Unit 6 International Trade

1
Unit 6 International Trade

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

2
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

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Part I Basic Concepts

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

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• direct trade vs. indirect trade
• direct trade the producing country sells the
  goods directly to the consuming country. (transit
  country, transit trade, transit duty)
• 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)

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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.

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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.

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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

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Important terms

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

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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

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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.

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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.

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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.

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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

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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

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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.

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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.

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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

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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

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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

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Part II Practices of
international trade

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

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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.)

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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

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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.

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Incoterms 2000
Group E Departure EXW Ex Works
Group F Main carriage unpaid FCA Free Carrier
Group F Main carriage unpaid FAS Free Alongside Ship
Group F Main carriage unpaid FOB Free on Board
Group C Main carriage paid CFR Cost and Freight
Group C Main carriage paid CIF Cost, Insurance and Freight
Group C Main carriage paid CPT Carriage Paid to
Group C Main carriage paid CIP Carriage and Insurance Paid to
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Incoterms 2000
Group D Arrival DAF Delivered at Frontier
Group D Arrival DES Delivered EX Ship
Group D Arrival DEQ Delivered EX Quay
Group D Arrival DDU Delivered Duty Unpaid
Group D Arrival DDP Delivered Duty Paid
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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

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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.

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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.

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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 US18 per piece FOB Guangzhou

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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)

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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).

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• 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 US12.5 per carton CFR New York

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• 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.

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• 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.

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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.)

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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

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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.

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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

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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 ????

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Major modes of international transportation

• Rail transport
• Air transport
• Road transport
• Inland waterway transport
• Pipeline transport

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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

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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.

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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.

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Bill of Lading (B/L)

• straight B/L order B/L blank B/L
• In a straight B/L, the consignee is named
  specially, thus only the named consignee is
  entitled to take delivery of the cargo.
  (non-negotiable/non-transferable)
• In an order B/L, To order or To the order
  of is filled in the column of Consignee. It
  means the goods are consigned to the order of
  consignor or a named person. (negotiable/transfera
  ble 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.

45
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.
  

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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.

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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
  (non-negotiable)
• air waybill (non-negotiable)
• international combined rail waybill
  (non-negotiable)????????
• multimodal transport document (MTD) it may be or
  may not be negotiable in practice.

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Words

• consignment C/U
• consigned goods
• consignor ???
• shipper ???
• consignee ???
• carrier ???
• shipment C/U
• forwarder/forwarding agent/freight forwarder
  ?????(?)
• bearer ???
• freight to collect ????
• freight prepaid ????

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Cargo transportation insurance

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

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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.

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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.

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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.

53
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

54
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.

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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

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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 ???

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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)

58
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 ?????????)

59
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)

60
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.

61
Key words

• ICC Institute Cargo Clauses ?????????????
• the Lloyds
• ??
• insure sth. against (fire)
• cover/effect/purchase/take out/arrange
  insurance
• franchise
• lodge/make a claim

62
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

63
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

64
Endorse the back!
DRAFT
January 5
Sight 20 Pay to the order of
Dollars To
At
08
ABC Exporter
8,020.00
Eight Thousand Twenty Dollars and 00/100
Drawn under Documentary Credit No.
M0491110NS00616, of the Standard Chartered Bank,
Seoul, Korea, dated September 17, 2007
Standard Chartered Bank New York, NY
ABC Exporter
65
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.

66
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.

67
Settlement on commercial credit

• 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)

68
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
• D/P documents against payment
• D/A documents against acceptance

69
Settlement on commercial credit

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

70
?
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?
71
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.

72
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
73
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 ???

74
Parties to a L/C
PARTY
LETTER OF CREDIT TERM
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LETTER OF CREDIT
Uniform Customs and Practice for Documentary
Credits (2006 Revision), International
Chamber of Commerce, Publication No. 600
UCP600
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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

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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

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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)

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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

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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

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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

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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

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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.

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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.

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(No Transcript)
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Exercises

• pp.48-49
• Letters of credit