIF is used for ocean freight only. However,in practice, many importers and exporters still use the term CIF in the air freight.

CPT {+ the named place of destination}Carriage Paid To The delivery of goods to the named place of destination (discharge) at seller's expense. Buyer

assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, andother costs and risks.

In the export quotation, indicate the place of destination (discharge) after the acronym CPT, for example CPT Los Angeles and CPT Osaka.

CIP {+ the named place of destination}Carriage and Insurance Paid ToThe delivery of goods and the cargo insurance to the named place of destination (discharge) at

seller's expense. Buyer assumes the import customs clearance, payment of customs duties and taxes,and other costs and risks.

In the export quotation, indicate the place of destination (discharge) after the acronym CIP, for example CIP Paris and CIP Athens.

DAF {+ the named point at frontier}Delivered At Frontier The delivery of goods to the specified point at the frontier at seller's expense. Buyer is

responsible for the import customs clearance, payment of customs duties and taxes, and other costs andrisks.

In the export quotation, indicate the point at frontier (discharge) after the acronym DAF, for example DAF Buffalo and DAF Welland.

DES {+ the named port of destination}Delivered Ex Ship The delivery of goods on board the vessel at the named port of destination (discharge), at seller's

expense. Buyer assumes the unloading fee, import customs clearance, payment of customs duties andtaxes, cargo insurance, and other costs and risks.

In the export quotation, indicate the port of destination (discharge) after the acronym DES, for example DES Helsinki and DES Stockholm.

DEQ {+ the named port of destination}Delivered Ex Quay


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The delivery of goods to the quay (the port) at destination at seller's expense. Seller isresponsible for the import customs clearance and payment of customs duties and taxes at the buyer'send. Buyer assumes the cargo insurance and other costs and risks.

In the export quotation, indicate the port of destination (discharge) after the acronym DEQ, for example DEQ Libreville and DEQ Maputo.

DDU {+ the named point of destination}Delivered Duty UnpaidThe delivery of goods and the cargo insurance to the final point at destination, which is often the

project site or buyer's premises, at seller's expense. Buyer assumes the import customs clearance andpayment of customs duties and taxes. The seller may opt not to insure the goods at his/her own risks.

In the export quotation, indicate the point of destination (discharge) after the acronym DDU, for example DDU La Paz and DDU Ndjamena.

DDP {+ the named point of destination}Delivered Duty PaidThe seller is responsible for most of the expenses, which include the cargo insurance, import

customs clearance, and payment of customs duties and taxes at the buyer's end, and the delivery of goods to the final point at destination, which is often the project site or buyer's premises. The seller mayopt not to insure the goods at his/her own risks.

In the export quotation, indicate the point of destination (discharge) after the acronym DDP, for example DDP Bujumbura and DDP Mbabane.

Diagram: Internat ional Comm ercial Terms in word.doc Insurance under Incoterms 2000

concerning only transportation risk (not other ones)is arranged by the seller in accordance with the contract

Claim of the person who is interested in safety (ie a person who at that time bore therisk)

Minimum risk cover under the Institute Cargo Clauseso 3 risk ranges:

HighCentrallowest (as prescribed by Incoterms minimum, then it is possible to arrange another risk

insurance)A minimum sum insured: the contract price + 10% in the currency of the contract (buyer

interest may be, the subsequent sale of goods so that they ensure any loss caused by the impossibility of selling the goods purchased= imaginary profit)

Question 3Payment terms, function of payment term, selection of payment term, forms of payment;

documentary forms (pass over documents, approve ownership, documents against payments, documentsand money exchanged at the same time; bill of lading = ownership; dirty bill of lading with remarks) vs.the rest

Bill of lading vs. letter of credit? bill of lading is one of possible (key) conditions of letter of credit, usually the most important one because it passes ownership

Clean bill of lading could be stated as condition in letter of credit, if no t, the buyer wont pay What if exporter and importer know that bill of lading is dirty and they will change the contract?

(make addition) payment wont take place because letter of credit is contract between three parties,bank will pay if all conditions are met; new signature means new fees for bank

- Timely payment is essential for the survival of your business, especially when you'retrading overseas. Financing export activities puts real strain on the cash flow of the business, thus, weneed to assess the possible risks, settle on acceptable payment terms, and consider insurance in order toprotect ourselves against problems.

- Payments terms and conditions should be established with the customer prior the finaldeal. Explain them in the beginning of your business relationship. Send out a written confirmation of their order with a copy of your terms and conditions of sale General Sales Conditions (written on the backside of offer, quantity and name of product is added with the respective price, all other conditions stay thesame for all contracts), always get acquainted with the general sales conditions, read them carefully.

- The simplest payment option is cash (check/cheque respectively) but that is pretty riskyas well. Not many businesses are conducted with cash nowadays except black market trade


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Payment Terms and Conditions- open account trading- clean / documentary collection- payment upon shipment of the goods- Documentary Letter of Credit- Payment in advanceOpen account trading- a selling on credit, without the exporter taking any safeguard that the Buyer will settle his

debt on the agreed date- long-standing business relationship between Buyer and Seller - trade between the countries is relatively free of government restrictions- The goods, along with all the necessary documents, are shipped directly to the importer

who agrees to pay the exporters invoice at a future date, usually in 30 to 90 days. - Exporter should be absolutely confident that the importer will accept shipment and pay at

agreed time and that the importing country is commercially and politically secure.- Open account terms may help win customers in competitive markets, if used with one or

more of the appropriate trade finance techniques that mitigate the risk of nonpayment- Risk: exporter faces significant risk as the buyer could default on the payment obligation

after shipment of goods- Pros: boost competitiveness in global market, establish and maintain a successful trade

relationship- Cons: exposed significantly to the risk of non-payment, additional costs associated with

risk mitigation measures

Clean/documentary collection- means the handling by banks of documents in order to:o obtain payment (D/P) and/or acceptance (D/A)o deliver documents against payment and/or acceptanceo deliver documents on other terms and conditions- A documentary collection (D/C) is a transaction whereby the exporter entrusts the

collection of payment to the remitting bank (exporters bank), which sends docu ments to a collecting bank(importer s bank), along with instructions for payment. Funds are received from the importer and remittedto the exporter through the banks involved in the collection in exchange for those documents. D/Csinvolve the use of a draft that requires the importer to pay the face amount either on sight (documentagainst payment D/P) or on a specified date in the future (document against acceptance D/A). Thedraft lists instructions that specify the documents required for the transfer of title to the goods. Althoughbanks do act as facilitators for their clients under collections, documentary collections offer no verification

process and limited recourse in the event of nonpayment. Drafts are generally less expensive than lettersof credit (LCs).Key points: D/Cs are less complicated and less expensive than LCs. Under a D/C transaction, the importer is not obligated to pay for goods prior to shipment. The exporter retains title to the goods until the importer either pays the face amount on

sight or accepts the draft to incur a legal obligation to pay at a specified later date. Banks that play essential roles in transactions utilizing D/Cs are the remitting bank

(exporters bank) and the collecting bank (importers bank).


