Unit 6 International Trade

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

Part I Basic Concepts

1. Definition

international trade: the exchange of goods

and services across national boundaries/borders.

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

Part I Basic Concepts

3. Classification

import vs. export (directions of the movement of commodity traded) tangible trade vs. intangible trade 1) tangible trade: the exchange of tangible goods (to carry out importing/exporting customs formalities) 2) intangible trade: the exchange of intangible goods, such as services and intellectual property rights

 direct trade vs. indirect trade 1) direct trade: the producing country sells the goods directly to the consuming country. (transit country, transit trade, transit duty) 2) indirect trade: the producing country sells the goods to a third country first and then the third country resells the goods to the consuming country. (middleman, entrepot trade)

4. Policies
Manchesterism (free trade policy)

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

4. Policies
Protectionism (protective trade policy)

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

Important terms
absolute advantage

comparative advantage
natural advantage

climate conditions, access to certain natural resources, or availability of an abundant labour force acquired advantage advantage in product or process technology factors of production/productive factors international division of labour

Important terms
labour-intensive

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

5. Trade barriers
Tariff barriers A tariff is a tax (duty) levied on a product when it crosses national boundaries. It is the most common type of trade control. Purposes: revenue tariff: to generate fiscal revenue protective tariff: to weaken the competitive power of the imported goods Types: import duty; export duty; transit duty

Tariff barriers
Methods of assessment:

specific tariff or duty : a fixed amount of duty per physical unit of the imported product, say $100 per imported auto ad valorem tariff or duty : a fixed percentage of the total value of the imported goods, e.g. 10%, 30% compound tariff or duty : a combination of the above two types of duties alternative tariff or duty : Both a specific duty and an ad valorem duty are prescribed for a product, with the requirement that the more onerous one shall apply.

Tariff barriers
Special duties:

countervailing duties (CVD): taxes assessed to counter the effects of subsidies provided by foreign governments to goods exported to the importing country. Subsidies cause the price of such merchandise to become artificially low, which may cause economic injury to manufacturers in the importing country.

Tariff barriers
Special duties:

anti-dumping duties (ADD): taxes assessed on imported goods that are sold in the importing country at a price less than normal value. Normal value is determined as the price the product is normally sold at in the domestic market of the exporting country or in a third country, or the constructed value ()which is based on the cost of production, selling, general and administrative expense, and the normal profits.

Words
duty

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

5. Trade barriers
Non-tariff barriers (NTBs) NTBs are restrictions to imports but not in the usual form of a tariff. Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. NTBs usually refer to government requirements for licenses, permits, or significant amounts of paperwork in order to allow imports into its country. gray area in international trade

Non-tariff barriers (NTBs)

Major forms:

import quota: a limit to the quantities or money values of a particular product that can be exported to the quota-enacting country. subsidy: a government payment to a domestic product or industry or a domestic exporting firm. (helping to compete against low-cost foreign imports and to gain export markets) import license: a document required and issued by some governments authorizing the importation of specified goods into their countries.

Non-tariff barriers (NTBs)

voluntary export restriction (VER): a quota imposed by the exporting country on its domestic firms exports to the importing country, typically at the request of the importing country. (the limitation on auto exports to USA enforced by Japan in 1981) customs valuation: import duties and other charges can be levied on the basis of a decreed value of goods that is valued by the customs. This practice is a means to avoid fraud in the declared import price. The customs of the importing country may raise the dutiable price of the imports arbitrarily in order to restrict the import.

Non-tariff barriers (NTBs)

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

6. Basic principles of WTO system

Non-discrimination: the MFN treatment and the

national treatment principle Free trade: lowering trade barriers Fair competition Special and differential treatment to developing countries: to provide developing countries special rights and exemptions from certain obligations Transparency

Important terms
balance of trade: the total of a countrys exports minus

its imports favourable balance of trade (trade surplus) unfavourable balance of trade (trade deficit) barter trade: the direct exchange of goods for goods embargo: a prohibition upon exports or imports, either with respect to specific products or countries export processing zone bonded warehouse/area p.47 Vocabulary

Part II Practices of international trade

1. 2.

3.
4.

Trade terms the language of foreign trade International transportation & insurance International payments & settlements International trade contracts

1. Trade terms price terms/delivery terms

Standardized terms used in international trade contracts which define the trade contract responsibilities and liabilities between the buyer and the seller. Key elements of international trade contracts, since they tell the parties what to do with respect to: delivery terms (carriages of the goods from the seller to the buyer and division of costs and risks between the parties) price terms (stipulating what are included in the price the buyer paid to the seller, e.g. cost, freight, insurance, export and import clearance fees, etc.) delivery obligation (what documents should the seller provide, e.g. B/L, insurance policy, etc.)

