Sei sulla pagina 1di 18


Benefits of international trade

1. Increase in employment
More employment could be generated as the market for the countries’ goods
widens through trade. International trade helps generate more employment
through the establishment of newer industries to eater to the demands of
various countries. This will help countries to bring down their unemployment
2. Encourage the use of new technology
New technology promotes competitiveness and profitability. If a business
could create a machine that works better, faster or cheaper then the business
will have produced a more competitive product for national and international
3. Encourage investment
Investment follows trade. Many foreign companies will invest in an office,
factory or distribution warehouse to simplify their trade and reduce cost. This
investment also creates more jobs. It also attract international investors.

Disadvantages of international trade

1. Import of harmful goods
Foreign trade may lead to import of harmful goods like cigarettes, drugs etc
which may run the health of the residents of the country e.g the people of
china suffered greatly through opium imports.
2. Dumping problem
With a view to capturing foreign markets, developed countries sell their goods
in the poor countries at less than cost price. This process is called dumping. It
results in keeping the underdeveloped countries economically backward.

What are the Similarities of Domestic Trade and International Trade?

• Profit (same)
• Meet the needs and wants of consumers (not limited to domestic goods)
• The need for support services of the same (banking, insurance, transport,
storage, communication & promotion system)
• Use of documents (invoices, credit notes, debit notes & statements)
• Improve the living standards of the people (wider range of goods)
• Practice of specialization (Kedah-Penang, Malaysia-Iraq)


• Tariffs i.e. taxes on imported goods
taxes collect by the government on imports of a particular good are known as
TARIFFS or import duties. A tariff may be either ‘specific’ i.e so much money
per unit of the good importer or it may be calculated as a percentage of the
price of the product. Tariffs being revenue to the government, but our present
concern is with the protection they give to domestic procedures when they
raise the prices of imported goods relative to the prices of competing domestic
• Import Quotas i.e. restrictions on quantity of imported goods
Limiting the quantity of a good that is allowed into the country over a period
of time is done through IMPORT QUOTAS, which provide an upper limit to
permitted imports over the given period.
• Non-tariff barriers i.e. rigorous safety requirement
The term usually employed for protective measures other than tariffs and
quotas is non-tariff barriers. Non-tariff barriers have provided the most
important means of restricting imports since the early 1970’s. there is a wide
variety of devices that are employed, including the imposition by governments
of quality restrictions of imports

Dumping is usually interpreted as selling goods overseas below the home price of
identical goods after allowing for transport and other additional costs, which
means, when importer brings goods to other countries, they import with lower
price. For example,

A local producer sells daily necessities at the price of 10~20, the cost of
production is 10 to 15, so he generates a profit of 5~10 on each head month.
However, a foreign producer came to the market and open RM2 shop here as
they bought in large amount of items so they get cheaper price as well as started
to sell cheaper, as a result she will lose all her customer to the foreign producer
and eventually she goes broke and close her business.

The advantages of Dumping

Consumers of the products being dumped in the importing country benefit from
lower prices, this will save them money. Furthermore, dumping can force
industries or companies in the importing markets to become more competitive
and innovative if they believe that dumping make it too new for the long term,
they have no choice but to look for ways to reduce costs or improve quality to
differentiate their products, it also allows the exporting countries and companies
to sell backlogs of inventory and products that might otherwise go to waste.

The disadvantages of Dumping

Dumping can push producers at manufacturers in the importing countries
out of business which can result in loss of jobs and higher unemployment rates,
dumping can lead to company forming a monopoly

Trade Embargo
Trade Embargo is government actions that terminate the free flow of trade and
goods services or ideas imposed for adversarial and political purposes. You
cannot simply import items unless you have the license. For example, you cannot
open Macdonald, if you don’t have the license to open Mac Donald in Malaysia or
when we go airline, the food need to be treat by a special process which need to go
through food safety, inspection services and so on, so only 2 or 3 specialized
companies will be given licenses to bring the food. Other than that if
Macdonald is restricted in certain areas, you will get caught if you open
Macdonald secretly in that areas.

