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

relations, contracts on exclusive purchase, commercial representation, commission merchant contract, piggybacking, direct export If we are talking about international business, we assume business to enter foreign market. What are the reasons for doing that? Need/want to increase sales economies of scale (if we are manufacturing big amounts we are saving costs) Gain new markets Diversification of markets in order to lower risks Tax advantages (some countries have lower taxes-why not to go there?) Usage of comparative advantages that certain country offers (China has cheap labor cost-why not to go there?) What are negatives for going abroad? Economical environment is different (political, legal, economical, cultural..) Foreign market is too far away Risks (political risks, war risk, boycott Danish vs. Arabian, currency risks) Methods of entering foreign market

What influence us when we are choosing commercial method? Nature of goods Capital goods we use direct business method o no third party is coming to relation between seller and buyer o only one purchase contract o raw materials, energy - often Commodity Exchange Consumer products we usually use indirect business method o enter others (mediators), conclusion of several purchase contracts o eg.: manufacturer - exporter - agent - wholesale -the final consumer o food, textiles, consumer engineering goods Business and political conditions Commercial policy = tools which are used to promote the interests of the state in the commercial area (for the movement of goods at international level) CR does not have its own - a common EU trade policy If the commercial policy is damaging a sector lobbying Contractual instruments Commercial Contracts Trade agreements

 Payment Agreement Other (agreement on double taxation ,...) Autonomous tools Tariff tools Import surcharges Import deposits non-tariff tools A total ban on the import / export Quantitative restrictions, ... The nature of the market Infrastructure Transport Services Distribution channels Storage Services Banking Services Management of receivables Insurance Services Information Services Cultural differences ... Nature of business partners legal information Business type - the complicated, often more credible Guarantee Persons authorized to act on behalf of Commercial Register Tax Identification signs Financial Information Solvency - payment practice Reliability Image Market Position Contacts rating (Standard & Poor's, Moody's, Fitch) Efficiency of business operations - the relationship to price Effect targeted loss of profit (loss - to penetrate the market, obtain market position, etc.) Costs associated with the implementation of transactions Direct trading costs - linked to realization of specific operations - transport, storage, etc. Indirect business costs - cannot be quantified for a particular operation - such as marketing, PR, participation in trade fairs, ... Cost circulation - associated with fiscal policy - customs duties, taxes (excise, VAT) FOREIGN INTERMEDIARIES/DISTRIBUTORS

Intermediaries are individuals that are buying goods/services (from foreign company) on their account and name and re-sell them at their domestic market. The reward for them is margin (difference between price of purchase and sale). Distributors can be distinguished from agents as distributors buy the goods in their own name, than re-sell them at prices which they have some liberty to set. Distributorship is frequently based on a contract which grants the distributor exclusivity for a specific territory. Suitable for small and medium size companies for which the export-import matters are not the main issue Advantages

Lower costs, elimination of risk from international trade, possibility to sell at foreign markets that would be too costly to go their directly Disadvantages No direct contact with customer, no control over marketing strategy, no control over prices Exclusive distributorship -buyer and seller set certain territory and products they write general agreement of exclusive distributorship (each orders are that according standard sales contract) -disadvantages: if we choose bad distributor AGENCY

COMMERCIAL REPRESENTATION/AGENT/AGENCY Agent is an independent person or legal entity which acts on behalf of another (principal) for the long term. Before we conclude contract with agent we should be careful and determine: where exactly is he going to work, on which basis, for how much. We should be informed about his relationship to other companies (our competitors). Non-exclusive representation Representation (boss) may use services of other agents and sales representative (agent) may also represent another person (boss) and so on. It is necessary for their work or respect the conditions set by representation (boss) and followed its instructions. Representatives also have an important informative function. Agent is paid by commission-usually depends on realization of transactions that agent made (% of sales). Agent should cover his/her costs (if contract does not say anything else) and is not responsible for contract. If he/she is responsible, than he/she (agent) has to be given delcredere=reward for taking liabilities of third party. Exclusive representation Boss/representation cannot use other agent in a given area for a given range of trades. Agent cannot represent others in that given area. Representation (boss) can make business without the assistance of an exclusive agent but he/she is obliged to pay commission for these transactions to exclusive agent (as if it was done by agent himself). It is considered that it was entitled to a representative due to constant work, processing on the market. This commission is described as recognition commission. Contract for exclusive representation creates a close link between representatives and represented, and representatives request it, in particular in those areas where the representation associated with such investments in the service network, or if a representative of the company is bound by a majority of its activities and life depends on it. If boss (representation) wants to terminate contract with agent they has give him/her reward for finding customers (establishing market, informing, goodwill...). Brokerage contract - single activity, usually at the stock exchange - when we want to test our potential agent COMMISION MERCHANT CONTRACT Is made by commission merchant/broker/agent and committer/principal. Principal pays to commission merchant for this service (it is called commission). Commission merchant concludes contract on his own name, but on account and risks of principal. Advantage of using commission merchant is the ability to control prices (he sells for prices given by principal), using goodwill of comm. merchant, his business contacts and distribution channels. Disadvantage might be too much autonomy, freedom of commission merchant and the fact that company is not using corporate image in foreign markets.

How commission contract differs from brokerage contract Commission merchant commits himself directly for making a particular contract, while the broker is committed to mediate only the opportunity for making contract. MANDATE CONTRACT Mandate contract is concluded between mandatory and mandant (client). Mandatory is obliged to arrange some business matter for mandant/client (on clients account and name). Client pays to mandatory for his service. Mandate contract is concluded only between entrepreneurs and has lot of similarities with commission merchant contract. The biggest difference: mandatory acts on name of mandant. PIGGYBACKING Cooperation of more companies from the same field of business in exporting. Typically large and well-known company gives to smaller company their foreign distribution channels (small company is paying for it). Advantages for small companies Ability to use the name and experience of large company (it provides also lots of marketing and logistics activities for small companies) Advantages for large companies Able to offer its customer a complete range of products (that gets from small companies also) Payment gained from small companies Disadvantages for large companies Piggyback can be inconvenient if small firms are not able to properly and on time supply the required quantity of goods, since it could damage their image (large companies works under their own name) Disadvantages for small companies Pressure of their stronger partners (they want lower prices, unfavorable payment terms, great demands on the quality of supplies and logistics. In some cases, piggyback is used as a form of inter-firm cooperation by large companies (not only large with small). Their main motive is cost savings (they might use and finance together sales network or provide services on the foreign market). DIRECT EXPORT Direct sales methods are mostly used in exporting of machinery, manufacturing equipment or complete industrial plants. Deliveries of these products are very complicated and are associated with the need to provide a wide range of professional services. That is the reason why is required presence of manufacturer in foreign markets. When we use direct sales method we have to have good technical and business knowledge. This has usually positive effect on building business relations. The advantage is the possibility to control over the implementation of their marketing strategy in international markets. Exporter should also have higher prices (therefore profit) because he is providing the entire implementation (exporter bears all the costs and risks). Question 2 Delivery terms, notion of delivery terms and their functions, Incoterms 2000, relation of delivery term to other elements of commercial contract Delivery term Describes transfer of the subject of purchase and sales place, time and way An agreement in a contract between a buyer and seller about when goods will be delivered, how they will be paid for etc Location and time of transition costs related to the delivery Location and time of shifting the risk of loss or damage Other contractual obligations - providing transport, packaging, customs clearance, insurance Relation of delivery term to other elements of commercial contract Influences purchase price the more we want the more we have to pay (e.g. EXW is for us as a buyer the cheapest term)

Incoterms 2000 International interpretative rules, it is not generally binding legal norm The International Chamber of Commerce in Paris The first version in 1936, has since upgraded several times, currently the latest from 2000, is preparing for further innovation in 2010 All versions are still valid, you can use any of them In order to by used, it has to be written in contract Each rule has 2 elements: o Marked the rule that is used, 3 capital letters (e.g. CIF) o Location Contain a summary of obligations of the seller and the buyer it describes mostly rules of how they share the costs associated with transport and the risks It does not describe transfer of ownership It does not describe relations of the contractual parties to the 3rd parties (but the damage caused by a third party yes - which party is responsible) Export customs formalities ALWAYS arranges the seller (the right to deduct VAT) 13 rules divided into 4 groups: EXW {+ the named place} Ex Works Ex means from. Works means factory, mill or warehouse, which is the seller's premises. EXW applies to goods available only at the seller's premises. Buyer is responsible for loading the goods on truck or container at the seller's premises, and for the subsequent costs and risks. In practice, it is not uncommon that the seller loads the goods on truck or container at the seller's premises without charging loading fee. In the quotation, indicate the named place (seller's premises) after the acronym EXW, for example EXW Kobe and EXW San Antonio. The term EXW is commonly used between the manufacturer (seller) and export-trader (buyer), and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers may use the term Ex Factory, which means the same as Ex Works. FCA {+ the named point of departure} Free Carrier The delivery of goods on truck, rail car or container at the specified point (depot) of departure, which is usually the seller's premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at seller's expense. The point (depot) at origin may or may not be a customs clearance center. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the air shipment, technically speaking, goods placed in the custody of an air carrier is considered as delivery on board the plane. In practice, many importers and exporters still use the term FOB in the air shipment. The term FCA is also used in the RO/RO (roll on/roll off) services. In the export quotation, indicate the point of departure (loading) after the acronym FCA, for example FCA Hong Kong and FCA Seattle. Some manufacturers may use the former terms FOT (Free On Truck) and FOR (Free On Rail) in selling to export-traders. FAS {+ the named port of origin} Free Alongside Ship Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller's expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks. In the export quotation, indicate the port of origin (loading) after the acronym FAS, for example FAS New York and FAS Bremen. The FAS term is popular in the break-bulk shipments and with the importing countries using their own vessels. FOB {+ the named port of origin} Free On Board The delivery of goods on board the vessel at the named port of origin (loading), at seller's expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the export quotation, indicate the port of origin (loading) after the acronym FOB, for example FOB Vancouver and FOB Shanghai.