Role of trade terms

To simplify the process of negotiation To simplify the paper-work of preparation for the contract To save time and cost of the transaction

Incoterms

Incoterms (International Commercial Terms) is a set of uniform rules published by ICC for the interpretation of trade terms most commonly used in international trade. Incoterms was published in 1936 (Incoterms 1936). Amendments and additions were later made in 1953, 1967, 1976, 1980, 1990 and presently 2000 in order to bring the rules in line with current international trade practices.

Incoterms 2000
Group E Departure Group F Main carriage unpaid Group C Main carriage paid EXW FCA FAS FOB CFR CIF Ex Works Free Carrier Free Alongside Ship Free on Board Cost and Freight Cost, Insurance and Freight

CPT CIP

Carriage Paid to Carriage and Insurance Paid to

Incoterms 2000
Group D Arrival DAF DES DEQ DDU Delivered at Frontier Delivered EX Ship Delivered EX Quay Delivered Duty Unpaid

DDP

Delivered Duty Paid

Incoterms 2000

Group E EXW

The seller fulfills his obligation to deliver when he has made the goods available to the buyer at his premises or another named place (i.e., works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle. The buyer bears all costs and risks involved in taking the goods from the sellers premises to the desired destination. It represents the minimum obligation for the seller. It can be used for any mode of transportation. Case: USD10 per set EX Works Dongguan

Incoterms 2000
Group F FCA, FAS, FOB The seller has the duty to deliver the goods to the carriers place and the freight from the place of delivering goods to the port or place of destination is paid by the buyer. Critical points coincide: the point for division of costs is the same as the point for division of risk.

Incoterms 2000
Group F FCA, FAS, FOB FCA The seller delivers the goods cleared for export to the carrier (or the person) nominated by the buyer at the named place. If delivery occurs at the sellers premises, the seller is responsible for loading; if delivery occurs at any other place, the seller is not responsible for unloading. It can be used for any mode of transportation including multimodal transport.

Incoterms 2000
FOB The seller has the duty to deliver the goods across the ships rail at the named port of shipment. The seller clears the goods for export. The buyer has to bear all costs and risks of loss of or damage to the goods from the point when the goods have passed the rail of the ship. It can be used only for sea or inland waterway transport. Case: US$18 per piece FOB Guangzhou

Incoterms 2000
FOB: practices When the ships rail serves no practical purpose, such as in the case of roll-on/roll-off or container transport, the FCA term is more appropriate. The buyer arranges the ship for the shipment of the goods. The seller sometimes also make the contract with the carrier at the buyers risk and expense on the buyers behalf. loading charges (trimming, stowing): liner (including); charter party (excluding, clarifying in the contract)

Incoterms 2000
Group C CFR, CIF, CPT, CIP The seller has the duty not only to deliver the goods to a place or point in his country but also to be responsible for arranging the carriage of the goods from the place of delivery to the place or point of destination at his own expense. Critical points: the point for division of costs (i.e. place of destination) is different from the point for division of risk (i.e. place of shipment).

CFR
The seller delivers when the goods pass the ships rail in the port of shipment. The seller pays the costs and freight necessary to bring the goods to the named port of destination, but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. The seller clears the goods for export. The seller arranges the charter party or rent the shipping space. It can be used only for sea or inland waterway transport. discharge/unloading charges: liner (including); charter party (excluding, negotiating) The buyer effects the insurance (the seller gives timely notice) Case: US$12.5 per carton CFR New York

CIF
The seller delivers when the goods pass the ships rail in the port of shipment. The seller pays the costs and freight necessary to bring the goods to the named port of destination, but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. The seller clears the goods for export. The seller has to procure marine insurance against the buyers risk of loss of or damage to the goods during the carriage. (The seller contracts for insurance on minimum cover and pays the insurance premium.) It can be used only for sea or inland waterway transport.

CPT & CIP CFR: When the ships rail serves no practical purpose, such as in the case of roll-on/roll-off or container transport, the CPT term is more appropriate. CIF: When the ships rail serves no practical purpose, such as in the case of roll-on/roll-off or container transport, the CIP term is more appropriate. The risks transfer to the buyer from the seller when the goods are delivered to the international carrier. Used for many mode of transportation.

Incoterms 2000
Group D DAF, DES, DEQ, DDU, DDP The seller has the responsibility for the arrival of the goods at the agreed place or point of destination at the border or within the importers country. The seller bears all risks and costs in transporting the goods. Contracts under D terms mean arrival contracts. (Contracts under F & C terms are shipment contracts.)