Protectionism – disadvantages
1) Prevents countries enjoying the benefits from abroad
2) Might invites harming from foreign governments
3) Protects inefficient local industries

Disadvantages of Protectionism
When countries open their borders to allow imports freely and without restrictions
this may lead to excessive purchase of imports over domestics productions money
spent on imports equates to spending that leaks out of the domestic economy
preventing further growth of the country.
Furthermore, domestic firms seeing loss of business will be forced to lay off workers
adding to unemployment in the country the damage of excessive imports to an
economy is especially harmful when unemployment that results in major part of
economy causing massive unemployment to occur and worsening poverty excessive
imports also cause domestic market to become dominated by foreign firms and in
the long run locals are forced to pay higher prices with lesser choice.
For example, when countries do not enact Protectionism, customers
will more likely to purchase foreign products over domestics’
products since there are no restrictions and domestic firm will need
to terminate their workers to maintain their business as they don’t
have much income to pay the salary of workers.
Furthermore, it will be tougher for domestic firms to survive as they
will need to compete with a lot of foreign firms.

Benefits of Protectionisms:
1. Protecting domestic manufacturing from foreign competition.
Country to protect their domestic industries and protect their own labor employment,
levy customs duties on imported goods or the permits, make imports less competitive,
domestic similar products relative competitiveness, ensure that part of the domestic
market, and protect their own industry and related industries

2. Promote the development of domestic productive forces.

The aim is to increase the productivity of wealth creation. The main manifestations
are: export subsidies, import duties and import quotas. The state has made extensive
use of various restrictive measures to protect its market from foreign competition and
to give preferential treatment and subsidies to its goods to encourage exports.

3. Protectionism makes domestic firms less competitive in the export market.

As import barriers raise domestic prices through higher costs for mediocre inputs this
means that export products also become more expensive and decrease in market share
against the international competition.

4. Protectionism can cause a retaliation reaction from other nations, ruining vital
relationships between nations.
A clear example of this would be the relationship between USA and China, when the
US put boundaries on the Chinese tires , China retaliated by putting up barriers
against different U.S. goods such as their chicken. This kind of hostility between
nations decreases the specialization between two nations, eventually damaging the

Types of Risks

• Credit risk
Risks are inherent in credit transactions; more so in international business.
International business is invariably riskier than the domestic trade. Credit risk.
is not the same whether one sells the goods in domestic market or in foreign
market. Success, in international business depends, largely, on the ability of
the exporters to give credit to importers on tree competitive and favorable
• Export business has become highly risky as selling on credit has become very
common. Importers are sought after so it is but natural they dictate terms as
there are many exporters competing for the cake of international trade.
Insolvency rate is on the increase. Balance of payment difficulties has severely
affected the capacity of many countries to pay the import price. However,
offering credit has become unavoidable to the exporters to face competition.
Two issues stand before the exporters:
• (i) The exporter must have sufficient funds to offer credit to the buyers
abroad and
• (ii) The exporter should be prepared to take credit risks.

• Sovereign risk
Political/sovereign risk refers to the complications that buyer or seller may
expose due to unfavourable political decisions or political changes that may
vary the expected outcome of an outstanding contract. Examples of
political/sovereign risk are changes in fiscal/monetary policy, war, riots,
terrorism, trade embargoes, etc.

• Transit risk
Transit risk is the risk of goods being damaged during shipment from the
place of origin to the place of destination. Failure in addressing transit risk
may result in heavy replacement cost or performance risk.

• Documentary risk
• Documentation risk is the risk of non-conformance to specific documentation
requirements under a sales contract or documentary credit. Failure in fulfillin
g documentation requirements may result in seller’s inability or delay in obtai
ning payment for goods delivered or service rendered.

• Trade performance risk

A seller may fail to carry out his obligations in a sales contract due to one or m
ore reasons, and such non-performance by the seller may have adverse conse
quential impacts on the buyer’s business. It could be expensive for the buyer t
o take legal actions against the seller in his country.