Under the rules of the INCOTERMS 1990, the term FOB is used for ocean freight only. However, in practice, many importers and exporters still use the term FOB in the air freight. In North America, the term FOB has other applications. Many buyers and sellers in Canada and the U.S.A. dealing on the open account and consignment basis are accustomed to using the shipping terms FOB Origin and FOB Destination. FOB Origin means the buyer is responsible for the freight and other costs and risks. FOB Destination means the seller is responsible for the freight and other costs and risks until the goods are delivered to the buyer's premises, which may include the import customs clearance and payment of import customs duties and taxes at the buyer's country, depending on the agreement between the buyer and seller. In international trade, avoid using the shipping terms FOB Origin and FOB Destination, which are not part of the INCOTERMS (International Commercial Terms). CFR {+ the named port of destination} Cost and Freight The delivery of goods to the named port of destination (discharge) at the seller's expense. Buyer is responsible for the cargo insurance and other costs and risks. The term CFR was formerly written as C&F. Many importers and exporters worldwide still use the term C&F. In the export quotation, indicate the port of destination (discharge) after the acronym CFR, for example CFR Karachi and CFR Alexandria. Under the rules of the INCOTERMS 1990, the term Cost and Freight is used for ocean freight only. However, in practice, the term Cost and Freight (C&F) is still commonly used in the air freight. CIF {+ the named port of destination} Cost, Insurance and Freight The cargo insurance and delivery of goods to the named port of destination (discharge) at the seller's expense. Buyer is responsible for the import customs clearance and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym CIF, for example CIF Pusan and CIF Singapore. Under the rules of the INCOTERMS 1990, the term CIF is used for ocean freight only. However, in practice, many importers and exporters still use the term CIF in the air freight. CPT {+ the named place of destination} Carriage Paid To The delivery of goods to the named place of destination (discharge) at seller's expense. Buyer assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, and other costs and risks. In the export quotation, indicate the place of destination (discharge) after the acronym CPT, for example CPT Los Angeles and CPT Osaka. CIP {+ the named place of destination} Carriage and Insurance Paid To The delivery of goods and the cargo insurance to the named place of destination (discharge) at seller's expense. Buyer assumes the import customs clearance, payment of customs duties and taxes, and other costs and risks. In the export quotation, indicate the place of destination (discharge) after the acronym CIP, for example CIP Paris and CIP Athens. DAF {+ the named point at frontier} Delivered At Frontier The delivery of goods to the specified point at the frontier at seller's expense. Buyer is responsible for the import customs clearance, payment of customs duties and taxes, and other costs and risks. In the export quotation, indicate the point at frontier (discharge) after the acronym DAF, for example DAF Buffalo and DAF Welland. DES {+ the named port of destination} Delivered Ex Ship The delivery of goods on board the vessel at the named port of destination (discharge), at seller's expense. Buyer assumes the unloading fee, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym DES, for example DES Helsinki and DES Stockholm. DEQ {+ the named port of destination} Delivered Ex Quay

The delivery of goods to the quay (the port) at destination at seller's expense. Seller is responsible for the import customs clearance and payment of customs duties and taxes at the buyer's end. Buyer assumes the cargo insurance and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym DEQ, for example DEQ Libreville and DEQ Maputo. DDU {+ the named point of destination} Delivered Duty Unpaid The delivery of goods and the cargo insurance to the final point at destination, which is often the project site or buyer's premises, at seller's expense. Buyer assumes the import customs clearance and payment of customs duties and taxes. The seller may opt not to insure the goods at his/her own risks. In the export quotation, indicate the point of destination (discharge) after the acronym DDU, for example DDU La Paz and DDU Ndjamena. DDP {+ the named point of destination} Delivered Duty Paid The seller is responsible for most of the expenses, which include the cargo insurance, import customs clearance, and payment of customs duties and taxes at the buyer's end, and the delivery of goods to the final point at destination, which is often the project site or buyer's premises. The seller may opt not to insure the goods at his/her own risks. In the export quotation, indicate the point of destination (discharge) after the acronym DDP, for example DDP Bujumbura and DDP Mbabane. Diagram: International Commercial Terms in word.doc Insurance under Incoterms 2000 concerning only transportation risk (not other ones) is arranged by the seller in accordance with the contract Claim of the person who is interested in safety (ie a person who at that time bore the risk) Minimum risk cover under the Institute Cargo Clauses o 3 risk ranges: High Central lowest (as prescribed by Incoterms minimum, then it is possible to arrange another risk insurance) A minimum sum insured: the contract price + 10% in the currency of the contract (buyer interest may be, the subsequent sale of goods so that they ensure any loss caused by the impossibility of selling the goods purchased= imaginary profit) Question 3 Payment terms, function of payment term, selection of payment term, forms of payment; documentary forms (pass over documents, approve ownership, documents against payments, documents and money exchanged at the same time; bill of lading = ownership; dirty bill of lading with remarks) vs. the rest Bill of lading vs. letter of credit? bill of lading is one of possible (key) conditions of letter of credit, usually the most important one because it passes ownership Clean bill of lading could be stated as condition in letter of credit, if not, the buyer wont pay What if exporter and importer know that bill of lading is dirty and they will change the contract? (make addition) payment wont take place because letter of credit is contract between three parties, bank will pay if all conditions are met; new signature means new fees for bank Timely payment is essential for the survival of your business, especially when you're trading overseas. Financing export activities puts real strain on the cash flow of the business, thus, we need to assess the possible risks, settle on acceptable payment terms, and consider insurance in order to protect ourselves against problems. Payments terms and conditions should be established with the customer prior the final deal. Explain them in the beginning of your business relationship. Send out a written confirmation of their order with a copy of your terms and conditions of sale General Sales Conditions (written on the back side of offer, quantity and name of product is added with the respective price, all other conditions stay the same for all contracts), always get acquainted with the general sales conditions, read them carefully. The simplest payment option is cash (check/cheque respectively) but that is pretty risky as well. Not many businesses are conducted with cash nowadays except black market trade

Payment Terms and Conditions open account trading clean / documentary collection payment upon shipment of the goods Documentary Letter of Credit Payment in advance Open account trading a selling on credit, without the exporter taking any safeguard that the Buyer will settle his debt on the agreed date long-standing business relationship between Buyer and Seller trade between the countries is relatively free of government restrictions The goods, along with all the necessary documents, are shipped directly to the importer who agrees to pay the exporters invoice at a future date, usually in 30 to 90 days. Exporter should be absolutely confident that the importer will accept shipment and pay at agreed time and that the importing country is commercially and politically secure. Open account terms may help win customers in competitive markets, if used with one or more of the appropriate trade finance techniques that mitigate the risk of nonpayment Risk: exporter faces significant risk as the buyer could default on the payment obligation after shipment of goods Pros: boost competitiveness in global market, establish and maintain a successful trade relationship Cons: exposed significantly to the risk of non-payment, additional costs associated with risk mitigation measures Clean/documentary collection means the handling by banks of documents in order to: o obtain payment (D/P) and/or acceptance (D/A) o deliver documents against payment and/or acceptance o deliver documents on other terms and conditions A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of payment to the remitting bank (exporters bank), which sends docu ments to a collecting bank (importers bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve the use of a draft that requires the importer to pay the face amount either on sight (document against paymentD/P) or on a specified date in the future (document against acceptanceD/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit (LCs). Key points: D/Cs are less complicated and less expensive than LCs. Under a D/C transaction, the importer is not obligated to pay for goods prior to shipment. The exporter retains title to the goods until the importer either pays the face amount on sight or accepts the draft to incur a legal obligation to pay at a specified later date. Banks that play essential roles in transactions utilizing D/Cs are the remitting bank (exporters bank) and the collecting bank (importers bank).

 While the banks control the flow of documents, they do not verify the documents nor take any risks, but can influence the mutually satisfactory settlement of a D/C transaction. Recommended for use in established trade relationships and in stable export markets. Risk: exporter is exposed to more risk as D/C terms are more convenient and cheaper than the L/C to the importer Pros: bank assistance in obtaining the payment, the process is simple, fast and less costly than L/Cs Cons: Banks role is limited and they dont guarantee payment, banks do not verify the accuracy of the documents Transaction flow: a) Documents Against Payment (D/P) Collection Under a D/P collection, the exporter ships the goods, and then gives the documents to his bank, which will forward them to the importers collecting bank, along with ins tructions on how to collect the money from the importer. In this arrangement, the collecting bank releases the documents to the importer only on payment for the goods. Upon receipt of payment, the collecting bank transmits the funds to the remitting bank for payment to the exporter. Time of Payment: After shipment, but before documents are released Transfer of Goods: After payment is made on sight Exporter Risk: If draft is unpaid, goods may need to be disposed b) Documents Against Acceptance (D/A) Collection Under a D/A collection, the exporter extends credit to the importer by using a time draft. In this case, the documents are released to the importer to receive the goods upon acceptance of the time draft. By accepting the draft, the importer becomes legally obligated to pay at a future date. At maturity, the collecting bank contacts the importer for payment. Upon receipt of payment, the collecting bank transmits the funds to the remitting bank for payment to the exporter. Time of Payment: On maturity of draft at a specified future date Transfer of Goods: Before payment, but upon acceptance of draft Exporter Risk: Has no control of goods and may not get paid at due date Documentary letter of credit (L/C) Letters of credit (LCs) are among the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter provided that the terms and conditions have been met, as verified through the presentation of all required documents. The buyer pays its bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyers foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped or delivered as promised. However, since LCs have many opportunities for discrepancies, they should be prepared by well-trained documenters or the function may need to be outsourced. Discrepant documents, literally not having an I-dotted and T-crossed, can negate payment. Key points: An LC, also referred to as a documentary credit, is a contractual agreement whereby a bank in the buyers country, known as the issuing bank, acting on behalf of its customer (the buyer or importer), authorizes a bank in the sellers country, known as the advising bank, to make payment to the beneficiary (the seller or exporter) against the receipt of stipulated documents. The LC is a separate contract from the sales contract on which it is based and, therefore, the bank is not concerned whether each party fulfills the terms of the sales contract. The banks obligation to pay is solely conditional upon the sellers compliance with the terms and conditions of the LC. In LC transactions, banks deal in documents only, not goods. Recommended for use in new or less-established trade relationships when you are satisfied with the creditworthiness of the buyers bank Risk: is evenly spread out between buyer and seller provided all terms and conditions are adhered to Pros: payment after shipment, a variety of payment, financing and risk mitigation options Cons: process is complex and labor intensive, relatively expensive in terms of transaction costs Illustrative L/C transaction: 1. The importer arranges for the issuing bank to open an LC in favor of the exporter. 2. The issuing bank transmits the LC to the advising bank, which forwards it to the exporter. 3. The exporter forwards the goods and documents to a freight forwarder.