How to select a trade term

the mode of transportation: sea and inland waterway transport only: FAS, FOB, CFR, CIF, DES, DEQ the mode of payment other factors: the time of delivery, the customs formalities, the possible risks of loss of or damage to the goods during the transportation

Variations of Incoterms

In practice, the parties often add words to an Incoterm to seek further precision than the term could offer, e.g. FOB Liner terms, FOB Under Tackle, FOB Stowed, FOB Trimmed Since Incoterms 2000 gives no guidance whatsoever of such additions, the parties are strongly advised to clarify the exact meanings of those added terms otherwise serious problems might arise.

2. International transportation & Insurance

Major modes of international transportation Ocean transportation: convenient; low freight charges 1. Liner transport (suitable for general cargo of small
quantity) the four fixed: fixed sailing date, fixed route, fixed ports to call at, and fixed freight rates different standards for calculating freight: W: calculated per metric ton on weight (weight ton) M: calculated per cubic meter on measurement of the cargo (measurement ton ) W/M: weight or measurement ton, subject to the higher one Ad Val.: based on the price or value of the cargo

Major modes of international transportation

Ocean transportation 2. Charter transport charter party between the charterer and the ship owner suitable for bulk cargo of large quantity, such as grain, coals, crude oil and raw timber time charter voyage charter

Major modes of international transportation

Rail transport Air transport Road transport Inland waterway transport Pipeline transport

Major modes of international transportation

Container transport & International multimodal transport

carrying goods in containers suitable for ocean, rail, air and multimodal transport FCL: Full Container Load The goods carried in a container is owned by the same consignor. Container yard (CY) LCL: Less than Container Load CFS: Container Freight Station door to door service

Major transport documents

Bill of Lading (B/L)

receipt for the goods evidence of the contract for carriage (between the shipper and the carrier) document of title to the goods Types: on board (shipped) B/L & received for shipment B/L The first is issued after the goods have been loaded on board the designated vessel. The second is issued before the goods are loaded on board and does not indicate the name of vessel and On Board.

Bill of Lading (B/L)

clean B/L & unclean B/L The first is issued for goods which appear to be in good condition, carrying no unfavorable remarks by the carrier. When the goods are received in apparent damaged condition by the carrier for shipment, he will note the damage on the B/L, such as packages in damaged condition, iron strap loose or missing, etc.

Bill of Lading (B/L)

straight B/L & order B/L & blank B/L In a straight B/L, the consignee is named specially, thus only the named consignee is entitled to take delivery of the cargo. (nonnegotiable/non-transferable) In an order B/L, To order or To the order of is filled in the column of Consignee. It means the goods are consigned to the order of consignor or a named person. (negotiable/transferable with endorsement) In a blank B/L, there is blank or the words To bearer filled in the column of Consignee. It could be transferable without endorsement.

Bill of Lading (B/L)

direct B/L & transshipment B/L & through B/L The first means the goods are shipped from the shipment port directly to the destination port. The second means the goods have to be transshipped at an international port as there is no direct service between the port of shipment and the port of destination. The third is issued by the first carrier covering the whole carriage of the goods from the port of shipment to the final destination when two or more modes of transportation are involved.

Bill of Lading (B/L)

liner B/L & charter party B/L

The first is issued by a liner company when the liner transport is used. The second is issued when the charter transport is used, and is often used together with the charter party or a copy of it.

long form B/L & short form B/L

The first is more detailed with shipping contract clauses on the back of the page. The second only has the major contents on the face.

Other documents
sea/ocean waybill receipt for the goods evidence of the contract for carriage (between the shipper and the carrier) not a document of title to the goods (nonnegotiable) air waybill (non-negotiable) international combined rail waybill (nonnegotiable) multimodal transport document (MTD): it may be or may not be negotiable in practice.

Words

consignment [C/U] consigned goods consignor shipper consignee carrier shipment [C/U] forwarder/forwarding agent/freight forwarder bearer freight to collect freight prepaid

Cargo transportation insurance

Key words insurer underwriter insurance broker (the) insured claimant insurance amount insurance coverage/cover insurance premium

Losses (Averages)
total loss Actual total loss means the whole lot of the consignment has been lost or damaged or found valueless upon the arrival at the port of destination. Constructive total loss might occur if the cargo is not actually lost, but is so seriously damaged as to make the goods no longer any use for the purpose for which they were originally intended.

Averages: partial loss

particular average A particular consignment is partially damaged; it is a partial loss which is suffered by the one whose goods are partly lost or damaged. Other interests in the voyage do not contribute to the partial recovery of the one suffering the loss.