• Foreign exchange risk

A buyer or seller may deal with foreign currencies in their daily course of
business. This implies that they are exposed to fluctuations in foreign
exchange market which may result in paying more (by the buyer) or receiving
less (from the buyer) in terms of the local currency.

Methods to Mitigate Risks (importer)

 Requesting for performance guarantee to avoid non-performance risk
 Agreeing on more secure means of payment, like documentary credit or
open account
 Respecting and acknowledging cultural differences with the seller
 Buying and selling in same currency to minimize foreign exchange risk
 Incoming into a fixed interest rate credit or interest rate swap agreement to
moderate against interest rate risk, in case of financing requirement
 Ensuring adequate insurance exposure against transit risk
 Having all the time a contingency plan against critical events

Methods to Mitigate(reduce) Risks (exporter)

 Engaging a trustworthy credit agency or credit insurer to reduce buyer’s
indebtedness or credit risk
 Engaging on additional secured techniques of payment such as
documentary credit or advance payment
 Evading granting unnecessary credit period or limit to the buyer
 Guarantee that the sales contract or documentary credit does not contain
unclear or inaccurate expressions and circumstances that are subject to
future disagreements
 Obtaining adequate information in document preparation to mitigate
against documentation risk
 Admitting and respecting cultural differences with the buyer
 Buying and selling in same currency to reduce foreign exchange risk
 Guaranteeing adequate insurance against transit risk
 Engaging a company’s representative in the buyer’s state to verify the
merchandises or relevant parties in case of the buyers non-acceptance or
 Having all the time contingency plan against hostile events

The Roles of International Financial Intermediary
 Sources of Information
1) To facilitate a safe or guaranteed trading, both sellers and buyers are easy
to get status enquiries from banks on either party before the trade takes
2) It is important for banks to provide trade information to both sellers and
buyers in order to ensure a safe, quality and good trade.
3) In this case, banks play a middleman role in assisting both sellers and
 Document Processor
1) International trade involves huge amount of documents, such as
commercial documents and financial documents.
2) Hence, banks act as the intermediary party to process the documents.
Banks do the transfer of documents or services from a party to another.
3) Banks have the responsibility to validate the documents received.
 Payments Receiver and Processor
1) Bank acts as a party to facilitate payment between trading partners.
2) It sends payments request to the buyer or importer (upon request of seller
to the bank) or to collect payment on behalf of the exporter
3) When payment received, banks will credit the amount into the seller or
exporter’s account.
 Sources of Financing
1) It is important for the exporter to receive full payments when the goods
services have reached the importers.
2) In the case that the importers take longer time to pay, the exporters whom
need cash urgently may face financial issues.
3) Thus, these exporting companies may seek help from banks.
 Risk Advisor
1) To advise and assist both exporters and importers in risk exposure faced
in international trade
2) A win-win situation between the bank’s customer and the bank, where
both parties wish to be in secured position, especially in international
 Supplier of Foreign Currency
1) Assist both the exporters and importers in exchanging the home currency
to foreign currency or vice versa.
2) The exchange process may be benefited to either an exporter or importer
depending upon the type of currency that is specified for trade settlement.
3) In this case, a bank is prepared to carry out either type of currency
conversion. For example, a conversion of Ringgit into foreign currency or
a conversion of foreign currency into Ringgit.

Methods of payment for international transaction
1. Open account (payment after deliver)
- An arrangement between buyer and seller whereby the goods are
manufactured and delivered before payment is made
- Usually used when the parties have been trading with each other for many
years. Trust has been built up
- Also used when trade occurs between a parent company to its subsidiary
- Most common method for companies to trade with new client
- Direct dealing between exporters and importers

To importer
- The buyer pays for the goods or services only when they are received
- Payment is subject to political, legal or economic situations in the buyer’s
- Low negotiation power of shipment
- No control of quality of goods

To exporter
- Save time and lengthy documentary process and no incurs extra charges
- Enhances competitiveness in global marketing
- Delay of payment
- Problem in cash flow

To bank
- zero exposure because no complicated documentation
- Bank earn no commission as official documents are issued

2. Advance payment (payment before deliver)

- Allows the buyer to pay cash in advance to the seller. Early payment made
by the importers to exporters
- The least favourable mode of payment as its contains least security as
compared to others, payment does not guarantee the shipment of the goods
from the seller
- One of the reasons of advanced payment could be that the products sold by
exporters are unique and has bargaining power.