4. The freight forwarder dispatches the goods and submits documents to the advising bank. 5. The advising bank checks documents for compliance with the LC and pays the exporter. 6. The importers account at the issuing bank is debited. 7. The issuing bank releases documents to the importer to claim the goods from the carrier. Irrevocable L/C = LCs can be issued as revocable or irrevocable. Most LCs are irrevocable, which means they may not be changed or cancelled unless both the buyer and seller agree. If the LC does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable. Revocable LCs are occasionally used between parent companies and their subsidiaries conducting business across borders. Confirmed L/C = A greater degree of protection is afforded to the exporter when a LC issued by a foreign bank (the importers issuing bank) is confirmed by a domestic bank (the exporters advising bank). This confirmation means that the advising bank adds its guarantee to pay the exporter to that of the foreign bank. If an LC is not confirmed, the exporter is subject to the payment risk of the foreign bank and the political risk of the importing country. Exporters should consider confirming LCs if they are concerned about the credit standing of the foreign bank or when they are operating in a high-risk market, where political upheaval, economic collapse, devaluation or exchange controls could put the payment at risk. Special L/C: LCs can take many forms. When an LC is issued as transferable, the payment obligation under the original LC can be transferred to one or more second beneficiaries. With a revolving LC, the issuing bank restores the credit to its original amount once it has been drawn down. Standby LCs can be used instead of security or cash deposits as a secondary payment mechanism. Payment in advance With this payment method, the exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms. Recommended for use in high-risk trade relationships or export markets, and ideal for Internet-based businesses. Risk: exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the importer Pros: payment before shipment, eliminates risk of nonpayment Cons: may lose customers over payment terms, no additional earnings through financial operations Key points: Full or significant partial payment is required, usually via credit card or bank/wire transfer, prior to the transfer of ownership of the goods. Cash-in-advance, especially a wire transfer, is the most secure and favourable method of international trading for exporters and, consequently, the least secure and attractive option for importers. However, both the credit risk and the competitive landscape must be considered. Insisting on these terms ultimately could cause exporters to lose customers to competitors who are willing offer more favorable payment terms to foreign buyers in the global market. Creditworthy foreign buyers, who prefer greater security and better cash utilization, may find cash-in-advance terms unacceptable and may simply walk away from the deal. Types of cash in advance: 1) Wire transfer = most secure and preferred cash-in-advance method An international wire transfer is commonly used and has the advantage of being almost immediate. Exporters should provide clear routing instructions to the importer when using this method, including the name and address of the receiving bank, the banks SW IFT, Telex, and ABA numbers, and the sellers name and address, bank account title, and account number. This option is more costly to the importer than other options of cash-in-advance method, as the fee for an international wire transfer is usually paid by the sender. 2) Credit card = viable cash-in-advance method Exporters who sell directly to the importer may select credit cards as a viable method of cash-in-advance payment, especially for consumer goods or small transactions. Exporters should check with their credit card company(s) for specific rules on international use of credit cards as the rules governing international credit card transactions differ from those for domestic use. As international credit card transactions are typically placed via online, telephone, or fax methods that facilitate fraudulent

transactions, proper precautions should be taken to determine the validity of transactions before the goods are shipped. Although exporters must endure the fees charged by credit card companies, this option may help the business grow because of its convenience. 3) Payment by check = a less attractive cash-in-advance method Advance payment using an international check may result in a lengthy collection delay of several weeks to months. Therefore, this method may defeat the original intention of receiving payment before shipment. If the check is in U.S. dollars or drawn on a U.S. bank, the collection process is the same as any U.S. check. However, funds deposited by non-local check may not become available for withdrawal for up to 11 business days due to Regulation CC of the Federal Reserve. In addition, if the check is in a foreign currency or drawn on a foreign bank, the collection process is likely to become more complicated and can significantly delay the availability of funds. Moreover, there is always a risk that a check may be returned due to insufficient funds in the buyers account. When to use cash-in-advance system: The importer is a new customer and/or has a less-established operating history. The importers creditworthiness is doubtful, unsatisfactory, or u nverifiable. The political and commercial risks of the importers home country are very high. The exporters product is unique, not available elsewhere, or in heavy demand. The exporter operates an Internet-based business where the use of convenient payment methods is a must to remain competitive. Extra remarks: Letter of Credit is considered the safest one but it is time demanding and also requires a lot of paper work and prep-work. While using different payment terms we are trying to reduce risks that can occur from international business such as risk of non-payment or non-conforming goods. Therefore documentary safeguards are often applied. Documentary credits (L/C mechanism, bank drafts, bills of lading) are negotiable instruments can be traded. Documentary forms are used as means of payment, security mechanism, and financial devices. a) Means of payment Drafts of bills of exchange with other documents, such as bill of lading and commercial invoice are the base for receiving payment for delivery of goods b) Security mechanism Exporters goods and importers payment are exchanged through neutral, third party (usually bank or another financial institution) c) Financial devices Grant a credit period (bills of exchange) vs. deferred payment (letter of credit) Question 4 Bill of exchange and cheque in international trade, promissory note, bill of exchange, formal and contents elements of bill of exchange, remittance of bill of exchange, bill of exchange with liability coaccept, formal and contents elements of cheques, types of cheques Belong to negotiable instruments. A negotiable instrument is a specialized type of "contract" for the payment of money that is unconditional and capable of transfer by negotiation. As payment of money is promised later, the instrument itself can be used by the holder in due course frequently as money. Common examples include check, banknotes (paper money), and commercial paper. Promissory notes and bills of exchange are two primary types of negotiable instruments. 1) Bill of exchange A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the check defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. It is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties--the drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is

addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. A bill of exchange may be endorsed by the payee in favor of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable. In some cases a bill is marked "not negotiable". In that case it can still be transferred to a third party, but the third party can have no better right than the transferor. Definition from WiseGeek: Bills of exchange are financial documents that require the individual or business that is addressed in the document to pay a specified amount of money on a date that is cited within the text of the document. Considered to be a negotiable instrument, the date for the demand to pay generally ranges from the current date to a date within the next six calendar months. A bill of exchange will also require the authorized signature of the debtor in order to be considered legal and binding. As an unconditional order to pay a fixed sum of money to a creditor, the bill of exchange can take on many different forms. One of the most common examples of the bill of exchange is the common bank check. A check specifies who is to receive the funds, with the order to pay the face value of the check to the order of the creditor. The exact amount of the payment is specified. The date specified on the check is often the issue date for the check, but may also be the date that the bank is to honor the payment. This process is referred to as post dating a check, since the creditor will physically receive the check at some time before it will be honored. It is also possible to establish a bill of exchange in the form of a bank draft. Like the bank check, drafts are normally set up with a fixed sum of payment, and with specific instructions of when to issue the payment to the creditor. The bill of exchange can be a very simplistic document, or one that is very detailed. In many countries around the world, the use of a bill of exchange is a common means of conducting business, and is often accompanied by an allonge (small piece of paper appended to some agreement, the purpose of the allonge is to provide room for an authorized signature that functions as an endorsement for the document, when there is no space for endorsements on the actual document). In situations where the bill of exchange is not honored, the holder of the document is free to take legal action against the debtor according to local laws, or to sell the bill of exchange to a collector at a discounted rate of exchange. Brief summary: The bill of exchange, commonly referred to as the draft or the bill, is an unconditional order in writing, signed and addressed by the drawer (the exporter usually) to the drawee (the confirming bank or the issuing bank usually), requiring the drawee to pay the drawer a certain sum of money at sight or at a fixed or determinable future time. The draft is widely used in international trade, most frequently in the payment against a letter of credit (L/C). It is also used in the open account without any L/C involved. Elements of B/E B/E has to include 1) Unconditional order to pay a certain sum of money and designation that it is the bill of exchange 2) Name of the person who is to pay (drawee) 3) Name of the person to whom or to whose order payment is to be made (drawer seller/exporter) 4) Date of the drawing of the bill of exchange (indication of maturity) 5) Signature of the drawer Four methods of indicating maturity of B/E: a) Sight draft - Maturity at sight is formally based on expressly using words "at sight", "at presentation", "after sight", etc. Another option consists in not stating the day of maturity as mentioned above. With bills of exchange at sight the due day is not determined clearly in advance. The due day is the day when the bill of exchange is presented to the respective person for payment. b) Payable at fixed period after sight = Time draft (usance draft) - An example of time draft is a bill of exchange which is due "one month after sight". The time stated in the bill runs from the day of acceptance of the bill or the protest. Therefore acceptance must bear a date. If the bill was not accepted, or the date of acceptance was not stated the bill must be protested. c) Payable at a fixed period after the date of drawing = Time draft (usance draft) - These are bills in which maturity is stated at a fixed period after the day of drawing, for example, "pay in a month after drawing". d) Payable on a fixed day = fixed time drafts - It is the usual determination of maturity date, st for example, "on 21 August 2001".