Averages: partial loss

general average a loss that affects all cargo interests on the ship and the ship itself. It is in use when both the ship and the consignments on board are endangered and the captain, for the safety of the ship and the consignment on board, intentionally and reasonably does some sacrifices or makes some expenses.

Ocean marine insurance under CIC (China Insurance Clause)

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

goods factors transport factors cost factors

Ocean marine insurance under CIC (China Insurance Clause)

Basic marine insurance coverage FPA (Free From Particular Average) It covers mainly total loss and general average. WA (WPA) (With Average/With Particular Average) Aside from the risks covered under FPA conditions, the insurance of WA also covers partial losses of the insured goods caused by heavy weather, lightning, tsunami, earthquake and/or flood.

Basic marine insurance coverage

All Risks Aside from the risks covered under the FPA and WA conditions, the insurance of All Risks also covers the loss of or damage to the insured goods whether partial or total, arising from extraneous risks during transit. All Risks cover FPA + WA + General Additional Risks

Additional risks coverage

General additional risks theft, pilferage, and non-delivery (T.P.N.D.) fresh water and/or rain damage shortage intermixture and contamination leakage clash and breakage taint of odour sweat and heating hook damage breakage of packing rust

Additional risks coverage

special additional risks war risks strike risks failure to delivery rejection on deck import duty aflatoxin fire risk extension clause for shortage of cargo at destination in Hong Kong, including Kowloon or Macao (FREC)

Case study
Suppose that you are selling glassware to Britain on the basis of CIF, you have the following alternatives: FPA plus Breakage Risk WA plus Breakage Risk All Risks plus SRCC (strike, riot, civil commotion )

Kinds of insurance policies

insurance policy containing all the details concerning the goods, coverage, premium and the insured value insurance certificate simplified version open policy providing all the goods shipped by the insured while the policy is in effect. (duration)

Insurance clause in the sales contract

Under CIF & CIP terms: Insurance: To be covered by the seller for 110% of total invoice value against All Risks and War Risk, as per and subject to the relevant ocean marine cargo clauses of PICC dated 1/1/1981. Under FOB ... Insurance: To be covered by the buyer.

Key words

ICC: Institute Cargo Clauses

the Lloyds insure sth. against (fire) cover/effect/purchase/take out/arrange insurance franchise lodge/make a claim

3. International payments
Key factors determining the payment method the business relationship between the seller and the buyer the nature of the goods industry norms the distance between the seller and the buyer the potential for currency fluctuation political and economic stability in both the exporting and the importing countries

Instruments of payment
Bill of Exchange (Draft) a bill (order) signed by the drawer, requiring the entrusted payer (drawee) to make unconditional payment in a fixed amount at the sight of the bill or on a fixed date to the payee or the holder. transferable with endorsement issue/draw a draft honour/dishonour a draft presentation acceptance sight draft/demand draft & time draft/usance draft bankers draft & commercial draft

DRAFT
At

Sight
ABC Exporter

January 5

20 08

Pay to the order of

8,020.00

Eight Thousand Twenty Dollars and 00/100

Dollars

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

To Standard Chartered Bank

New York, NY

ABC Exporter

Endorse the back!

Instruments of payment
Promissory note an instrument written and issued by a drawer, promising to pay unconditionally a fixed amount of money to a payee or bearer at the sight of the instrument. Check an instrument issued by a drawer, at the sight of which the check deposit bank or other financial institutions unconditionally pay the fixed amount to the payee or bearer.

Settlement on commercial credit

payment in advance/advance payment greatest security for the seller and greatest risk for the buyer open account an agreement between the buyer and the seller whereby the goods are manufactured and delivered before payment is required. remittance a bank (the remitting bank), at the request of its customer (the remitter), transfers a certain sum of money to its oversea branch or correspondent bank (the paying bank) instructing them to pay to a named person or corporation (the payee or beneficiary) domiciled in the country.

Settlement on commercial credit

1.

2.

3.

remittance M/T: mail transfer means the remittance by airmail. T/T: telegraphic transfer refers to the remittance by cable, telex, or SWIFT (Society for Worldwide Interbank Financial Telecommunication ) D/D: remittance by bankers demand draft (the
remitting bank draws a demand draft on the paying bank at the request of remitter, and the remitter himself sends the draft to the payee and the payee then presents this draft to the paying bank for payment)

Settlement on commercial credit

collection the seller entrusts a bank to collect payment from the buyer through the banks branch or correspondent bank in the buyers country. clean collection: without accompanied by commercial documents, such as invoice, B/L, insurance policy documentary collection 1. D/P: documents against payment 2. D/A: documents against acceptance

Settlement on commercial credit

collection parties related to a collection principal: creditor (the seller) drawee: payer (debtor) remitting bank collecting bank presenting bank

Buyer Takes All the Risk

?? ?