To importer
- Buyer may able to negotiate for a discount in prices
- Guarantee of receive of the desired goods

- Negative impact on cashflow

To exporter
- seller can have immediate use of funds
- payment received in advance, enhance cash flow
- fees incurred in entering advance payment bond

To bank
- Generate fees. Bank earn from setting up advance payment bond
- Importer may have insufficient funds to make advance payment therefore
banks have to face the risk

3. Document collection (payment upon document)

- An arrangement whereby goods are shipped and the document are sent to
the buyer country. The buyer can collect his goods from the customs in his
country only after collecting the documents from the bank. The bank gives
those documents only after he agrees to pay the amount right away (if the
condition is document against payment) or at later stage (document against

To importer
- Payment may be deffered until the arrival of goods
- Documentary collection is relatively cheaper than documentary credit
- The buyer may have opportunity to inspect the documents prior to making
- Obligation to pay before inspection/release the goods
To exporter
- documentary collection is generally uncomplicated and inexpensive
compared to a documentary credit
- more secure as title of the goods release upon payment

- timeline consideration in payment collection

To bank
- generate fees from collections procedures
- low income fees generate as both sides are trading based on instructions
given to the banks

4. Documentary letter of credit (bank involvement)

- It is a guarantee of payment by the importer’s bank to the exporters
- a document issued by a bank as requested by the importer to pay the
beneficiary (exporter) when goods or services are accepted
- Exporters have to present the specified documents and other requirements
as stated in the L/C to collect payments
- A letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount. In the event that the buyer is
unable to make payment on the purchase, the bank will be required to
cover the full or remaining amount of the purchase
- An undertaking issued by a bank for the account of the buyer or for its own
account, to pay the seller provided that all the terms and conditions of the
credit are complied with

To importer
- The buyer’s creditworthiness is enhanced with a bank willing to issue a
documentary credit for his account.
- Payment is only made by the bank upon the seller’s fulfilment of the terms
and conditions of the credit.
- Possibility of having forged documents by the exporter upon payment
- No guarantees if the goods same with the one importer order
- Fews bank expenses that need to pay

To exporter:
- The Bank acts as a trusted third party to guarantee payment if the seller
can fulfil the terms
and conditions of the credit.
- Title of the goods (ownership) is retained by the seller or bank until
payment or acceptance of documents by the buyer.
- Documentary credit operations are guided by recognised international
rules and practices
- Lot documents involve (fulfill the L/C)
- No guarantee on timely payment

To bank:
- The issuing bank earn from administrative fees
- Dispute arises between banks and importers
- Default risk by importers

Various transaction in counter trade:

1. Buyback/Compensation Agreement
- Agreement by a exporter of plant/equipment to take compensation in the
form of future output from that plant
- The value of the goods received usually exceeds the value of the original
sales, as would be appropriate to reflect the time value of money
Example: when a firm builds a plant in a country/supplies technology,
equipment, training to the country. Besides, the firm agrees to take a certain
percentage of the plant's output as partial payment for the contract
2. Counter purchase
- Involves an initial export, but with the exporter receiving goods that is
unrelated to items the exporter manufactured
- Sale of goods and services to one company in other country by a company
that promises to make a future purchase of a specific product from the
same company in that country
Example: In 1989, $3billion deals between PepsiCo (soft drinks distribution) &
former Soviet Union (purchase Vodka & ocean vessels)
3. Offset
- The reequipment of importing countries that their purchase price be
offset in some way by the seller
- Sale of goods and services to one company in other country by a company
that promises to make a future purchase of a specific product from the
same company in that country
Example: defence-related sales, commercial aircraft, high-technology goods
(huge payments & generally a foreign government deal)
4. Barter trade
- The very traditional way of trading where it involves a direct exchange of
goods and services between two parties
- In international trading, barter trade involves a single trading contract for
the simultaneous exchange of goods between two countries
- Straight forward barter is famous in some African and Latin America
countries due to insufficient hard currencies