Remittance (settlement) of bill of exchange: Acceptance = before the payment of a bill drawn for a term can be enforced it must be presented to the drawee for acceptance. This is accomplished by the formality of writing or stamping the word "accepted" across its face over the signature of the drawee. The latter thus gives notice of his acknowledgment of the indebtedness and of his willingness to pay the bill at maturity. The endorser guarantees to the endorsee that the bill, if payable after sight, will be accepted upon presentation, and that it will be paid at maturity, either by the acceptor or, in case of his default, by himself. 2) Promissory Note A promissory note is a written promise by the maker to pay money to the payee. Bank note is frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer on demand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date. A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person, on demand or on a specified date. A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at fixed or determinable future time, sum certain in money, to order or to bearer. A promissory note, briefly stated, is a promise to pay a sum of money. Original parties to a promissory note: There are originally two parties in a promissory note. The one who makes the promise and signs the instrument is called the "maker" and the party to whom the promise is made or the instrument is payable is called the "payee" 3) Check/cheque = is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified demand account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities. It is addressed to the bank, and contains the date of the order, the amount to be transferred, usually expressed both in figures and in letters, the name of the person in whose favor and to whose order the transfer is to be made, the signature of the depositor or drawer, and usually a number corresponding to one written on the portion of the check retained by the drawer and containing a record of all the essential features of the transaction. Being simply an order to pay, the check is not binding upon the bank to which it is addressed until it has been presented and accepted. Types of check: o Check: A draft drawn by a depositor (the drawer) ordering a bank or other financial institution (the drawee) to pay a sum certain of money on demand to, or to the order of, a third person (the payee). The drawer is liable for ensuring that sufficient funds are in his account to cover the check. o Cashiers Check: A check drawn by the bank on itself, rather than on a drawers account, which constitutes the banks (1) promise to pay the payee on presentment and (2) assumption of liability if the bank fails to pay. o Travelers Check: A check, often used as a substitute for cash, that is (1) drawn on or payable through a bank and (2) payable on demand by the holder. A travelers check does not require the holder to present it to the drawee bank for payment. o Certified Check: A check that has been accepted by the drawee bank prior to presentment (indeed, often at the time it is issued). By certifying the check, the bank assumes all liability for failure to pay the check on presentment. Another division of cheques: 1) Bearer cheque: it is a cheque which is either expressed to be so payable or on which the last or only endorsement is an endorsement in blank. 2) Order cheque: it is a cheque which is expressed to be so payable or which is expressed to be payale to particualar person, without containing words prohibiting transfer or indicating that it is not transferable. 3) Open cheque: it is a cheque, which can be presented to the banker on whom they are drawn and paid by them over counter. There be3ing always a great danger of such cheques being stolen or lost the commercial community invested the method crossing cheques 4) Crossed cheque: it is chaque, which cannot be cashed at the counter, but which can be collected only by a bank from the drawer bank. Crossing may be of two types: (A) general crossing (B) special crossing From the lesson (Mr. Halik): If you employ bill of exchange the obligation of payment does not relate to the contract anymore but to the bill of exchange only.

Sales of contracts -> commercial code (export obligation to deliver, importer obligation to pay, if importer doesnt pay in money but gives I owe you money paper=B/E or check, unconditional promise to pay) Bill of exchange, check -> special law (Czech) Documents against acceptance vs. Documents against payment (conditional promise to pay) (different due date) Smenka vlastni (promissory note) Smenka cizi (B/E) Promissory note vs. B/E Drawer (payer) and drawee -> promissory note When third party is involved, another payer -> bill of exchange Endorsement of the B/E means when the pa yer sells B/E to somebody else and drawee doesnt know who actually the payer is. If the last payer cant pay the obligation to pay moves backwards, Drawee can sue the last obliged payer. Forfeiting and factoring (companies specialized, obliged) vs. B/E Separate legal act from Commercial Code Bills of Exchange and Cheques Act (BECA), for CR Situation: write B/E, go to bank, no money capable to get from bank account, sue based on BECA unconditional promise to pay Used for separation of the payment from the goods Non-covered B/E is irrelevant for one judge who based the judgment on Commercial code (looks only if the paper is valid) Fees paid to judge/attorneys pays whoever loses Keep valid B/E nobody wonders how the debt occurredits important only if it s valid, judge makes verdict based on that compensations, consequent losses, fees, etc. Question 5 Documentary forms of payment, documentary letter of credit, notion, types, and possibilities of usage. Documentary collection - documents against payment and documents against acceptance of the bill of exchange, notion, types possibilities of usage Answer: L/C. A binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the shipment of goods within a given time frame. It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability. Notion: # Applicant - the buyer in a transaction, Importer # Beneficiary - the seller or ultimate recipient of funds, exporter # Issuing bank - the bank that promises to pay # Confirming bank - helps the beneficiary use the letter of credit Exporter and Importer conclude a sales contract with the payment provision by documentary credit- Letter of credit. The Importer proceeds to the Issuing bank and submits an application for L/C that is in conformity with the contract of sale. After issuing banks approves L/C application it will issue the credit and request that a cofirming bank adds its own irrevocable commitment to pay under terms of credit. Once the Seller/Exporter receives the written notification of the credit from Confirming bank he should make sure that would be able to provide all documents agreed in the sales contract. Once goods are delivered to the transport carrier, the exporter receives transport documents which together with other documents (Invoice, insurance, draft, certificate of origin, inpection certificate) are presented to the confirming bank for payment. Confirming bank will closely examine documents and if there are no discrepancies it will pay the Seller, forward the documents together with request for reimbursement to the Issuing bank. Issuing bank will also closely examine documents and if there are no problems it will reimburse the confirming bank. Issuing bank will then release the documents to the Applicant who can use the bill of lading to obtain the goods from the carrier. Types of L/C: 1. Revocable vs. Irrevocable: Irrevocable L/C can NOT be changed without written consent of all parties including beneficiary. Revocable L/C CAN be changed without notifying beneficiary.

1. Confirmed vs. Advised: Confirmed is better as confirming bank promises to pay. Advised DOES NOT guarantee the creditworthiness of the opening bank. 2. Straight vs. Negotiation: L/c can be presented to any bank. A straight L/C can only be paid in the country of the Paying bank. 3. Sight vs. Usance: At sight means that beneficiary is paid as soon as the paying bank determines that all documents are ok. Usance time can be between 30-180 days after the B/L date. Payment on open account represents the most risk for exporter whereas payment by documentary credit represents the safest method for exporter. Clean Collection: Clean collection is an open account payment made via bill B/E. The exporter ships the goods then sends the importer a B/E via importers banks. Whereas a documentary collection allows exporter to retain control of the goods until he has received a payment or assurance of payment in the future. Clean collection is Documentary collection whereby only the financial document (bill of exchange) is sent through the banks without a bill of lading and/or other shipping documents (which are sent separately by the consignor to the consignee). Used usually in open account arrangements, clean collection allows a consignee to take delivery of the shipment without paying and without making a firm commitment to pay on a fixed date. Documentary collections: 1. Documents against payment- cash against documents-D/P The importer pays the draft (Bill of exchange) in order to receive the bill of lading (the document that enables the importer to obtain delivery of the goods). Payment terms for exported goods in which the shipping documents are sent to a bank, agent, etc., in the country to which the goods are being shipped, and the buyer then obtains the documents by paying the invoice amount in cash to the bank, agent, etc. Having the shipping documents enables the buyer to take possession of the goods when they arrive at their port of destination; this is known as documents against presentation. 2. Documents against acceptance- D/A Here the importer accepts the draft/Bill of Exchange in order to receive the bill of lading. By accepting the draft the importer acknowledges an unconditional legal obligation to pay according to terms of draft. Exporter will present instructions for draft acceptance through series of banks. Exporters bank is called Remitting (a bank that forwards sellers documents to the importers bank call ed collecting bank and sends payment in the opposite direction). The importers bank presents the relevant documents for collection to the drawee -smenecni dluznik Exporter has to give precise information and complete in a so-called lodgment form-collection instructions, which bank has to follow. Based on this form bank remitting bank will prepare its collection instruction which will accompany the documentary collection when transmitted to the collecting bank. Advantages and disadvantages Advantages of documentary collection for exporter are that they are relatively cheap and easy and that control over transport documents is maintained until the exporter receives the assurance of payment. Advantage for importer is that he does not have to pay until he has the opportunity to inspect the documents and in some cases also the goods themselves. Disadvantages for the exporter are that documentary collection exposes the seller to: 1. Importer might not accept the goods, credit risk of importer, political risk of th e importers country and that shipment may fail to clear customs. So prudent exporter will get a credit report on the importer, as well as country evaluation. Another problem is that the collection can be relatively slow process. Sometimes exporters bank is willing to cover the period when exporter waits for the funds to clear. The risk of Importer under D/P is that the goods shipped may not be as indicated on the invoice and bill of lading. For banks there are no significant risks and thus document collections are much cheaper than documentary credits. Question 6 Delivery on open account, delivery credits, possibilities of limitation of non payment risks, deferred payment letter of credit, bill of exchange, bank guarantees, insurance of credits, ownership reservation. Introduction:

The central risk of international trade is the exporters risk of non -payment and the importers risk that the goods shipped will not conform to the contract. Both these risks can be reduced by documentary safeguards provided by letter of credit mechanism, however, they involve relatively high banking fees and complex documentary procedures. Non-payment risks can be reduced via effective credit investigation and management, exchange rate management bank guarantees or surety bonds and insurance. Negotiable instruments like B/L or bank draft can be used to raise interim finance or receive discounted payment. Exporter might use credit agencies to receive credit ratings of importer. Credit history or reference from importers bank can be available. We should bear in mind that every country has different accounting and working capital requirements. Delivery on Open account With open account payments the exporter ships the goods to the buyer and then at agreed upon future time, transmits an invoice and other shipping documents i.e. importer buys now pay later. It is also sometimes called sales on credit as the seller extends credit without documentary security. For the importer the open account terms are quite advantageous as there is no need to pay for the goods as they are received. Open account sales are common in domestic sales, but less common in international transactions as they increase the risk of seller. Only when the seller is absolutely sure about the credit stability of the buyers country and credit rating of the importer it should sell on open account. With increasing globalization and market integration open account payment at the international level has significantly increased. In the past major barriers such as lack of transparency and concerns about cross border exposure. Today with increasing technology it became easier to trade on open account and it is predicted that it will be increasing. Differed payment L/C Arrangement under which the bank issuing a L/C also finances it. The bank pays the beneficiary upon presentation of the required documents but delays charging that amount to the applicant until a future date. Its objective usually is to allow the applicant a period long enough to resell the financed goods. If you are an exporter, a letter of credit (or L/C, also known as a documentary credit) enables you to offer an importer the option of deferred payment. You and the importer must negotiate the terms and conditions of the L/C, including the expenses that the importer will bear. You must agree on the following: * The rate of interest that the importer will pay on the deferred payment * The length of the credit period and the payment dates Bill of Exchange A draft or B/E is a negotiable instrument (possessing it has a money value like B/L), which represents an unconditional demand for payment. Unconditional meaning that the origin of the debt is not important. Together with Bill of lading it represents the basis for documentary collection procedures. Together with the commercial invoice the B/E can be used to charge the importer for the goods. It is an unconditional order in writing addressed by one person to another signed by the person giving it requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain some of money. Draft is written by a Drawer-vydavatel smenky to the drawee-smenecni dluzni,requiring a payment of a fixed amount at specific time. It must be written in the text Bill of exchange and in the same language as the whole document. Money must be expressed in words and numbers. A draft payable upon presentation is called at sight whereas payable at future date is called usance draft. The draft is legally accepted when a buyer or bank write accepted, the date and signature on the face of a time draft. A draft accepted by bank is called bankers acceptance while a draft accepted by a buyer is called a trade accepted. When the seller attaches the bill of lading or other transport documents to a bill of exchange, the bill of exchange is called documentary bill. By doing this he will make sure that a buyer will not get any rights to the goods via the bill of lading before having accepted or paid the B/E. Since they are negotiable drafts may be transferred by endorsement. Bank guarantees: As the judical enforcement of contractual rights can be slow and expensive and documentary credits provide primary protection for exporter. Two basic kinds of guarantees:

1. Demand guarantees-represent instant cash for the beneficiary-who only has to make a demand. 2. Surety guarantees-these guarantees are conditional-the beneficiary must prove that he is entitled to money as by providing a court judgment. Historically the usage of cash deposits was used, however it had drawbacks as opportunity costs or used by another party. This is overcome with the advent of a system where bank issues a guarantee or bond to the importer instead of cash deposits. Many types of guarantees: bonds, guarantees, ndemnities-pojistna nahrada, standby letters of credit,bank guarantees,surety guarantees. Etc.. The main parties: Beneficiary: Receives the money in the event of non-payment or non performance. Often a buyer/importer. Principal: The party that issues or directs the issue of guarantee. Typically large construction companies that guarantee that construction project will be completed or exporters that guarantee they will repay any sums advanced by importer if goods are no properly shipped. Guarantor: The bank or insurance company that issues guarantee on the instructions of the principal. Two main types: 1. Demand guarantee Under demand guarantee the guarantor must pay on demand by beneficiary. There is no need to prove that the principal has defaulted on contractual obligation. The beneficiary is assured of speedy and certain monetary guarantee. They are substitutes for cash deposits. The main problem is the unfair call where beneficiaries can unjustifiably make a demand. Usually it is protected by law. Another problem with the demand guarantee is the validity as beneficiary may be able to force extension period of validity. So called extend or pay. Demand guarantees are independent undertakings-zavazek,prislib. So even if principal goes bankrupted it is binding .Demand guarantees are usually a small fraction of the total contract value. In 5%-10%. Usually used where the beneficiary has a great bargaining power, take it or leave it.. 2.Surety guarantee or conditional guarantee The obligation of guarantor is triggered by the actual default or contractual breach of the contract of the principal. This is evidenced by court judgment or arbitrage. So the beneficiary has to prove it. In contrast to demand guarantees they are secondary because the guarantors obligations are dependent on the principals actual default. Guarantor is only obliged to fulfill the principles obligations. Conditional guarantees eliminate the problem of unfair calls and are preferable from the principals point of view. Usually higher coverage 30-40% of total contract value. Moreover it is possible to combine both guarantees together. Export credit: Trade insurance Risks exporter might wish to insure against: 1. Exchange rate fluctuations 2. Importer refuses to pay for whatever reason 3. Insolvency of importer 4. Exporter fails to perform the contract 5. Force major 6. Political force major Two types of credit insurance: Public: Export/Import banks, EGAP etc.. working capital guarantees, export credit insurance. Publicly finance export insurance sometimes considered as indirect export subsidy that can distort int. trade. Private: Credit insurance brokers, they advise exporters on how to choose from many insurance services and policies. Credit insurance- covering exporter against non-payment. Comprehensive insurance-cover against currency, business, political risk OWNERSHIP RESERVATION: Grants a seller a guarantee in property law to a right of claim for payment of the purchase price. For this, the parties must enter into a contract, without conditions, under the law of obligations and into a conditional contract under property law which prescribes transfer of ownership to the purchaser upon payment of the purchase price in full. An expectant right is a possibility to acquire a particular right in the future (ownership) under definite circumstances. An expectant right grants a purchaser the right to become an owner automatically upon the fulfilment of certain conditions.

Question 7 Logistics in international trade, shipping operations, contractual arrangements in shipping operations, forwarders contract, shipping contract, documents used in international transport of goods, specification of types of transport, rationalization of transporting systems, warehousing and checking operations, contractual arrangements, consignment stocks, contract on checking, checking companies and importance of checking certificates Interesting website: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=107811252 6 Answer: International trade logistics is the art by which various activities pertaining to international trade are coordinated simultaneously. It encompasses the science of controlling as well as managing the flux of energy, information and goods. International trade logistics also include the flow of resources like services and products from the point, where they are produced to the point where it is made available to the consumers (the market place). The process of manufacturing and marketing is considered incomplete 1 without the support of logistics . Another interpretation: International Trade Logistics provides an integrated transportation management and trade compliance solution that enables organizations to make faster, smarter trade decisions by streamlining, accelerating, and integrating complex import and export processes. It ensures timely delivery of goods and curtails customs delays at the border, reducing exposure to non-compliance fines, penalties, and 2 seizures . International trade logistics is broadly based on the following: Consolidation of information Inventory Transportation Material handling Shipping Operations Shipping has multiple meanings. It can be a physical process of transporting goods and cargo, by land, air, and sea. It also can describe the movement of objects by ship. Land or "ground" shipping can be by train or by truck. In air and sea shipments, ground transportation is often still required to take the product from its origin to the airport or seaport and then to its destination. Ground transportation is typically more affordable than air shipments, but more expensive than shipping by sea. Shipment of freight by trucks, directly from the shipper to the destination, is known as a door to door shipment. Vans and trucks make deliveries to sea ports and air ports where freight is moved in bulk. Much shipping is done aboard actual ships. An individual nation's fleet and the people that crew it are referred to its merchant navy or merchant marine. Merchant shipping is essential to the world economy, carrying 90% of international trade with 50,000 merchant ships worldwide. The term shipping in this context originated from the shipping trade of wind power ships, and has come to refer to the delivery of cargo and parcels of any size. Terms of shipment Main article: Incoterms Common trading terms used in shipping goods internationally include: Freight on board, or free on board (FOB) the exporter delivers the goods at the specified location (and on board the vessel). Costs paid by the exporter include load and lash, including securing cargo not to move in the ships hold, protecting the cargo from contact with the double bottom to prevent slipping, and protection against damage from condensation. For example, "FOB Kunming Airport" means that the exporter delivers the goods to the airport, and pays for the cargo to be loaded and secured on the plane. The exporter is bound to deliver the goods at his cost and expense. In this case, the freight and other expenses for outbound traffic is borne by the importer. Cost and freight (C&F, CFR, CNF): Insurance is payable by the importer, and the exporter pays the ocean shipping/air freight costs to the specified location. For example, C&F Los Angeles (the exporter pays the ocean shipping/air freight costs to Los Angeles). Many of the shipping carriers (such as UPS, DHL, FEDEX) offer guarantees on their delivery times. These are known as GSR

1 2

http://finance.mapsofworld.com/trade/international-logistics.html http://www.infor.com/solutions/scm/transportation/intltradelogistics/