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While the banks control the flow of documents, they do not verify the documents nor takeany risks, but can influence the mutually satisfactory settlement of a D/C transaction.

Recommended for use in established trade relationships and in stable export markets.- Risk: exporter is exposed to more risk as D/C terms are more convenient and cheaper

than the L/C to the importer - Pros: bank assistance in obtaining the payment, the process is simple, fast and less

costly than L/Cs- Cons: Banks role is limited and they dont guarantee payment, banks do not verify the

accuracy of the documentsTransaction flow:a) Documents Against Payment (D/P) Collection Under a D/P collection, the exporter ships the goods, and then gives the documents to his bank,

which will forward them to the importers collecting bank, along with ins tructions on how to collect themoney from the importer. In this arrangement, the collecting bank releases the documents to the importer only on payment for the goods. Upon receipt of payment, the collecting bank transmits the funds to theremitting bank for payment to the exporter.

Time of Payment: After shipment, but before documents are released Transfer of Goods: After payment is made on sight Exporter Risk: If draft is unpaid, goods may need to be disposed b) Documents Against Acceptance (D/A) Collection Under a D/A collection, the exporter extends credit to the importer by using a time draft. In this

case, the documents are released to the importer to receive the goods upon acceptance of the time draft.By accepting the draft, the importer becomes legally obligated to pay at a future date. At maturity, thecollecting bank contacts the importer for payment. Upon receipt of payment, the collecting bank transmits

the funds to the remitting bank for payment to the exporter. Time of Payment: On maturity of draft at a specified future date Transfer of Goods: Before payment, but upon acceptance of draft Exporter Risk: Has no control of goods and may not get paid at due date Documentary letter of credit (L/C)- Letters of credit (LCs) are among 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 theexporter provided that the terms and conditions have been met, as verified through the presentation of allrequired documents. The buyer pays its bank to render this service. An LC is useful when reliable creditinformation about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyers foreign bank. An LC also prote cts the buyer since no payment obligation arises until thegoods have been shipped or delivered as promised.

- However, since LCs have many opportunities for discrepancies, they should be preparedby well-trained documenters or the function may need to be outsourced. Discrepant documents, literallynot having an I -dotted and T- crossed, can negate payment.

Key points: An LC, also referred to as a documentary credit, is a contractual agreement whereby a

bank in the buyers country, known as the issuing bank, acting on behalf of its customer (the buyer or importer), authorizes a bank in the sellers country, known as the advising bank, to make payment to thebeneficiary (the seller or exporter) against the receipt of stipulated documents.

The LC is a separate contract from the sales contract on which it is based and, therefore,the bank is not concerned whether each party fulfills the terms of the sales contract.

The banks obligation to pay is solely conditional upon the sellers compliance with theterms and conditions of the LC. In LC transactions, banks deal in documents only, not goods.

Recommended for use in new or less-established trade relationships when you aresatisfied with the creditworthiness of the buyers bank

- Risk: is evenly spread out between buyer and seller provided all terms and conditions areadhered to

- Pros: payment after shipment, a variety of payment, financing and risk mitigation options- Cons: process is complex and labor intensive, relatively expensive in terms of transaction

costs

Illustrative L/C transaction:1. The importer arranges for the issuing bank to open an LC in favor of the exporter.2. The issuing bank transmits the LC to the advising bank, which forwards it to the exporter.3. The exporter forwards the goods and documents to a freight forwarder.


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4. The freight forwarder dispatches the goods and submits documents to the advising bank.5. The advising bank checks documents for compliance with the LC and pays the exporter.6. The importers account at the issuing bank is de bited.7. The issuing bank releases documents to the importer to claim the goods from the carrier.- Irrevocable L/C = LCs can be issued as revocable or irrevocable. Most LCs are

irrevocable, which means they may not be changed or cancelled unless both the buyer and seller agree.If the LC does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable.Revocable LCs are occasionally used between parent companies and their subsidiaries conductingbusiness across borders.

- Confirmed L/C = A greater degree of protection is afforded to the exporter when a LCissued by a foreign bank (the importers issuing bank) is confirmed by a domestic bank (the exporters

advising bank). This confirmation means that the advising bank adds its guarantee to pay the exporter tothat of the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of theforeign bank and the political risk of the importing country. Exporters should consider confirming LCs if they are concerned about the credit standing of the foreign bank or when they are operating in a high-riskmarket, where political upheaval, economic collapse, devaluation or exchange controls could put thepayment at risk.

- Special L/C: LCs can take many forms. When an LC is issued as transferable , thepayment obligation under the original LC can be transferred to one or more second beneficiaries. With arevolving LC , the issuing bank restores the credit to its original amount once it has been drawn down.Standby LCs can be used instead of security or cash deposits as a secondary payment mechanism.

Payment in advance- With this payment method, the exporter can avoid credit risk, since payment is received

prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly

used cash-in-advance options available to exporters. However, requiring payment in advance is the leastattractive option for the buyer, as this method creates cash flow problems. Foreign buyers are alsoconcerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist onthis method of payment as their sole method of doing business may find themselves losing out tocompetitors who may be willing to offer more attractive payment terms.

- Recommended for use in high-risk trade relationships or export markets, and ideal for Internet-based businesses.

- Risk: exporter is exposed to virtually no risk as the burden of risk is placed nearlycompletely on the importer

- Pros: payment before shipment, eliminates risk of nonpayment- Cons: may lose customers over payment terms, no additional earnings through financial

operationsKey points: Full or significant partial payment is required, usually via credit card or bank/wire transfer,

prior to the transfer of ownership of the goods. Cash-in-advance, especially a wire transfer, is the most secure and favourable method of

international trading for exporters and, consequently, the least secure and attractive option for importers.However, both the credit risk and the competitive landscape must be considered.

Insisting on these terms ultimately could cause exporters to lose customers tocompetitors who are willing offer more favorable payment terms to foreign buyers in the global market.

Creditworthy foreign buyers, who prefer greater security and better cash utilization, mayfind cash-in-advance terms unacceptable and may simply walk away from the deal.