Compensation Trade
Compensation trade is a form of barter in which one of the flows is partly in goods
and partly in hard currency. In a compensation trade, the obligations are laid down in
a single commercial contract and the countertrade is done through an incoming
investment repaid from the revenues generated by that investment. The ‘original’
seller may negotiate settlement in the form of partially cash and remaining are goods,
while some compensation deals are full exchanges of goods (called as total
compensation trade).

Two types of compensation are total compensation and part compensation.

Total compensation
Total compensation is similar to a barter trade. In total compensation,
1. The goods being exchanged are valued in currency terms and
2. Here is a remittance of currency as between the two parties.

For example, once the counterparty has shipped the goods to original seller, the seller
will send a remittance of the agreed amount to a named bank and the sum will be held
in a special bank account called an escrow account. (An escrow account is a
temporary pass through account held by a third party during the process of a
transaction between two parties). Thereafter, when the original seller has shipped his
goods to the counterparty, he will claim the sum due to him from the banker that is
maintain the escrow account.

Part compensation
Under a part compensation, the original seller negotiates on the basis that, from the
counterparty, settlement will be partly in the forms of goods and partly in cash. The
settlement similar to total compensation except that the cash receipt is split. Part of the
amount will go to the original seller and part will be held in escrow account for the
counterparty to claim back at a later date.

Under the buyback agreement, the seller supplies plant, equipment or technology and
agrees to buy goods produced with that plant, or equipment as payment. Typically,
the Buyback trades are of much longer term and also of larger amounts. The seller of
equipment can receive a part of the payment in the shape of products produced by that
equipment and the remaining amount in the shape of cash.
For example, National Textiles Corporation of India signed a buy back agreement of
Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The
buyback ratio was 75% textile produce from these looms and the remaining was in
--Industry Co-operation

Offset is the type of countertrade, which is mostly related to very high value of
exports and medium to high technology capital goods supplied by a multinational
corporations or a major manufacturer. It may be in many forms such as co-production,
license production, subcontractor production, technology transfer, overseas
investment, research and development, technical assistance and training, or patent
agreements etc. Offset activity can be divided into two main categories direct and

The offset is said to be direct when some components of the item sold are to be
manufactured within the buyer’s country and that the seller agrees to buy those
components to use them in-house.
The offset is said to be indirect when the buyer requires the seller to enter into a long
term industrial or other co-operation and investment, but this co-operation or
investment is not related to goods supplied by the seller.
The benefits of offset agreement is that the importing country can save the foreign
exchange on high value imports, avoid an increase in foreign debt, increase local
employment, introduce state of the art technology in local industries, reduce
dependence on foreign suppliers, and increase the level of foreign investment.

Offset has been popular among the governments all over the world, as they have been
purchasing heavy military equipments, but now it is gaining momentum in other
sectors also. Typically, offsets deals are common in defense, aerospace and
telecommunications sectors and also the local content “offset” is usually not more
than 20% to 30% of the deal value.

Recommended for use in established trade relationships, in stable export markets
and for transactions involving ocean shipments

Riskier for the exporter, though D/C terms are more convenient and cheaper than an
LC to the importer

- Bank assistance in obtaining payment
- The process is simple, fast, and less costly than LCs

- Banks’ role is limited and they do not guarantee payment
- Banks do not verify the accuracy of the documents

What are the steps in documentary collection?