guarantees or "guaranteed service refunds"; if the parcels are not delivered on time, the customer is entitled to a refund. Cost, insurance, and freight (CIF): Insurance and freight are all paid by the exporter to the specified location. For example, at CIF Los Angeles, the exporter pays the ocean shipping/air freight costs to Los Angeles including the insurance). The term "best way" generally implies that the shipper will choose the carrier who offers the lowest rate (to the shipper) for the shipment. In some cases, however, other factors, such as better insurance or faster transit time will cause the shipper to choose an option other than the lowest bidder. Contractual arrangements in shipping operations Ship-owners contract to carry cargo for an agreed price per tone, while the charter market hires out ships for a certain period. A charter is legally agreed upon in a charter-party in which the terms of the deal are clearly set out. Four types of contractual arrangements: Voyage charter, is the hiring of a vessel and crew for a voyage between a load port and a discharge port. The charterer pays the vessel owner on a per-ton or lump-sum basis. The owner pays the port costs (excluding stevedoring loading and unloading ships), fuel costs and crew costs. Contract of affreightment, is the expression usually employed to describe the contract between a ship-owner and another person called the charterer, by which the ship-owner agrees to carry goods of the charterer in his ship, or to give to the charterer the use of the whole or part of the cargocarrying space of the ship for the carriage of his goods on a specified voyage or voyages or for a specified time. The charterer on his part agrees to pay a specified price, called freight, for the carriage of the goods or the use of the ship. Time charter, is the hiring of a vessel for a specific period of time; the owner still manages the vessel but the charterer selects the ports and directs the vessel where to go. The charterer pays for all fuel the vessel consumes, port charges, and a daily 'hire' to the owner of the vessel. Bareboat charter, is an arrangement for the hiring of a vessel whereby no administration or technical maintenance is included as part of the agreement. The charterer pays for all operating expenses, including fuel, crew, port expenses and hull insurance (marine insurance - covers the loss or damage of ships, cargo, terminals, and any transport or property by which cargo is transferred, acquired, or held between the points of origin and final destination).. Usually, the charter period (normally years) ends with the charterer obtaining title (ownership) in the hull. Effectively, the owners finance the purchase of the vessel. Forwarders contract International freight forwarders act as a middleman between the exporter-importer and the carrier. Freight forwarders can work either on behalf of the shipper (exporter) or the consignee (importer). A fright forwarders business is to move freight as quickly as possible at prices lower than what their clients can generally receive on their own. Few exporters-importers ship enough volume to deal directly with an international carrier such as steamship line or a commercial airline. Freight forwarders contract for space on these carriers by committing a certain level of business based on the total shipping volume of their customer base. By doing so, they can obtain lower rates than what average shipper can obtain on their own. Although freight forwarders make international trade viable for smaller and medium size company, even the largest of shippers use them. Having a presence at the port of entry and contracts at these ports of entry is critical when moving freight internationally. Some international air freight forwarders are certified by International Air Transport Association (IATA). The air-freight industry is not regulated, and as such, air freight forwarders do not have to be certified. Air freight forwarders certified by IATA, however, are issued an IATA number. Many commercial airlines will ask for an IATA number before they will accept any freight from an air-freight forwarder. From a shippers standpoint, freight forwarders act ass common carrier. A shipper must be careful to understand that international forwarders limit their liability. Two organizations are involved in setting standards and practices in the freight forwarder industry. The first one is International Federation of Freight Forwarders Association and the second National Custom Brokers and Freight Forwarders of America Association. 3 Another interpretation : An international freight forwarder is an agent for the exporter and can move cargo from dock -todoor, providing several significant services such as: Advising on exporting costs including freight costs, port charges, consular fees, costs of special documentation, insurance costs and freight handling fees;

http://www.export.gov/logistics/eg_main_018144.asp

 Preparing and filing required export documentation such as the bill of lading and routing appropriate documents to the seller, the buyer or a paying bank; Advising on the most appropriate mode of cargo transport and making arrangements to pack and load the cargo; Reserving the necessary cargo space on a vessel, aircraft, train, or truck. Making arrangements with overseas customs brokers to ensure that the goods and documents comply with customs regulations. Export freight forwarders are licensed by the International Air Transport Association (IATA) to handle airfreight and the Federal Maritime Commission to handle ocean freight. Shipping contract A legally binding agreement between two or more persons/organizations to carry out reciprocal obligations or value, such is shipment of goods with negotiation for freight, insurance etc. Documents used in international transport of goods Every shipment must travel with some form of manifest. These are typically referred to as bill of lading for ground and ocean shipments and air-way bill for air shipments. The bill of lading and air-way bill serve as a contract between the shipper and the carrier. Most international shipments use both a domestic and an ocean (or airway) bill of lading. These documents are typically non negotiable, which mean they do not convey title. As such, carrier can deliver the order without the consignee presenting an original copy of bill of lading. An order bill of lading, however, is negotiable and is often used in international transportation. If the shipment includes an order bill of lading, then the consignee must pay the value of the invoice to receive the original bill of lading from the shipper. The carrier will not tender unless consignee can present original bill of lading to the carrier. Only then does title of the merchandise pass from seller to buyer. In essence, an order bill of lading is similar to a domestic cash-on-delivery (COD) shipment. 4 COMMON EXPORT DOCUMENTS Airway Bill Air freight shipments require Airway bills, which can never be made in negotiable form. Airway bills are shipper-specific (i.e. USPS, Fed-Ex, UPS, DHL, etc). Bill of Lading A contract between the owner of the goods and the carrier (as with domestic shipments). For vessels, there are two types: a straight bill of lading, which is non-negotiable, and a negotiable or shipper's order bill of lading. The latter can be bought, sold, or traded while the goods are in transit. The customer usually needs an original as proof of ownership to take possession of the goods. Commercial Invoice A bill for the goods from the seller to the buyer. These invoices are often used by governments to determine the true value of goods when assessing customs duties. Governments that use the commercial invoice to control imports will often specify its form, content, number of copies, language to be used, and other characteristics. The commercial invoice contain following information: 1. Country of origin for each item, 2. Sellers name and address, 3. Buyers name and address, 4. Description of the items being shipped, 5. Schedule B number (this number, which is referred to as a harmonized tariff schedule number on imports, is a code used to determine the duty rate). Export Packing List Considerably more detailed and informative than a standard domestic packing list, it lists seller, buyer, shipper, invoice number, date of shipment, mode of transport, carrier, and itemizes quantity, description, the type of package, such as a box, crate, drum, or carton, the quantity of packages, total net and gross weight (in kilograms), package marks, and dimensions, if appropriate. Both commercial stationers and freight forwarders carry packing list forms. A packing list may serve as conforming document. It is not a substitute for a commercial invoice. Electronic Export Information Form (Shippers Export Declaration) The EEI is the most common of all export documents. Required for shipments above $2,500* and for shipments of any value requiring an export license. SED has to be electronically filed via AES Direct (free service from Census and Customs) online system. *Note: EEI is required for shipments to Puerto Rico, the U.S. Virgin Islands and the former Pacific Trust Territories even though they are not considered exports (unless each Schedule B item in the shipment is under $2,500).
4

http://www.export.gov/logistics/eg_main_018121.asp

Shipments to Canada do not require an SED except in cases where an export license is required. (Shipments to third countries passing through Canada do need an SED.) CERTIFICATES OF ORGIN Generic Certificate of Origin The Certificate of Origin (CO) is required by some countries for all or only certain products. In many cases, a statement of origin printed on company letterhead will suffice. The exporter should verify whether a CO is required with the buyer and/or an experienced shipper/freight forwarder or the Trade Information center. Note: Some countries (i.e. Middle East) require that certificate of origin be notarized, certified by local chamber of commerce and legalized by the commercial section of the consulate of the destination country. For textile products, an importing country may require a certificate of origin issued by the manufacturer. The number of required copies and language may vary from country to country. Certificate of Origin for claiming benefits under Free Trade Agreements Special certificates may be required for countries with which the United States has free trade agreements (FTAs). Some certificate of origin including those required by the North American Free Trade Agreement (NAFTA), and the FTAs with Israel and Jordan, are prepared by the exporter. Others including those required by the FTAs with Australia, CAFTA countries, Chile and Morocco, are importers responsibility). OTHER CERTIFICATES FOR SHIPMENTS OF SPECIFIC GOODS ATA CARNET/Temporary shipment certificate An ATA Carnet a. k. a. "Merchandise Passport" is a document that facilitates the temporary importation of products into foreign countries by eliminating tariffs and value-added taxes (VAT) or the posting of a security deposit normally required at the time of importation. Apply for an ATA Carnet. Certificate of Analysis: A certificate of analysis is required for seeds, grain, health foods, dietary supplements, fruits and vegetables, and pharmaceutical products. Certificate of Free Sale Certificate of free sale may be issued for biologics, food, drugs, medical devices and veterinary medicine. More information is available from the Food and Drug Administration. Health authorities in some states as well as some trade associations also issue Certificates of Free Sale. Dangerous Goods Certificate Exports submitted for handling by air carriers and air freight forwarders classified as dangerous goods need to be accompanied by the Shippers Declaration for Dangerous Goods required by the International Air Transport Association (IATA). The exporter is responsible for accuracy of the form and ensuring that requirements related to packaging, marking, and other required information by IATA have been met. For shipment of dangerous goods it is critical to identify goods by proper name, comply with packaging and labeling requirements (they vary depending upon type of product shipper and country shipped to). Specification of types of transport About half of the global trade takes place between locations of more than 3,000 km apart. Because of the involved geographical scale, most international freight movements involve several modes, especially when origins and destinations are far apart. Transport chains must thus be established to service these flows which reinforce the importance of intermodal transportation modes and terminals at strategic locations. Among the numerous transport modes, two are specifically concerned with international trade: Ports and maritime shipping. The importance of maritime transportation in global freight trade in unmistakable, particularly in terms of tonnage as it handles about 90% of the global. Thus, globalization is the realm of maritime shipping, with containerized shipping at the forefront of the process. The global maritime transport system is composed of a series of major gateways granting access to major production and consumption regions. Between those gateways are major hubs acting as points of interconnection and transshipment between systems of maritime circulation. Airports and air transport. Although in terms tonnage air transportation carries an insignificant amount of freight (0.2% of total tonnage) compared with maritime transportation, its importance in terms of the total value is much more significant; about 15%. International air freight is about 70 times more valuable than its maritime counterpart and about 30 times more valuable than freight carried overland, which is linked with the types of goods it transports (e.g. electronics). The location of freight airports correspond to high technology manufacturing clusters as well as intermediary locations where freight planes are refueled and/or cargo is transshipped.