Types of cash in advance:1) Wire transfer = most secure and preferred cash-in-advance method- An international wire transfer is commonly used and has the advantage of being almost

immediate. Exporters should provide clear routing instructions to the importer when using this method,including the name and address of the receiving bank, the banks SW IFT, Telex, and ABA numbers, andthe sellers name and address, bank account title, and account number. This option is more costly to theimporter than other options of cash-in-advance method, as the fee for an international wire transfer isusually paid by the sender.

2) Credit card = viable cash-in-advance method- Exporters who sell directly to the importer may select credit cards as a viable method of

cash-in-advance payment, especially for consumer goods or small transactions. Exporters should checkwith their credit card company(s) for specific rules on international use of credit cards as the rulesgoverning international credit card transactions differ from those for domestic use. As international creditcard transactions are typically placed via online, telephone, or fax methods that facilitate fraudulent


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transactions, proper precautions should be taken to determine the validity of transactions before thegoods are shipped. Although exporters must endure the fees charged by credit card companies, thisoption may help the business grow because of its convenience.

3) Payment by check = a less attractive cash-in-advance method- Advance payment using an international check may result in a lengthy collection delay of

several weeks to months. Therefore, this method may defeat the original intention of receiving paymentbefore shipment. If the check is in U.S. dollars or drawn on a U.S. bank, the collection process is thesame as any U.S. check. However, funds deposited by non-local check may not become available for withdrawal for up to 11 business days due to Regulation CC of the Federal Reserve. In addition, if thecheck is in a foreign currency or drawn on a foreign bank, the collection process is likely to become morecomplicated and can significantly delay the availability of funds. Moreover, there is always a risk that acheck may be returned due to insufficient funds in the buyers account.

When to use cash-in-advance system: The importer is a new customer and/or has a less-established operating history. The importers creditworthiness is doubtful, unsatisfactory, or u nverifiable. The political and commercial risks of the importers home country are very high. The exporters product is unique, not available elsewhere, or in heavy demand. The exporter operates an Internet-based business where the use of convenient payment

methods is a must to remain competitive.Extra remarks:- Letter of Credit is considered the safest one but it is time demanding and also requires a

lot of paper work and prep-work.- While using different payment terms we are trying to reduce risks that can occur from

international business such as risk of non-payment or non-conforming goods. Therefore documentary

safeguards are often applied.- Documentary credits (L/C mechanism, bank drafts, bills of lading) are negotiableinstruments can be traded.

- Documentary forms are used as means of payment, security mechanism, and financialdevices.

a) Means of payment- Drafts of bills of exchange with other documents, such as bill of lading and commercial

invoice are the base for receiving payment for delivery of goodsb) Security mechanism- Exporters goods and importers payment are exchanged through neutral, third party

(usually bank or another financial institution)c) Financial devices- Grant a credit period (bills of exchange) vs. deferred payment (letter of credit)Question 4Bill of exchange and cheque in international trade, promissory note, bill of exchange, formal and

contents elements of bill of exchange, remittance of bill of exchange, bill of exchange with liability co-accept, formal and contents elements of cheques, types of cheques

Belong to negotiable instruments. A negotiable instrument is a specialized type of "contract" for the payment of money that is unconditional and capable of transfer by negotiation. As payment of moneyis promised later, the instrument itself can be used by the holder in due course frequently as money.Common examples include check, banknotes (paper money), and commercial paper. Promissory notesand bills of exchange are two primary types of negotiable instruments.

1) Bill of exchange A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the

payee . A common type of bill of exchange is the check defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written ordersby one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today. A billof exchange is an unconditional order in writing addressed by one person to another, signed by theperson giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. It is essentially an order made byone person to another to pay money to a third person. A bill of exchange requires in its inception threeparties--the drawer, the drawee, and the payee.

The person who draws the bill is called the drawer. He gives the order to pay money to thirdparty. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is


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addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to paythe bill. The party in whose favor the bill is drawn or is payable is called the payee.

The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to hisown order. A bill of exchange may be endorsed by the payee in favor of a third party, who may in turnendorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the billagainst the drawee and all previous endorsers, regardless of any counterclaims that may have disabledthe previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable. Insome cases a bill is marked "not negotiable". In that case it can still be transferred to a third party, but thethird party can have no better right than the transferor.

Definition from WiseGeek: Bills of exchange are financial documents that require the individual or business that is addressed in the document to pay a specified amount of money on a date that is citedwithin the text of the document. Considered to be a negotiable instrument, the date for the demand to paygenerally ranges from the current date to a date within the next six calendar months. A bill of exchangewill also require the authorized signature of the debtor in order to be considered legal and binding. As anunconditional order to pay a fixed sum of money to a creditor, the bill of exchange can take on manydifferent forms. One of the most common examples of the bill of exchange is the common bank check. Acheck specifies who is to receive the funds, with the order to pay the face value of the check to the order of the creditor. The exact amount of the payment is specified. The date specified on the check is often theissue date for the check, but may also be the date that the bank is to honor the payment. This process isreferred to as post dating a check, since the creditor will physically receive the check at some time beforeit will be honored. It is also possible to establish a bill of exchange in the form of a bank draft. Like thebank check, drafts are normally set up with a fixed sum of payment, and with specific instructions of whento issue the payment to the creditor. The bill of exchange can be a very simplistic document, or one that isvery detailed. In many countries around the world, the use of a bill of exchange is a common means of

conducting business, and is often accompanied by an allonge (small piece of paper appended to someagreement, the purpose of the allonge is to provide room for an authorized signature that functions as anendorsement for the document, when there is no space for endorsements on the actual document). Insituations where the bill of exchange is not honored, the holder of the document is free to take legalaction against the debtor according to local laws, or to sell the bill of exchange to a collector at adiscounted rate of exchange.

Brief summary: The bill of exchange , commonly referred to as the draft or the bill , is anunconditional order in writing, signed and addressed by the drawer (the exporter usually) to the drawee(the confirming bank or the issuing bank usually), requiring the drawee to pay the drawer a certain sum of money at sight or at a fixed or determinable future time. The draft is widely used in international trade,most frequently in the payment against a letter of credit (L/C). It is also used in the open account withoutany L/C involved.