Seller Takes All the Risk

Pre-Pay

Letter of Credit

Documents Against Payment

Documents Against Acceptance

Open Account

Who Should Take the Risk?

Settlement on bank credit

Letter of Credit (L/C)

a written undertaking issued by a bank (the issuing bank) to the seller (the beneficiary) at the request and in accordance with the instruction of the buyer (the applicant) to effect payment (i.e. by making a payment, or by accepting or negotiating bills of exchange) up to a stated sum of money, within a prescribed time limit and against stipulated documents. Guaranteed by the issuing banks creditworthiness (the issuing bank undertakes to effect payment) Self-sufficient instrument: the L/C is issued on the basis of the sales contract but independent of it. Dealing with documents: under a L/C, banks deal with documents other than goods.

WHY HAVE A LETTER OF CREDIT?

IF I SHIP GOODS, WILL YOU PAY? IF I PAY, WILL YOU SHIP THE GOODS?

SOLVES ISSUES OF MUTUAL MISTRUST BY USING BANKS AS ARBITERS

NEGOTIATE L/C TERMS BEFORE ENTERING A CONTRACT

Parties to a L/C

applicant or opener: importer or buyer (margin) beneficiary: exporter or seller issuing bank or opening bank: advising bank confirming bank negotiating bank paying bank accepting bank reimbursing bank

Parties to a L/C
PARTY
BUYERS BANK

LETTER OF CREDIT TERM

ISSUER ISSUING BANK OPENING BANK PAYING BANK ACCEPTING BANK DRAWEE ADVISING BANK CONFIRMING BANK TRANSFERRING BANK NEGOTIATING BANK ACCEPTING BANK PAYING BANK

ISSUING BANK CORRESPONDENT

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

Contents of a L/C

Statements about the credit: the name and

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

Requirements on the documents:

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

Contents of a L/C

Descriptions about the goods transacted: name,

quantity, quality, unit price, packing, shipping marks, etc.

Details of the transportation of the goods: the

shipment port/place, the destination port/place, time of shipment, transshipment allowed/not allowed, partial shipment permitted/not permitted.

Other items: instructions to the advising bank or

negotiating bank or paying bank, the undertaking clauses of the issuing bank

General procedure

1. Applying for issuing a L/C in favour of the seller (the beneficiary) by the applicant (the buyer) the application form 2. Issuing and advising the L/C: the issuing bank issues the L/C and transmit it to another bank through which the L/C will be advised to the beneficiary (so that the beneficiary may make necessary preparation for shipping the goods and drafting the documents stipulated in the credit)

General procedure
3. Examining the L/C and presenting the documents by the beneficiary the terms and conditions of the L/C are in accordance with those in the sales contract to contact the applicant and request an amendment of the L/C to present the documents to the negotiating bank for negotiation 4. Examining and negotiating the documents by the negotiating bank

General procedure
5. Examining the documents and making the payment by the issuing bank After negotiation, the negotiating bank presents the documents to the issuing bank for payment. The issuing bank examines the documents and make the payment. the right to recourse the beneficiary 6. Examining the documents and paying to the issuing bank by the applicant

Some common pitfalls

Things that stop payment under the L/C: discrepancies

L/C expired L/C overdrawn tenor incorrect draft not endorsed goods description not as per L/C late shipment B/L not on board B/L not endorsed insurance coverage not sufficient

ports incorrect freight payment not as per L/C B/L notify party incorrect insurance policy not negotiable signatures not present certifications absent descriptions not consistent

Major types of credit

clean credit

payment is made only against a draft without any shipping documents

documentary credit
payment is made against documents representing title to the goods and thus making the transfer o title possible

revocable L/C

can be amended or cancelled at any moment by the issuing bank without previous notice

irrevocable L/C
constitutes a definite undertaking of the issuing bank and
can be amended or cancelled by the issuing bank only on condition that all parties concerned

Major types of credit

sight L/C

calling for payment on the presentation of the documents either with or without a sight draft

usance/time L/C
a time draft is to be drawn at any length of time (30 days, 60 days)

confirmed L/C

advised to the beneficiary with another banks confirmation added.

unconfirmed L/C
advised to the beneficiary without adding any other banks
confirmation.

Major types of credit

transferable L/C

the beneficiary is allowed to transfer all or part of the proceeds/amount of the L/C to a second beneficiary. (be noted transferable and be transferred only once)

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

Exercises

pp.48-49 Letters of credit