Road and railway modes tend to occupy a more marginal portion of international transportation since they are above all modes for national or regional transport services. Their importance is focused on their role in the "first and last miles of global distribution. Freight is mainly brought to port and airport terminals by trucking or rail. There are however notable exceptions in the role of overland transportation in international trade. A substantial share of the NAFTA trade between Canada, United States and Mexico is supported by trucking, as well as large share of the Western European trade. In spite of this, these exchanges are at priori regional by definition, although intermodal transportation confers a more complex setting in the interpretation of these flows. Rationalization of transporting systems The growth of the amount of freight being traded as well as a great variety of origins and destinations promotes the importance of international transportation as a fundamental element supporting the global economy. International transportation systems have been under increasing pressures to support additional demands in volume and distance carried. This could not have occurred without considerable technical improvements permitting to transport larger quantities of passengers and freight, and this more quickly and more efficiently. Few other technical improvements than containerization have contributed to this environment of growing mobility of freight. Since containers and their intermodal transport systems improve the efficiency of global distribution, a growing share of general cargo moving globally is containerized. Consequently, transportation is often referred as an enabling factor that is not necessarily the cause of international trade, but a mean over which globalization could not have occurred without. A common development problem is the inability of international transportation infrastructures to support flows, undermining access to the global market and the benefits that can be derived from international trade. International trade requires distribution infrastructures that can support trade between several partners. Three components of international transportation facilitate trade: Transportation infrastructure. Concerns physical infrastructures such as terminals, vehicles and networks. Efficiencies or deficiencies in transport infrastructures will either promote or inhibit international trade. Transportation services. Concerns the complex set of services involved in the international circulation of passengers and freight. It includes activities such as distribution, logistics, finance, insurance and marketing. Transactional environment. Concerns the complex legal, political, financial and cultural setting in which international transport systems operate. It includes aspects such as exchange rates, regulations, quotas and tariffs, but also consumer preferences. Warehousing and checking operations A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities and towns. Major warehousing processes include: Receiving Put away Order preparation / picking Shipping Inventory management (cycle counting, addressing...) Warehouses frequently provide services, such as: Co-packing Kitting Material direction and tracking in a warehouse can be coordinated by a Warehouse Management System (WMS), a database driven computer program. Logistics personnel use the WMS to improve warehouse efficiency by directing putaways and to maintain accurate inventory by recording warehouse transactions. Seller is responsible for the costs of checking operations, such as quality checking, weighing, measuring, and counting, that takes place before delivery. Contractual arrangements Agreements between two parties (for example, carrier and exporter) on a specific rendering of service, such as moving cargo from exporter to consignee (importer). Contractual arrangements may be of different types, for example franchising, contract on insurance etc. Consignment stocks Consignment stock is any stock that the supplier has placed in the warehouse without charge. It remains the property of the supplier until it is actually used (issued) and should not be included in the value of the stock on hand. At the point of issue a liability to pay for the amount used is incurred - for

conventional stock the liability occurs when the stock is ordered (commitment) and when it is received at the warehouse (accrual). When consignment stock is re-ordered, the purchase order needs to be marked as a "consignment stock replenishment" order to ensure that the supplier does not raise an invoice for it. The invoice is raised on the basis of the stock issued each month. Contract on checking, checking companies, and checking certificates Checking once a product is completed. Independent agency is examining a product and issuing a document that a product is in conformity with norms and standards. Contract of checking First, agreement on checking, where obligations of the party exercising the checking and the party ordering the checking are stated. We can learn from agreement checking matter, method of checking, time and local identification, in particular, checking body must identify defects and reasons why they appeared. Checking Certificates (Certificate of inspection) The minimum requirements for certificate are that the inspector has visually inspected goods and found them in good condition. Of the numerous inspection organizations dealing with general merchandise, 4 may be mentioned, as they are represented in many commercial centers of the world: Societe Generale de Surveillance SA (SGS) operated in UK Cargo Superintendents Ltd Superintendence Co (New York) Bureau Veritas of France Contract between the inspection organization and the client is known as contract on goods inspection. The inspector is under contractual duty to use reasonable care. Pre-shipment inspection Goods are physically inspected when they arrive to the carrier (quantity and condition of goods, sometimes price control) Advantages: Avoids disputes between insured and insurer on whether any loss of or damage to the goods occurred before or after the risk attached, Avoid disputes between seller and buyer on whether goods are in accordace with the contract Contract on checking Guys, I couldnt find anything about this neither in the internet nor in the book. Tomorrow I am going to Halik to ask him what he meant by this. As soon as I get answer, I will send you it. Some businesses and organizations need to send their draft contracts for consideration and approval by another party (or their legal advisers). These tend to be the smaller business or association that does not have its own corporate legal department at its disposal but, quite sensibly, wishes to ensure that there are no nasty surprises lurking in the small print. In addition to checking and advising on the terms of the Contract, companies may also wish us to negotiate any amendments with the other party. From another source: Contracts are the glue which binds businesses selling goods and services to the customers who buy them. Small businesses relying on this glue often use the same form contract for years and never review its language with a critical eye until a dispute arise s. By that time, its too late and dealing with the consequences is at a very expensive stage. A few minutes invested now to do a quick review of your basic business contract could save a great deal of time, aggravation and money, in the future. The Basic Elements Start evaluating contract by doing a quick check of the critical basic elements. In most states, for a written contract to be enforceable, it must at a minimum: Identify the Parties. Simply make sure that you and your employees ALWAYS (legibly, if done by hand) insert the names of the parties in the appropriate spaces on the contract. Describe the Subject Matter. A contract must adequately describe the subject matter of the agreement. If the contract is for the sale of goods, it should clearly indicate that the parties have agreed to a sale of goods. Making it clear that the parties understood and agreed in advance that the contract was for the sale of goods, not services, or vice versa, will make sure that the correct body of law is applied in the event of a dispute. For example, the Uniform Commercial Code (adopted in some form by all states and known as the UCC) applies only to the sale of goods. All other types of contracts are generally governed by the more imprecise and varied statutory and common law of each state. In some cases, it is not always clear whether the contract is for the sale of goods or services. State the Material Terms. Every contract must state the material terms and conditions of the contract. Under the Uniform Commercial Code the only material term necessary for an enforceable

contract is a term stating the quantity of goods to be sold. In the event of a dispute, the Uniform Commercial Code permits a court to fill in the unstated or missing terms with what the court deems to be a reasonable price, quality, color, delivery date, interest rate, etc. Include a Signature. Every written contract must be signed by the party to be charged in the event of a breach. What this means is that if the seller eventually requires enforcement of a contract against a buyer, the contract must have been signed by the buyer. Conversely, if the buyer wants to force a seller to comply with the terms of a contract, the contract must bear the sellers signature. A signature by the buyer of goods or services is critical evidence that he or she agreed to the terms of the contract and intended to be bound by them. Most pre-printed form contracts provide the necessary spaces for signatures. Question 8 Insurance and double insurance in international trade, English system of shipping insurance, insurance of foreign transport, insurance of international credits and documentary collection of damage liability insurance Insurance and double insurance: Only under CIF and CIP is insurance required: the seller must obtatin at his own expense cargo insurance entitling the buyer to claim directly from the insurer. The minimum insurance coverage required under CIF and CIP is 110% of the value of the goods this extra 10% is meant to account for the potential profit to the buyer from the transaction. The incoterms insurance requirements are based on on the Institute Cargo Clauses drafted by the Institute of London Underwriters. There are three alternatives: clauses, A, B, C, with clause A - representing the so-called all risk insurance. These clauses define the risk covered by the insurance policy and were intented to replace and improve the previously common clauses know as all risk with average and free particular average. Clause A: provides the broadest coverage and is therefore sometimes considered to provide all risk cover (traders should not be deceived by this term into thinking that ALL risks are covered because actually they are not). However, such terminology os deceptive, because several important risks like strikes, war, as well as damage resulting from insufficinet packaging, delay, ordinary wear, tear of transport or the insolvency of the carrier, are not covered by clause A. Clause B and C are even more restrictive, covering, only risks that are specifically referred to. Under Incoterms, the seller may choose Clause C, which provides the least coverage. Importers should therefore be forewarned that in cases where such minimum coverage is insufficient, they will need to specify in the contract the level of additional insurance they require. For example if the importer expects to earn a high profit margin on goods, coverage of 110% of the value of the goods maybe insufficient; 120% or 130% may be advisable. The incoterms principle of minimum coverage is a potential trap for the inexperienced traders, because minimum coverage is only appropiate when the risk of loss is solely from such casualties as collision or fire; such coverage does not include damage resulting theft, pilferage or improper handling of the goods. As a result, minimum cover is not suitable for manufactured goods, especially if they are of hight value. The buyer may want to go even further than clause A by requiring insurance against war, riots and strikes (this is the so-called SRCC clauses which is coverage for strikes, riots and civil commotions). Insurance of foreign transport (Cargo insurance) International trade shipments are almost without exception insured against damage or loss in transit by some form of cargo insurance. Either the exporter or importer may have the primary responsibility to insure, and in some other cases, both parties will have the cargo insured to varying extend The trader may have long-term open or floating cover with the insurance company, which will cover a number of shipments over a given period of time. In other cases, the trader may directly insure a particular shipment via a marine, aviation or overland insurance policy. Despite their names, such insurance policies are generally not limited to insurance for only the marine, air or land, but can each be extended to cover the goods warehouse to warehouse Duty to insure versus commercial need to insure: Under CIF and CIP, the exporter has a contractual duty to the importer to provide a minimum level of insurance to cover the goods during international transit. Under all other Incoterms, there is no contractual duty for either side to provide insurance, but however this does not remove the obvious practical need to obtain insurance