Elements of B/EB/E has to include1) Unconditional order to pay a certain sum of money and designation that it is the bill of

exchange2) Name of the person who is to pay (drawee)3) Name of the person to whom or to whose order payment is to be made (drawer

seller/exporter)4) Date of the drawing of the bill of exchange (indication of maturity)5) Signature of the drawer Four methods of indicating maturity of B/E:a) Sight draft - Maturity at sight is formally based on expressly using words "at sight", "at

presentation", "after sight", etc. Another option consists in not stating the day of maturity as mentionedabove. With bills of exchange at sight the due day is not determined clearly in advance. The due day isthe day when the bill of exchange is presented to the respective person for payment.

b) Payable at fixed period after sight = Time draft (usance draft) - An example of time draftis a bill of exchange which is due "one month after sight". The time stated in the bill runs from the day of acceptance of the bill or the protest. Therefore acceptance must bear a date. If the bill was not accepted,or the date of acceptance was not stated the bill must be protested.

c) Payable at a fixed period after the date of drawing = Time draft (usance draft) - These arebills in which maturity is stated at a fixed period after the day of drawing, for example, "pay in a monthafter drawing".

d) Payable on a fixed day = fixed time drafts - It is the usual determination of maturity date,for example, "on 21 st August 2001".


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Remittance (settlement) of bill of exchange: Acceptance = before the payment of a bill drawn for a term can be enforced it must be presented to the drawee for acceptance. This is accomplished by theformality of writing or stamping the word "accepted" across its face over the signature of the drawee. Thelatter thus gives notice of his acknowledgment of the indebtedness and of his willingness to pay the bill atmaturity. The endorser guarantees to the endorsee that the bill, if payable after sight, will be acceptedupon presentation, and that it will be paid at maturity, either by the acceptor or, in case of his default, byhimself.

2) Promissory Note A promissory note is a written promise by the maker to pay money to the payee . Bank note is

frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer ondemand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specificamount on a specified date. A promissory note is an unconditional promise to pay a specific amount tobearer or to the order of a named person, on demand or on a specified date. A negotiable promissorynote is unconditional promise in writing made by one person to another, signed by the maker, engaging topay on demand, or at fixed or determinable future time, sum certain in money, to order or to bearer. Apromissory note, briefly stated, is a promise to pay a sum of money.

Original parties to a promissory note: There are originally two parties in a promissory note. Theone who makes the promise and signs the instrument is called the "maker" and the party to whom thepromise is made or the instrument is payable is called the "payee"

3) Check/cheque= is a negotiable instrument instructing a financial institution to pay a specific amount of a specific

currency from a specified demand account held in the maker/depositor's name with that institution. Boththe maker and payee may be natural persons or legal entities.

It is addressed to the bank, and contains the date of the order, the amount to be transferred,usually expressed both in figures and in letters, the name of the person in whose favor and to whoseorder the transfer is to be made, the signature of the depositor or drawer, and usually a number corresponding to one written on the portion of the check retained by the drawer and containing a record of all the essential features of the transaction.

Being simply an order to pay, the check is not binding upon the bank to which it is addressed untilit has been presented and accepted.

Types of check:o Check: A draft drawn by a depositor (the drawer ) ordering a bank or other financial

institution (the drawee ) to pay a sum certain of money on demand to, or to the order of, a third person(the payee ). The drawer is liable for ensuring that sufficient funds are in his account to cover the check.

o Cashiers Check: A check drawn b y the bank on itself, rather than on a drawersaccount, which constitutes the banks (1) promise to pay the payee on presentment and (2) assumption of liability if the bank fails to pay.

o Travelers Check: A check, often used as a substitute for cash, that is (1) drawn on or payable through a bank and (2) payable on demand by the holder. A travelers check does not requirethe holder to present it to the drawee bank for payment.

o Certified Check: A check that has been accepted by the drawee bank prior topresentment (indeed, often at the time it is issued). By certifying the check, the bank assumes all liabilityfor failure to pay the check on presentment.

Another division of cheques:1) Bearer cheque: it is a cheque which is either expressed to be so payable or on which the

last or only endorsement is an endorsement in blank.2) Order cheque: it is a cheque which is expressed to be so payable or which is expressed

to be payale to particualar person, without containing words prohibiting transfer or indicating that it is nottransferable.

3) Open cheque: it is a cheque, which can be presented to the banker on whom they aredrawn and paid by them over counter. There be3ing always a great danger of such cheques being stolenor lost the commercial community invested the method crossing cheques

4) Crossed cheque: it is chaque, which cannot be cashed at the counter, but which can becollected only by a bank from the drawer bank. Crossing may be of two types: (A) general crossing (B)special crossing

From the lesson (Mr. Halik):If you employ bill of exchange the obligation of payment does not relate to the contract anymore

but to the bill of exchange only.


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Sales of contracts -> commercial code (export obligation to deliver, importer obligation to pay, if importer doesnt pay in money but gives I owe you money paper=B/E or check, unconditional promise topay)

Bill of exchange, check -> special law (Czech)Documents against acceptance vs. Documents against payment (conditional promise to pay)

(different due date)Smenka vlastni (promissory note)Smenka cizi (B/E)Promissory note vs. B/EDrawer (payer) and drawee -> promissory noteWhen third party is involved, another payer -> bill of exchangeEndorsement of the B/E means when the pa yer sells B/E to somebody else and drawee doesnt

know who actually the payer is. If the last payer cant pay the obligation to pay moves backwards, Draweecan sue the last obliged payer.

Forfeiting and factoring (companies specialized, obliged) vs. B/E- Separate legal act from Commercial Code- Bills of Exchange and Cheques Act (BECA), for CR- Situation: write B/E, go to bank, no money capable to get from bank account, sue based

on BECA unconditional promise to pay- Used for separation of the payment from the goods- Non-covered B/E is irrelevant for one judge who based the judgment on Commercial

code (looks only if the paper is valid)- Fees paid to judge/attorneys pays whoever loses- Keep valid B/E nobody wonders how the debt occurredits important only if it s valid,

judge makes verdict based on that compensations, consequent losses, fees, etc.Question 5Documentary forms of payment, documentary letter of credit, notion, types, and possibilities of

usage. Documentary collection - documents against payment and documents against acceptance of thebill of exchange, notion, types possibilities of usage

Answer: L /C. A binding document that a buyer can request from his bank in order to guaranteethat the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods.

In order for the payment to occur, the seller has to present the bank with the necessary shippingdocuments confirming the shipment of goods within a given time frame. It is often used in internationaltrade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.

Notion:# Applicant - the buyer in a transaction, Importer # Beneficiary - the seller or ultimate recipient of funds, exporter # Issuing bank - the bank that promises to pay# Confirming bank - helps the beneficiary use the letter of creditExporter and Importer conclude a sales contract with the payment provision by documentary

credit- Letter of credit.The Importer proceeds to the Issuing bank and submits an application for L/C that is in conformity

with the contract of sale. After issuing banks approves L/C application it will issue the credit and request that a cofirming

bank adds its own irrevocable commitment to pay under terms of credit.Once the Seller/Exporter receives the written notification of the credit from Confirming bank he

should make sure that would be able to provide all documents agreed in the sales contract.Once goods are delivered to the transport carrier, the exporter receives transport documents

which together with other documents (Invoice, insurance, draft, certificate of origin, inpection certificate)are presented to the confirming bank for payment.