1) The buyer (importer) and seller (exporter) agree on the terms of sale, shipping
dates, etc., and that payment will be made on a documentary collection basis.
2) The exporter, through a freight forwarder, arranges for the delivery of goods to
the port/airport of departure.
3) The forwarder delivers the goods to the point of departure and prepares the
necessary documentation based on instructions received from the exporter.
4) Export documents and instructions are delivered to the exporter's bank by either
the exporter or the freight forwarder.
5) Following the instructions of the exporter, the bank processes the documents and
forwards them to the buyer's bank.
6) The buyer's bank, on receipt of documents, contacts the buyer and requests
payment or acceptance of the trade draft.
7) After payment or acceptance of the draft, documents are released to the buyer,
who utilizes them to pick up the merchandise.
8) The buyer's bank remits funds to the seller's bank or advises that the draft has
been accepted.
9) On receipt of good funds, seller's bank credits the account of the exporter.
When to Use Letters of Credit vs. Documentary Collection
Letters of credit are perhaps most useful for doing business with a person or
company that you do not know well. Buyers have the comfort of documentation
verifying the quality and characteristics of the goods before having the obligation to
pay, while sellers are guaranteed payment as long as they comply with the terms of
the letter of credit. Additionally, letters of credit are highly useful when a buyer’s
country has political or economic instability or restrictive foreign exchange controls.
For sellers, the risk of a letter of credit lies in whether the documents are drafted
perfectly. Sometimes, unethical buyers will deliberately make the documentary
requirements incredibly tedious, hoping that the documents will be noncompliant in
order to give them a better position to renegotiate their contract after the goods are
shipped. If your documents aren’t in strict compliance and you refuse to negotiate or
give them better terms, they may simply refuse to pay and cancel their contract with
you – it’s their right to do so. This gives them a lot of leverage, and gives you a big
incentive to make sure your export documents are correct before you ship them.

Documentary collection, on the other hand, can be a better option in some

circumstances. While a letter of credit often costs between 1%-2% of the total
payment obligation, documentary collection can be much less expensive. This
method is best used for parties that know each other well and do not anticipate any
financial problems between them, nor much risk of the buyer rejecting the goods.
Unlike letters of credit, where strict compliance is required in the wording of all
documents, minor errors or omissions may not serve as an unequivocal basis for the
buyer to reject the goods because the buyer may reject the goods anyway! Yet while
the buyer may still reject the goods, he may still be “on the hook” for the sales
contract even if the documents are not perfect.

Method Π: Prepayments
• The goods will not be shipped until the buyer has paid the seller.
• Time of payment : Before shipment
• Goods available to buyers : After payment
• Risk to exporter : None
• Risk to importer : Relies completely on exporter to ship goods as ordered

Least risk for exporter, highest risk for importer
• Payment made by importer prior to shipment
• Importer’s payment methods:
• Wire Transfer
• Check
• Draft
• Credit Card
• Goods are available to the importer upon delivery
• There is no risk to the exporter and no credit management is required
• The importer loses the use of funds until goods arrive and risks the exporter
not shipping goods as ordered, in partial or not at all

Method  : Letters of credit (L/C)

• These are issued by a bank on behalf of the importer promising to pay the
exporter upon presentation of the shipping documents.
• Time of payment : When shipment is made
• Goods available to buyers : After payment
• Risk to exporter : Very little or none
• Risk to importer : Relies on exporter to ship goods as described in documents

Method Ž : Drafts (Bills of Exchange)

• These are unconditional promises drawn by the exporter instructing the
buyer to pay the face amount of the drafts.
• Banks on both ends usually act as intermediaries in the processing of shipping
documents and the collection of payment. In banking terminology, the
transactions are known as documentary collections.
Unlike a letter of credit, in documentary collection, the bank is not required to pay
the seller or exporter if the buyer decides that it does not want to buy

Method Ž : Drafts (Bills of Exchange) / Documentary Collection

• While documentary collection won’t give the user a right to payment from
the bank when being presented for fully compliant documentation, if
someone ever have to take a buyer or importer to court for revoking a
contract, the documentary collection mechanism will provide him with solid
evidence to establish his case in court.
• Funds are received from the importer and remitted to the exporter through
the participating banks (exporter's and importer's bank) in the exchange for
the documents used.
• It involves using a bill of exchange which requires the importer to pay the face
amount either
a) at sight (document against payment, D/P)
b) on a specified future date (document against acceptance, D/A)

1) Documents against Payment (D/P) also known as "Sight

Draft" or "Cash against Documents” (CAD). The buyer must
pay before the collecting bank releases the title documents.
2) Documents against Acceptance (D/A). The buyer accepts a time draft,
promising to pay for the goods at a future date. After acceptance, the title
documents are released to the buyer.

