International Trade Instruments: DR (Prof) Sandeep Parmar
International Trade Instruments: DR (Prof) Sandeep Parmar
Instruments
by
Dr (Prof) Sandeep Parmar
Foreign trade transacti on
W e understand “Trade” as something wherein
goods are sold in return of some goods or money.
I n international trade, there is always dilemma
ot importer and exporter who would like to do
business with one another.
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Payment method for international
trade
Prepayment
L e t t e r of credit
D r a f t (sight/time)
Consignment
O p e n account
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Prepayment
I t is also known as advance payment.
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Draft
A draft is the instrument normally used in
international commerce to effect payment.
D r a f t can be:
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Consignment
U n d e r a consignment arrangement, the exporter
ships the goods to the importer while still retaining
actual title itself (exporter).
company.
Open Account
i f there is good relationship between importer
and exporter, they may choose open account
for transaction.
I n open account, importer open account in
exporter firm. The value of goods shipped is
added to this account.
A n exporter send invoice at the end of each
month or after each transaction. This method
save collection fees as well as cost of letter of
credit.
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The Financing of International
Trade
Short term financing
Account receivable
financing
Factoring
Letter of credit
Banker’s acceptance
Long term
financing
Forfaitin
g
Buyer credit
Government Financing
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Account receivable
financing
Exporter can easily provide credit to the importer if
there is good relationship between importer and
exporter.
Issuing bank
Advising bank
Beneficiary
Confirming bank
Negotiating bank
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S tep - b y - step p ro c ess:
B u y e r and seller agree to conduct business. The
seller wants a letter of credit to guarantee
payment.
(beneficiary).
Step in Import letter of credit
SELLER BUYER
1. Sales Contract
ADVISING/ ISSUING
CONFIRMING
BANK BANK
3. Request to advice and, if
applicable, confirm letter of
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credit
Cont…
S e l l e r (beneficiary) ships the goods, then
verifies and develops the documentary
requirements to support the letter of credit.
Documentary requirements may vary greatly
depending on the perceived risk involved in
dealing with a particular company.
10.
Reimbursement
ADVISING/CONFIRMIN ISSUING
G BANK
BANK
8. Send documents
and Debit Issuing bank
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Type of L/C
• Revocable L/C : It may be amended or
cancelled by the opening bank at any moment
and without prior notice to the seller
• Irrevocable L/C : In this case it is not possible
to revoked or amended a credit without the
agreement of the issuing bank, the confirming
bank, and the beneficiary.
• Confirmed L/C : It is a special type of L/c
in which another bank apart from the
issuing bank has added its guarantee
• The cost of confirming by two banks makes it20
costlier.
Cont…
S i g h t or Term(Usane): Letters of credit can permit the
beneficiary to be paid immediately upon presentation of
specified documents (sight letter of credit), or at a
future date as established in the sales contract
(term/usance letter of credit).
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Cont…..
Financing opportunities, such as pre-shipment
finance secured by a letter of credit and/or
discounting of accepted drafts drawn under letters
of credit, are available in many countries.
B a n k expertise is made available to help complete
trade transactions successfully.
Payment for the goods shipped can be remitted ot
your own bank or a bank of your choice.
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Cont…
T o the importer:
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Risk in
L/c
F r a u d Risks: The payment will be obtained for
nonexistent or worthless merchandise against presentation
by the beneficiary of forged or falsified documents.
Sometime Credit itself may be forged.
Sovereign and Regulatory Risks: Performance of the
Documentary Credit may be prevented by government
action outside the control of the parties.
L e g a l Risks: Possibility that performance of a
Documentary Credit may be disturbed by legal action
relating directly to the parties and their rights and
obligations under the Documentary Credit
F o r c e Majeure and Frustration of Contract:
Performance of a contract including an obligation under a
Documentary Credit relationship is prevented by externa l
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Cont…
R i s k s to the Applicant:
Non-delivery of Goods
Short Shipment
Inferior Quality
Early /Late Shipment
Damaged in transit
Foreign exchange
Failure of Bank viz Issuing bank / Collecting
Bank
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Trust Received loan
Tr u s t Receipt (TR) is a type of short-term import loan to
provide the buyer with financing to settle goods imported
under Letter of Credit where title of goods is held by the
bank.
U n d e r a TR arrangement, the Bank retains title to the goods
but allows the buyer to take possession of the goods on trust
for resale before paying the Bank on TR due date
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Medium and long term
financing
B u y e r credit
Government Financing
Forfaiting
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Buyer Credit
W h e n expensive capital equipment is being
purchased an exporter sometime arranges for a
financial institutions to grant credit to the importer,
known as buyer credit.
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Step involved in
forfeiting
6 Cash payment
7 Ship the
4 . Deliver Guarantee Notes 8 Notes 10
goods Payment
1. Sales Present made
ract
cont
2. Notes send for
guarantee
Importer Importer bank
3 Guaranteed notes
return
9 Payment made
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Countertrade
T h e term countertrade denotes all type of
foreign transaction in which sales of goods to
the country is linked to the purchase or
exchange of goods from the same country.
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Switchin
g
Switching trading involves a third party, a switch
trader, who facilitates the eventual clean of an
imbalance of trade, between two parties to a
bilateral clearing agreement.
F o r example, Nepal and China might agree to
exchange Nepalese tea for Chinese garment during
the coming year; at the time of delivery value of
Nepalese tea exceeds the value of Chinese
garments.
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N o w this
settle Nepalese exporter has two alternatives to
balancing
Switchin
g
F i r s t , Nepalese exporter can used this balancing
value to purchase other goods from china or from
other third country say India with the help of
switch trader or
Second, it can directly sells this credit to
switch trade in cash. Later on switch trader used
this balancing value to purchase goods from
china.
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Counterpurchased
Barter require a double action of wants in that two
parties in the transaction must each want what the
other party has to provide, and want it at the same
time and in the same amount.
Because of these difficulties, there is another form
of countertrade, called counterpurchase. Counter
purchased is agreement between seller and buyer
either to:
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Counterpurchase
M a k e purchase from a company nominated by the
buyer, later buyer settle up the company it has
nominated.
Ta k e product from the buyer in future, that is the
seller accept credit in term of product.
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Offset
A n Offset is a requirement of an importing
country that the price of its import be offset in
some way by the exporter.
I n offset, there might be contract between
importer and exporter, where exporter,
purchase raw material from Importer Company
or country, in return exporter may supply
finished goods.
I n other case exporter agree to purchase goods in
the importers country, to increase its imports
from that country, to transfer
y to the country or to conduct additional direct foreign 44
Buybac
In
k
this agreement, the seller of the capital
equipment agrees to buy the product made
with the equipment it supplies.
T h i s form of countertrade is common with
capital equipment used in mining and
manufacturing.