Confirming bank will closely examine documents and if there are no discrepancies it will pay theSeller, forward the documents together with request for reimbursement to the Issuing bank. Issuing bankwill also closely examine documents and if there are no problems it will reimburse the confirmin g bank.

Issuing bank will then release the documents to the Applicant who can use the bill of lading toobtain the goods from the carrier.

Types of L/C:1. Revocable vs. Irrevocable: Irrevocable L/C can NOT be changed without written consent of all

parties including beneficiary.Revocable L/C CAN be changed without notifying beneficiary.


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1. Confirmed vs. Advised: Confirmed is better as confirming bank promises to pay. Advised DOES NOT guarantee the creditworthiness of the opening bank.

2. Straight vs. Negotiation: L/c can be presented to any bank. A straight L/C can only be paidin the country of the Paying bank.

3. Sight vs. Usance: At sight means that beneficiary is paid as soon as the paying bankdetermines that all documents are ok. Usance time can be between 30-180 days after the B/L date.

Payment on open account represents the most risk for exporter whereas payment bydocumentary credit represents the safest method for exporter.

Clean Collection:Clean collection is an open account payment made via bill B/E. The exporter ships the goods

then sends the importer a B/E via importers banks. Whereas a documentary collection allows exporter to

retain control of the goods until he has received a payment or assurance of payment in the future.Clean collection is Documentary collection whereby only the financial document (bill of exchange)

is sent through the banks without a bill of lading and/or other shipping documents (which are sentseparately by the consignor to the consignee). Used usually in open account arrangements, cleancollection allows a consignee to take delivery of the shipment without paying and without making a firmcommitment to pay on a fixed date.

Documentary collections :1. Documents against payment- cash against documents-D/PThe importer pays the draft (Bill of exchange) in order to receive the bill of lading (the document

that enables the importer to obtain delivery of the goods).Payment terms for exported goods in which the shipping documents are sent to a bank, agent,

etc., in the country to which the goods are being shipped, and the buyer then obtains the documents bypaying the invoice amount in cash to the bank, agent, etc. Having the shipping documents enables the

buyer to take possession of the goods when they arrive at their port of destination; this is known asdocuments against presentation.2. Documents against acceptance- D/AHere the importer accepts the draft/Bill of Exchange in order to receive the bill of lading. By

accepting the draft the importer acknowledges an unconditional legal obligation to pay according to termsof draft.

Exporter will present instructions for draft acceptance through series of banks. Exporters bank iscalled Remitting (a bank that forwards sellers documents to the importers bank call ed collecting bankand sends payment in the opposite direction).

The importers bank presents the relevant documents for collection to the drawee -smenecnidluznik

Exporter has to give precise information and complete in a so-called lodgment form-collectioninstructions, which bank has to follow. Based on this form bank remitting bank will prepare its collectioninstruction which will accompany the documentary collection when transmitted to the collecting bank.

Advantages and disadvantages Advantages of documentary collection for exporter are that they are relatively cheap and

easy and that control over transport documents is maintained until the exporter receives the assurance of payment.

Advantage for importer is that he does not have to pay until he has t he opportunity to inspect thedocuments and in some cases also the goods themselves.

Disadvantages for the exporter are that documentary collection exposes the seller to: 1. Importer might not accept the goods, credit risk of importer, political risk of th e importers country and thatshipment may fail to clear customs. So prudent exporter will get a credit report on the importer, as well ascountry evaluation.

Another problem is that the collection can be relatively slow process. Sometimes exporters bankis willing to cover the period when exporter waits for the funds to clear.

The risk of Importer under D/P is that the goods shipped may not be as indicated on the invoiceand bill of lading. For banks there are no significant risks and thus document collections are muchcheaper than documentary credits.

Question 6Delivery on open account, delivery credits, possibilities of limitation of non payment risks,

deferred payment letter of credit, bill of exchange, bank guarantees, insurance of credits, ownershipreservation.

Introduction:


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The central risk of international trade is the exporters risk of non -payment and the importers riskthat the goods shipped will not conform to the contract. Both these risks can be reduced by documentarysafeguards provided by letter of credit mechanism, however, they involve relatively high banking fees andcomplex documentary procedures.

Non-payment risks can be reduced via effective credit investigation and management, exchangerate management bank guarantees or surety bonds and insurance.

Negotiable instruments like B/L or bank draft can be used to raise interim finance or receivediscounted payment.

Exporter might use credit agencies to receive credit ratings of importer. Credit history or referencefrom importers bank can be available. We should bear in mind that every country has differentaccounting and working capital requirements.

Delivery on Open accountWith open account payments the exporter ships the goods to the buyer and then at agreed upon

future time, transmits an invoice and other shipping documents i.e. importer buys now pay later. It is alsosometimes called sales on credit as the seller extends credit without documentary security.

For the importer the open account terms are quite advantageous as there is no need to pay for the goods as they are received.

Open account sales are common in domestic sales, but less common in international transactionsas they increase the risk of seller. Only when the seller is absolutely sure about the credit stability of thebuyers country and credit rating of the importer it should sell on open account.

With increasing globalization and market integration open account payment at the internationallevel has significantly increased. In the past major barriers such as lack of transparency and concernsabout cross border exposure. Today with increasing technology it became easier to trade on openaccount and it is predicted that it will be increasing.

Differed payment L/C Arrangement under which the bank issuing a L/C also finances it. The bank pays the beneficiaryupon presentation of the required documents but delays charging that amount to the applicant until afuture date. Its objective usually is to allow the applicant a period long enough to resell the financedgoods.

If you are an exporter, a letter of credit (or L/C, also known as a documentary credit) enables youto offer an importer the option of deferred payment.

You and the importer must negotiate the terms and conditions of the L/C, including the expensesthat the importer will bear. You must agree on the following:

* The rate of interest that the importer will pay on the deferred payment* The length of the credit period and the payment dates

Bill of Exchange A draft or B/E is a negotiable instrument (possessing it has a money value like B/L), which

represents an unconditional demand for payment. Unconditional meaning that the origin of the debt is notimportant.

Together with Bill of lading it represents the basis for documentary collection procedures.Together with the commercial invoice the B/E can be used to charge the importer for the goods.

It is an unconditional order in writing addressed by one person to another signed by the persongiving it requiring the person to whom it is addressed to pay on demand or at a fixed or determinablefuture time a certain some of money.