Method Ž : Drafts (Bills of Exchange) / Documentary Collection

Documents against Payment

Time of Payment: After shipment, but before documents are released
Transfer of Goods: After payment is made at sight
Exporter Risk: If draft is unpaid, goods may need to be disposed of r may be
delivered without payment if documents do not control possession

Documents against Acceptance

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 over goods after acceptance and may not get
paid at due date
Sight drafts (documents against payment): When the shipment has been
made, the draft is presented to the buyer for payment
• Time of payment : On presentation of draft
• Goods available to buyers : After payment
• Risk to exporter : Disposal of unpaid goods
• Risk to importer : Relies on exporter to ship goods as described in documents

Time drafts (documents against acceptance) : When the shipment has been
made, the buyer accepts (signs) the presented draft.
• Time of payment : On maturity of draft
• Goods available to buyers : Before payment
• Risk to exporter : Relies on buyer to pay
• Risk to importer : Relies on exporter to ship goods as described in documents

Who are the parties involved in documentary collection

1) PRINCIPAL - exporter, seller, remitter, drawer of the draft.
2) REMITTING BANK - exporter's bank handling the collection
3) PRESENTING OR COLLECTING BANK - usually the buyer's bank.
4) DRAWEE - importer, buyer, payee.

Method  : Consignments
• The exporter retains actual title to the goods that are shipped to the importer.
• Time of payment : At time of sale to third party
• Goods available to buyers : Before payment
• Risk to exporter : Allows importer to sell inventory before paying exporter
• Risk to importer : None

Method  : Open Accounts

• The exporter ships the merchandise and expects the buyer to remit payment
according to the agreed-upon terms.
• Time of payment : As agreed upon
• Goods available to buyers : Before payment
• Risk to exporter : Relies completely on buyer to pay account as agreed upon
• Risk to importer : None

When should a Documentary Collection be used?

1) The seller and the buyer know each other to be reliable.
2) No doubt about the buyer's willingness or ability to pay.
3) Stable political and economic conditions of the buyer's country
4) No restrictive foreign exchange controls in the importer's country

What is a Letter of Credit?
 The L/C is a document that is issued by a bank per instructions by the buyer
of the goods
 This document authorizes the seller to draw a specified sum of money under
specified terms, usually the receipt by the bank of certain documents within a
given time
 Payment under L/C is based on documents (not on the terms of the sale or
the physical condition of the goods)
 The L/C specifies the documents required by the exporter, such as an ocean
bill of lading, consular invoice, draft and an insurance policy
 Before the payment, the bank responsible for payment verifies that the
proper documents conform to the L/C requirements

Types of L/C
 Commercial L/C’s are classified as follows
◦ Irrevocable Vs. Revocable – irrevocable letters of credit are non-
cancelable while its opposite can be cancelled at any time
◦ Confirmed Vs. Unconfirmed – An L/C issued by one bank can be
confirmed by another bank
 Advantages - it reduces risk of default and a confirmed L/C helps secure
 Disadvantages - the fees charged and that the L/C reduces the available credit
of the importer


1. Transferable Letter of Credit
- It gives the beneficiary the right to pass the benefits of the credit in
whole/part to a 3rd party/another beneficiary
- It is used in financing a middleman for the purchase of goods from

 A middleman in Singapore contracts to supply palm oil to a buyer in India at a
certain price.
 He will then turn to a supplier in Malaysia to obtain the goods at a lower price
 To effect the transaction, the supplier in Malaysia wants the credit to be
opened in his favor but the middleman needs funds to comply with the
 Accordingly, the middleman will request the buyer in India to open an