Draft is written by a Drawer-vydavatel smenky to the drawee-smenecni dluzni,requiring apayment of a fixed amount at specific time. It must be written in the text Bill of exchange and in the samelanguage as the whole document. Money must be expressed in words and numbers.

A draft payable upon presentation is called at sight whereas payable at future date is calledusance draft. The draft is legally accepted when a buyer or bank write accepted, the date and signatureon the face of a time draft.

A draft accepted by bank is called bankers acceptance while a draft accepted by a buyer iscalled a trade accepted.

When the seller attaches the bill of lading or other transport documents to a bill of exchange, thebill of exchange is called documentary bill. By doing this he will make sure that a buyer will not get anyrights to the goods via the bill of lading before having accepted or paid the B/E. Since they are negotiabledrafts may be transferred by endorsement.

Bank guarantees: As the judical enforcement of contractual rights can be slow and expensive and documentary

credits provide primary protection for exporter.Two basic kinds of guarantees:


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1. Demand guarantees-represent instant cash for the beneficiary-who only has to make ademand.

2. Surety guarantees-these guarantees are conditional-the beneficiary must prove that he isentitled to money as by providing a court judgment.

Historically the usage of cash deposits was used, however it had drawbacks as opportunity costsor used by another party.

This is overcome with the advent of a system where bank issues a guarantee or bond to theimporter instead of cash deposits.

Many types of guarantees: bonds, guarantees, ndemnities-pojistna nahrada, standby letters of credit,bank guarantees,surety guarantees. Etc..

The main parties: Beneficiary: Receives the money in the event of non-payment or nonperformance. Often a buyer/importer.

Principal : The party that issues or directs the issue of guarantee. Typically large constructioncompanies that guarantee that construction project will be completed or exporters that guarantee they willrepay any sums advanced by importer if goods are no properly shipped.

Guarantor : The bank or insurance company that issues guarantee on the instructions of theprincipal.

Two main types:1. Demand guaranteeUnder demand guarantee the guarantor must pay on demand by beneficiary. There is no need to

prove that the principal has defaulted on contractual obligation. The beneficiary is assured of speedy andcertain monetary guarantee. They are substitutes for cash deposits. The main problem is the unfair callwhere beneficiaries can unjustifiably make a demand. Usually it is protected by law.

Another problem with the demand guarantee is the validity as beneficiary may be able to force

extension period of validity. So called extend or pay.Demand guarantees are independent undertakings-zavazek,prislib. So even if principal goesbankrupted it is binding .Demand guarantees are usually a small fraction of the total contract value. In5%-10%.

Usually used where the beneficiary has a great bargaining power, take it or leave it..2.Surety guarantee or conditional guaranteeThe obligation of guarantor is triggered by the actual default or contractual breach of the contract

of the principal. This is evidenced by court judgment or arbitrage. So the beneficiary has to prove it.In contrast to demand guarantees they are secondary because the guarantors obligations are

dependent on the principals actual default. Guarantor is only obliged to fulfill the principles obligations. Conditional guarantees eliminate the problem of unfair calls and are preferable from the

principals point of view. Usually higher coverage 30 -40% of total contract value. Moreover it is possible tocombine both guarantees together.

Export credit: Trade insuranceRisks exporter might wish to insure against:1. Exchange rate fluctuations2. Importer refuses to pay for whatever reason3. Insolvency of importer 4. Exporter fails to perform the contract 5. Force major 6. Political force major Two types of credit insurance:Public: Export/Import banks, EGAP etc.. working capital guarantees, export credit insurance.Publicly finance export insurance sometimes considered as indirect export subsidy that can

distort int. trade.Private: Credit insurance brokers, they advise exporters on how to choose from many insurance

services and policies.Credit insurance- covering exporter against non-payment.Comprehensive insurance-cover against currency, business, political risk

OWNERSHIP RESERVATION:Grants a seller a guarantee in property law to a right of claim for payment of the purchase price. For this,the parties must enter into a contract, without conditions, under the law of obligations and into aconditional contract under property law which prescribes transfer of ownership to the purchaser uponpayment of the purchase price in full. An expectant right is a possibility to acquire a particular right in thefuture (ownership) under definite circumstances. An expectant right grants a purchaser the right tobecome an owner automatically upon the fulfilment of certain conditions.


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Question 7Logistics in international trade, shipping operations, contractual arrangements in shipping

operations, forwarders contract, shipping contract, documents used in international transport of goods,specification of types of transport, rationalization of transporting systems, warehousing and checkingoperations, contractual arrangements, consignment stocks, contract on checking, checking companiesand importance of checking certificates

Interesting website:http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=107811252

6 Answer:International trade logistics is the art by which various activities pertaining to international trade are coordinated

simultaneously. It encompasses the science of controlling as well as managing the flux of energy,information and goods. International trade logistics also include the flow of resources like services andproducts from the point, where they are produced to the point where it is made available to theconsumers (the market place). The process of manufacturing and marketing is considered incompletewithout the support of logistics 1.

Another interpretation:International Trade Logistics provides an integrated transportation management and trade

compliance solution that enables organizations to make faster, smarter trade decisions by streamlining,accelerating, and integrating complex import and export processes. It ensures timely delivery of goodsand curtails customs delays at the border, reducing exposure to non-compliance fines, penalties, andseizures 2.

International trade logistics is broadly based on the following:

Consolidation of informationInventoryTransportationMaterial handling

Shipping OperationsShipping has multiple meanings. It can be a physical process of transporting goods and cargo, by

land, air, and sea. It also can describe the movement of objects by ship.Land or "ground" shipping can be by train or by truck. In air and sea shipments, ground

transportation is often still required to take the product from its origin to the airport or seaport and then toits destination. Ground transportation is typically more affordable than air shipments, but more expensivethan shipping by sea.

Shipment of freight by trucks, directly from the shipper to the destination, is known as a door todoor shipment. Vans and trucks make deliveries to sea ports and air ports where freight is moved in bulk.

Much shipping is done aboard actual ships. An individual nation's fleet and the people that crew itare referred to its merchant navy or merchant marine. Merchant shipping is essential to the worldeconomy, carrying 90% of international trade with 50,000 merchant ships worldwide. The term shipping inthis context originated from the shipping trade of wind power ships, and has come to refer to the deliveryof cargo and parcels of any size.

Terms of shipment Main article: IncotermsCommon trading terms used in shipping goods internationally include:

Freight on board, or free on board (FOB) the exporter delivers the goods at thespecified location (and on board the vessel). Costs paid by the exporter include load and lash, includingsecuring cargo not to move in the ships hold, protecting the cargo from contact with the double bottom toprevent slipping, and protection against damage from condensation. For example, "FOB Kunming Airport"means that the exporter delivers the goods to the airport, and pays for the cargo to be loaded andsecured on the plane. The exporter is bound to deliver the goods at his cost and expense. In this case,the freight and other expenses for outbound traffic is borne by the importer.

Cost and freight (C&F, CFR, CNF): Insurance is payable by the importer, and theexporter pays the ocean shipping/air freight costs to the specified location. For example, C&F Los

Angeles (the exporter pays the ocean shipping/air freight costs to Los Angeles). Many of the shippingcarriers (such as UPS, DHL, FEDEX) offer guarantees on their delivery times. These are known as GSR

1 http://finance.mapsofworld.com/trade/international-logistics.html2 http://www.infor.com/solutions/scm/transportation/intltradelogistics/
http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1078112526http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1078112526http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1078112526http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1078112526http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1078112526


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guarantees or "guaranteed service refunds"; if the parcels are not delivered on time, the customer isentitled to a refund.

Cost, insurance, and freight (CIF): Insurance and freight are all paid by the exporter tothe specified location. For example, at CIF Los Angeles, the exporter pays the ocean shipping/air freightcosts to Los Angeles including the insurance).

The term " best way " generally implies that the shipper will choose the carrier who offersthe lowest rate (to the shipper) for the shipment. In some cases, however, other factors, such as better insurance or faster transit time will cause the shipper to choose an option other than the lowest bidder.

Contractual arrangements in shipping operationsShip-owners contract to carry cargo for an agreed price per tone, while the charter market hires

out ships for a certain period. A charter is legally agreed upon in a charter-party in which the terms of thedeal are clearly set out.

Four types of contractual arrangements: Voyage charter , is the hiring of a vessel and crew for a voyage between a load port and

a discharge port. The charterer pays the vessel owner on a per-ton or lump-sum basis. The owner paysthe port costs (excluding stevedoring loading and unloading ships), fuel costs and crew costs.

Contract of affreightment, is the expression usually employed to describe the contractbetween a ship-owner and another person called the charterer, by which the ship-owner agrees to carrygoods of the charterer in his ship, or to give to the charterer the use of the whole or part of the cargo-carrying space of the ship for the carriage of his goods on a specified voyage or voyages or for aspecified time. The charterer on his part agrees to pay a specified price, called freight, for the carriage of the goods or the use of the ship.

Time charter , is the hiring of a vessel for a specific period of time; the owner stillmanages the vessel but the charterer selects the ports and directs the vessel where to go. The charterer pays for all fuel the vessel consumes, port charges, and a daily 'hire' to the owner of the vessel.

Bareboat charter, is an arrangement for the hiring of a vessel whereby no administrationor technical maintenance is included as part of the agreement. The charterer pays for all operatingexpenses, including fuel, crew, port expenses and hull insurance (marine insurance - covers the loss or damage of ships, cargo, terminals, and any transport or property by which cargo is transferred, acquired,or held between the points of origin and final destination).. Usually, the charter period (normally years)ends with the charterer obtaining title (ownership) in the hull. Effectively, the owners finance the purchaseof the vessel.

Forwarders contract International freight forwarders act as a middleman between the exporter-importer and the carrier.

Freight forwarders can work either on behalf of the shipper (exporter) or the consignee (importer). A frightforwarders business is to move freight as quickly as possible at prices lower than what their clients cangenerally receive on their own. Few exporters-importers ship enough volume to deal directly with an

international carrier such as steamship line or a commercial airline. Freight forwarders contract for spaceon these carriers by committing a certain level of business based on the total shipping volume of their customer base. By doing so, they can obtain lower rates than what average shipper can obtain on their own. Although freight forwarders make international trade viable for smaller and medium size company,even the largest of shippers use them. Having a presence at the port of entry and contracts at these portsof entry is critical when moving freight internationally.

Some international air freight forwarders are certified by International Air Transport Association(IATA). The air-freight industry is not regulated, and as such, air freight forwarders do not have to becertified. Air freight forwarders certified by IATA, however, are issued an IATA number. Many commercialairlines will ask for an IATA number before they will accept any freight from an air-freight forwarder.

From a shippers standpoint, freight forwarders act ass common carrier. A shipper must becareful to understand that international forwarders limit their liability.

Two organizations are involved in setting standards and practices in the freight forwarder

industry. The first one is International Federation of Freight Forwarders Association and the secondNational Custom Brokers and Freight Forwarders of America Association. Another interpretation 3: An international freight forward er is an agent for the exporter and can move cargo from dock -to-

door, providing several significant services such as: Advising on exporting costs including freight costs, port charges, consular fees, costs of

special documentation, insurance costs and freight handling fees;

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Preparing and filing required export documentation such as the bill of lading and routingappropriate documents to the seller, the buyer or a paying bank;

Advising on the most appropriate mode of cargo transport and making arrangements topack and load the cargo;

Reserving the necessary cargo space on a vessel, aircraft, train, or truck.Making arrangements with overseas customs brokers to ensure that the goods and

documents comply with customs regulations.Export freight forwarders are licensed by the International Air Transport Association (IATA) to

handle airfreight and the Federal Maritime Commission to handle ocean freight. Shipping contract

A legally binding agreement between two or more persons/organizations to carry out reciprocalobligations or value, such is shipment of goods with negotiation for freight, insurance etc.

Documents used in international transport of goodsEvery shipment must travel with some form of manifest. These are typically referred to as bill of

lading for ground and ocean shipments and air-way bill for air shipments. The bill of lading and air-way billserve as a contract between the shipper and the carrier. Most international shipments use both adomestic and an ocean (or airway) bill of lading. These documents are typically non negotiable, whichmean they do not convey title. As such, carrier can deliver the order without the consignee presenting anoriginal copy of bill of lading. An order bill of lading, however, is negotiable and is often used ininternational transportation. If the shipment includes an order bill of lading, then the consignee must paythe value of the invoice to receive the original bill of lading from the shipper. The carrier will not tender unless consignee can present original bill of lading to the carrier. Only then does title of the merchandisepass from seller to buyer. In essence, an order bill of lading is similar to a domestic cash-on-delivery(COD) shipment.

COMMON EXPORT DOCUMENTS4

Airway Bill Air freight shipments require Airway bills, which can never be made in negotiable form. Airway

bills are shipper-specific (i.e. USPS, Fed-Ex, UPS, DHL, etc).Bill of Lading

A contract between the owner of the goods and the carrier (as with domestic shipments). For vessels, there are two types: a straight bill of lading, which is non-negotiable, and a negotiable or shipper's order bill of lading. The latter can be bought, sold, or traded while the goods are in transit. Thecustomer usually needs an original as proof of ownership to take possession of the goods.