 1) Indian importer applies for LC from Indian bank
 2) Indian bank issues LC in favour of the Indian importer and sends LC to
exporter’s Malaysian bank. Malaysian bank confirms the LC adding its promise
to that of the Indian bank to make payment under the specified conditions.
 3) Malaysian bank advises canned food exporter of opening of confirm LC.
 4) Canned food exporter ships durian to Indian, shipping on an order of bills
of lading and made deliverable to itself.
 5) Canned food exporter draws against Indian bank according to the terms of
the LC and present draft to Malaysian bank
 6) Malaysian bank presents the draft along with endorsed order bill of lading
and the documents to Indian bank.
 7) Indian bank accepts the draft or pays it. Indian bank returns accepted draft
to exporter to hold to maturity.
 8) At maturity, Malaysian bank collects on the draft and pays the canned food
exporter/investor who was holding the draft.

2. Back to back letter of credit

 Similar to transferable credit
 it is used by the middleman with limited financial resources who undertakes
to supply goods to a buyer.
 It is simply the issue of 1 credit secured by another, referred to as “MASTER
 Why? Usage:
to avoid the supplier and buyer from knowing the identity of each other and
thus, allowing the middleman to earn his profit from the transaction

3. Red Clause Letter of Credit

- Contains a special clause printed in red whereby the advising bank is
authorized to give advance to the beneficiary up to the extent of the total
value of the credit
- It is issued to the exporter to collect payment in advance prior delivering
the goods to the importer
- This is usually drawn against to the limited range of supplied product such
as wool, timber
- This will only be made available to the exporter who is reliably known to
the importer

4. Standby Letter of Credit

- This type of L/C requires performance on the part of the beneficiary.
- The beneficiary is assured of payment only when he performs under the
- It doesn’t provide guarantee to the beneficiary in terms of payment,
acceptance or negotiation but it gives guarantee against default by the

Example :
 The beneficiary can claim from the issuing bank by presenting the sight bill
and other documents stipulated in the credit together with a certificate
certifying default on the part of applicant
 Usually issued to the existing trade transactions using open account or
collection basis which always come with period of validity

5. Revolving Letter of Credit

- It is normally established when the importer anticipates regular
shipments to be made over a period of time.
- Instead of opening credit every time a shipment is made, he establishes
one credit to cover all the shipments.
An importer signed a contract worth USD1million for the purchase of spare
parts from a supplier in Chicago to be delivered in 4 equal shipments over a
period of 6 months.
The importer can request his bank to open a revolving credit favouring the
supplier for USD250,000 available each shipment for a period of 6 months.
Advantages: save a lot of paper works and inconvenience to all parties
handling the credits.

6. Deferred Payment LC.

- According to this LC the payment to the seller is not made when the
documents are submitted, but instead at a later period defined in the
letter of credit.
- In most cases the payment in favor of Seller under this LC is made upon
receipt of goods by the Buyer
7. Payment at Sight LC
According to this LC, payment is made to the seller immediately (maximum
within 7 days) after the required documents have been submitted.


-Consignment in international trade is a variation of open account in which payment

is sent to the ex-porter only after the goods have been sold by the foreign distributor
to the end customer.

-An international consignment transaction is based on a contractual arrangement in

which the foreign distributor receives, manages, and sells the goods for the exporter
who retains title to the goods until they are sold.

-Clearly, exporting on consignment is very risky as the exporter is not guaranteed any
payment and its goods are in a foreign country in the hands of an independent
distributor or agent.

-Consignment helps export-ers become more competitive on the basis of better

availability and faster delivery of goods. Selling on consignment can also help
exporters reduce the direct costs of storing and managing inventory.

-The key to success in exporting on consignment is to partner with a reputable and

trustworthy foreign distributor or a third-party logistics provider.

-Appropriate insurance should be in place to cover consigned goods in transit or in

possession of a foreign distributor as well as to mitigate the risk of non-payment.