Commercial Invoice A bill for the goods from the seller to the buyer. These invoices are often used by governments to

determine the true value of goods when assessing customs duties. Governments that use the commercialinvoice to control imports will often specify its form, content, number of copies, language to be used, and

other characteristics. The commercial invoice contain following information:1. Country of origin for each item,2. Sellers name and address, 3. Buyers name and address, 4. Description of the items being shipped,5. Schedule B number (this number, which is referred to as a harmonized tariff schedule

number on imports, is a code used to determine the duty rate).Export Packing List Considerably more detailed and informative than a standard domestic packing list, it lists seller,

buyer, shipper, invoice number, date of shipment, mode of transport, carrier, and itemizes quantity,description, the type of package, such as a box, crate, drum, or carton, the quantity of packages, total netand gross weight (in kilograms), package marks, and dimensions, if appropriate. Both commercialstationers and freight forwarders carry packing list forms. A packing list may serve as conformingdocument. It is not a substitute for a commercial invoice.

Electronic Export Information Form (Shippers Export Declaration)The EEI is the most common of all export documents. Required for shipments above $2,500* and

for shipments of any value requiring an export license. SED has to be electronically filed via AES Direct(free service from Census and Customs) online system.

*Note: EEI is required for shipments to Puerto Rico, the U.S. Virgin Islands and the former Pacific Trust Territories even though they are not considered exports (unless each Schedule B item in theshipment is under $2,500).

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Shipments to Canada do not require an SED except in cases where an export license is required.(Shipments to third countries passing through Canada do need an SED.)

CERTIFICATES OF ORGINGeneric Certificate of Origin The Certificate of Origin (CO) is required by some countries for all or only certain products. In

many cases, a statement of origin printed on company letterhead will suffice. The exporter should verifywhether a CO is required with the buyer and/or an experienced shipper/freight forwarder or the TradeInformation center.

Note: Some countries (i.e. Middle East) require that certificate of origin be notarized, certified bylocal chamber of commerce and legalized by the commercial section of the consulate of thedestination country.

For textile products, an importing country may require a certificate of origin issued by themanufacturer. The number of required copies and language may vary from country to country.

Certificate of Origin for claiming benefits under Free Trade Agreements Special certificates may be required for countries with which the United States has free trade

agreements (FTAs). Some certificate of origin including those required by the North American Free Trade Agreement (NAFTA), and the FTAs with Israel and Jordan, are prepared by the exporter . Othersincluding those required by the FTAs with Australia, CAFTA countries, Chile and Morocco, are importers responsibility).

OTHER CERTIFICATES FOR SHIPMENTS OF SPECIFIC GOODSATA CARNET/Temporary shipment certificate

An ATA Carnet a. k. a. "Merchandise Passport" is a document that facilitates the temporaryimportation of products into foreign countries by eliminating tariffs and value-added taxes (VAT) or theposting of a security deposit normally required at the time of importation. Apply for an ATA Carnet.

Certificate of Analysis: A certificate of analysis is required for seeds, grain, health foods, dietarysupplements, fruits and vegetables, and pharmaceutical products. Certificate of Free Sale Certificate of free sale may be issued for biologics, food, drugs, medical devices and veterinary

medicine. More information is available from the Food and Drug Administration. Health authorities insome states as well as some trade associations also issue Certificates of Free Sale.

Dangerous Goods Certificate Exports submitted for handling by air carriers and air freight forwarders classified as dangerous

goods need to be accompanied by the Shippers Declaration for Dangerous Goods required by theInternational Air Transport Association (IATA). The exporter is responsible for accuracy of the form andensuring that requirements related to packaging, marking, and other required information by IATA havebeen met.

For shipment of dangerous goods it is critical to identify goods by proper name, comply withpackaging and labeling requirements (they vary depending upon type of product shipper and countryshipped to).

Specification of types of transport About half of the global trade takes place between locations of more than 3,000 km apart.

Because of the involved geographical scale, most international freight movements involve several modes,especially when origins and destinations are far apart. Transport chains must thus be established toservice these flows which reinforce the importance of intermodal transportation modes and terminals atstrategic locations. Among the numerous transport modes, two are specifically concerned withinternational trade:

Ports and maritime shipping . The importance of maritime transportation in global freighttrade in unmistakable, particularly in terms of tonnage as it handles about 90% of the global. Thus,globalization is the realm of maritime shipping, with containerized shipping at the forefront of the process.The global maritime transport system is composed of a series of major gateways granting access to major production and consumption regions. Between those gateways are major hubs acting as points of interconnection and transshipment between systems of maritime circulation.

Airports and air transport . Although in terms tonnage air transportation carries aninsignificant amount of freight (0.2% of total tonnage) compared with maritime transportation, itsimportance in terms of the total value is much more significant; about 15%. International air freight isabout 70 times more valuable than its maritime counterpart and about 30 times more valuable than freightcarried overland, which is linked with the types of goods it transports (e.g. electronics). The location of freight airports correspond to high technology manufacturing clusters as well as intermediary locationswhere freight planes are refueled and/or cargo is transshipped.


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Road and railway modes tend to occupy a more marginal portion of international transportationsince they are above all modes for national or regional transport services. Their importance is focused ontheir role in the "first and last miles of global distribution. Freight is mainly brought to port and airportterminals by trucking or rail. There are however notable exceptions in the role of overland transportationin international trade. A substantial share of the NAFTA trade between Canada, United States andMexico is supported by trucking, as well as large share of the Western European trade. In spite of this,these exchanges are at priori regional by definition, although intermodal transportation confers a morecomplex setting in the interpretation of these flows.

Rationalization of transporting systemsThe growth of the amount of freight being traded as well as a great variety of origins and

destinations promotes the importance of international transportation as a fundamental element supportingthe global economy. International transportation systems have been under increasing pressures tosupport additional demands in volume and distance carried. This could not have occurred withoutconsiderable technical improvements permitting to transport larger quantities of passengers and freight,and this more quickly and more efficiently. Few other technical improvements than containerization havecontributed to this environment of growing mobility of freight. Since containers and their intermodaltransport systems improve the efficiency of global distribution, a growing share of general cargo movingglobally is containerized. Consequently, transportation is often referred as an enabling factor that is notnecessarily the cause of international trade, but a mean over which globalization could not have occurredwithout. A common development problem is the inability of international transportation infrastructures tosupport flows, undermini