 Parties will normally obtain insurance coverage to protect themselves as a matter of ordinary commercial prudence, so at minimum they will wish to be insured in that part of transit in which they are at risk. Splitting of insurance cover according to division of risk: Parties may wish to pay for insurance coverage for that part of the transit in which they were at risk Example: FOB transfer of risk is at the ships side. The seller is at risk up to that point, so he might reasonably wish the cargo to be insurance by himself up to the ships rail and no further he has no contractual duty at all to insure the goods up to the ships side, but he will normally do so out of self-interest Buyer might desire that his insurance coverage should begin at the ships rail and no earlier. Most often the insurance is warehouse to warehouse, so it is not a common practice to slip insurance coverage at the transfer of risk point because has several disadvantages: o The two insurance covers will not match exactly leaving a gap not insured o If loss or damage is only discovered upon arrival it may difficult to prove where the loss or damage occurred both insurers may be able to avoid payment. o Two separate partial insurance are generally more expensive than a single cover Open cover versus floating cover: are intended to cover multiple shipments over a period of time, and therefore only state the general condition of the insurance contract. In each case the insured party notifies the insurer of the specific voyages to be covered under the policy. Under a floating policy, the value of the risk insured on each voyage is deducted from the total value of the insurance contracted. Under an open policy the insurance limit is automatically renewed after each voyage. When the payment is done under letter of credit, the shipper may need to have an insurance document. Under the open insurance, this is accomplished by the use of insurance certificates that are issued by the insurer at the instruction of the insured party. Cost of insurance: varies according to the transport and nature of the goods. The cost varies from 0.3% (value of the goods) to 2% (long roads or rail transport legs). Sea transport is in the range 0.6 0.7% Export credit (trade credit) insurance: insures a supplier against the risk of monetary loss in respect of goods and services sold on credit to another party in the even if that buyers default. Default occurs when a valid debt remains unpaid after a specified period from the due date for payment varies as between different credit insurance companies, but usually from 6 to 12 months. Limits: limit of discretion that is the maximum amount outstanding in respect of any particular debtor, below which amount the insured is free to transact business without contacting the insurer. Anyway in case of buyer that exceed this limit, the policy holder is obliged to obtain the prior consent of the credit insurer. Period: the credit term is usually considered to commence from the date of delivery of the goods or performance of a service contracted until the due date for payment. There is a fundamental distinction between short term where the credit term is only exceptionally longer than 180 days and medium or long term business transactions conducted on credit which are between 3 5 years or longer and normally relate to capital goods and works contracts. The maximum credit term specified in a policy is usually established in consultation with the policy holder and the term is always market-related. It plays a basic and vital role in international trade for both supplier and buyer. In the absence of the credit insurer, many trade transactions would have to be done on cash basics or even not at all. The credit insurer is both a protector and an agent for growth. We say a protector of profit, cash flow, balance sheet and the customer base on the other side we say an agent for growth in many countries, its trade sector expertise and experience, and its knowledge of a vast number of companies, ensure its continuing role in international trade. The risks that the exporter may wish to insure against are: Currency risks: exchange rate fluctuations, imposition of foreign exchange controls Business risks: the importer refuses to pay for whatever reason, the importer goes to bankrupt, the exporter fails to adequately perform the contract, the importers or exporters performance is blocked by a major force such as natural disaster Political risks: political force majeur even, such as revolutions or outbreak of war, confiscation of expropriation, new regulations which prevent performance of the contract There are two basic types of international credit insurers: public and private. They assist exporters not only by reimbursing them for losses sustained from non-payment but also by helping them set up proper credit management procedures. Also insurers may provide exporters with credit data on

prospective customers, suggest appropriate credit levels and supply info about countrys economic and political risk. Public insurers: Good examples of the public providers are Export-Import of the US (providing working capital guarantee, export credit insurance, loan guarantees and direct loans), Canadas Export Development Corporation etc. These public insurance actually has become object of international political sensitivity because it can be considered as indirect export subsidy that can unfairly distort international trade OECD Consensus on Export Credit. Especially with regards to the short-term coverage, public insurers have lower down their operations in favor private insurer. Public insurers, unlike the private ones, do not offer to the exporter the ability to cover both domestic and international risks. Private insurers: market their services through specialized credit insurance brokers which advice the exporters how to choose amongst of insurance services and policies available. In the event of claim, broker may assist in preparing the documentations and dealing with the insurance company. Types of policy EX credit insurance covering the exporter against or default of the IM Comprehensive policy - cover the exporter against currency, business and political risks Various combination are possible depending on the specific risk and EX wishes to cover Exporter who wishes to self-insure or handle credit management by themselves may wish to take out a catastrophic loss or excess loss policy. These policies provide total coverage for any losses in excess of a certain threshold, leaving the company to self-insure for losses below that amount. Coverage: nonpayment caused by the exporters own fault is normally excluded from the coverage. Coverage of currency risk is exceptional, especially as the term of coverage increases and may require a separate policy or premium. The amount of coverage is commonly between 80-90% and the cost is in the range of less than 1% to 2% of the contract price plus a base fee and the insurers minimum processing charges. Collection of insured debts: in case an insured debt remains unpaid (for more than 30 days after its original due date) the policy holder is required immediately to notify the credit insurer. From this point the debt becomes the subject of a cooperative collection procedure in which the credit insurer may also enlist the assistance of other ICIA (International Credit Insurance Association) colleagues. Particularly in the case of significant amounts, the credit insurer may involve legal arrangement extending to final insolvency proceedings. Question 9 Methods and instruments of financing, methods of short term financing, factoring, methods mod-term financing and long term financing, forfeiting, leasing One of the greatest problem the exporters are facing is the growing insistence of the importers that the trade should be conducted on open account terms, which is actually a practice that is growing in many parts of the world. This is happening because of the technological advances and increased financial knowledge which have facilitated the open account trading. The open account trade means that the payment is received from the buyer many weeks or also month after delivery, often after 30, 60, and 90 or even 180 days. Under the financing schemes that are available from exporters bank, but the exporter can rely on an overdraft or credit line. If the sale involves a bank draft or a bill of exchange the exporter can obtain cash by having his bank negotiate or discount the bill. In this case the sales proceeds are realized by routing of documents through banking channels. Or in alternative the bank will make an 80% or 90% advance against the bill and other shipping documents. But in case of confirmed letter of 5 credit (or bill of exchange AVALIZED by banks) so in this case there is not so much risk for the bank failing to obtain payment and the financing is generally without recourse. Of course giving buyers credit in this way can cause severe cash-flow problems to exporters and even worse problems can arise of the importers delays payment beyond the originally agreed terms or makes no payment at all. This of course can create a problem when the exporter needs to pay its suppliers or it has other opportunities to make other deals but needs to buy materials in order to perform the contract. On one hand the exporters needs cash but on the other hand exporter is in posses of the account receivables which are obligations on the part of his trading partners to pay the exporter at specified time in the future. On importer side, he can pay in advance before receiving the goods, and in this case he is faced with the gap time between the time it has paid and the goods received (or the revenues he will receive when the goods will be sold). The importer can receive an advance upon the revenue that it expects from the good sold. By this he can receive a straightforward loan from the bank or overdraft facility but this is expensive and limited options. Factoring and Forfeiting are both designed to facilitate the financing of trade accounts receivables and are easy to use.

A bill of exchange to which an AVAL has been added - AVAL: term for an unconditional third-party (usually the importer's or buyer's bank) guaranty of the payment of a bill of exchange or promissory note.

FACTORING: just a package of services designed to ease the international problem of selling on open account. Another name it can be invoice financing or receivables discounting and it is more suitable for SMEs. Services that are offered by: credit risk assessment and protection, collection of overdue accounts, administration of sales accounting ledgers and financing. When it comes to the definition: any arrangement which contained at least two of the above services could be considered as international factoring. In certain situations, an exporter will not wish an importer to know that the exporter is making use of the factoring and in this case will require undisclosed or silent factoring that it is factoring that it is not revealed to the buyer. One reason it can be that the buyer can create negative assumptions about the financial status of the exporter. How it works: An exporter sells the goods to a foreign importer on open account terms and agrees to receive the payment on, say, 30, 60, 90, or up to 180 days term. In order to increase the working capital and to obtain credit cover the exporter assigns its invoices (receivables) to a factoring organization. Exporter may purchase different factoring services (finance, collection and credit cover) but in all cases exporters get the best deal when they assign the whole or part of their receivables flow to the factor. Immediately after shipment, the factor advances to exporter a % of the invoice amount, normally up to 80%-90% and the factors collects the sums due from the importer on shortly after the relevant payment dates. The factoring can be straightforward that means the exporter can assign all the agreed future receivables to an export factor. Most of the time the factoring is done on a non-secure basis that means that the factor which buys the receivables evaluate the receivables in advance and assumes all the credit risk of nonpayment. Fee structure: the exporter normally pays a service charge of approximately 1% of the invoice amount (this cover the credit risk protection, the collection service etc). In case that the exporter wants to draw the funds in advance, he normally pays an interest charge calculated on funds in use per day. Two-factor schemes Exporter enter in contact with a factor in his country: called the export factor Export factor will establish an agreement with a correspond factor in the importers country: called import factor. These two factors may belong to the same factoring company or simply may establish a contract. Once the agreement is in place the receivables are reassigned to the import factor (of course the import factor investigates the financial situation and the credit standing. The system is very helpful especially in credit check by the import factor on a prospective customer in the importing country. The import factor will follow up any overdue accounts and even resort to legal action if necessary. And the import factor pays 100% of the invoices value to the export factor. Single Factor schemes Widely recognized in international trade and it is very common in the European Union. In well-written contract is easier for single factors to initiate legal proceedings, if required When there are long and well established between the exporter and importer the import factor roles is credit-checking or collection may not be perceived as necessary. Single factor is cheaper but are also more exposed to the risks. FORFAITING Allows exports to provide short to medium term credit to importers and then to obtain immediate payment from a bank to which the exporter transfers the debt assets on a discounted 6 non-recourse basis Typically medium term finance 3 5 years concluded at a fixed interest rate, although it can be arranged for a floating interest bearing basis for periods from 6months 10 years. Form of export trade finance involving the discount trade-related debt obligations due to mature at a future date without recourse to the exporter: 100 % of financing Uses mostly in countries where backed export credit are not available, investing working capital for business, and for also medium-term exports such as capital goods

That means the exporter will sell the debts to the bank cheaper the exporter will receive less than he is supposed to receive but this is the cost of receiving the money in advance. The bank will receive discounted debts but in the best situation they will receive them 100%, so they will receive more which is their premium for taking the risk.

 The amount financed can range from 100 000 USD to 200 million or more USD and the contracts can by in any worlds major currency The importers obligation is supported normally by a local bank guarantee or aval Acceptance or deferred payment undertaking incurred under a letter of credit by the issuing bank and any guarantee should be irrevocable, unconditional and assignable The debt is usually evidenced by bills of exchange, promissory notes or a letter of credit. How it works: Importer accepts bills of exchange (draft) or signs promissory notes which are guaranteed or availized by a bank in the importers country. The exporter then endorses the drafts and hands them over to the discounting bank, which negotiates them without recourse to the exporter. If the documents are written drawn by a letter of credit, the issuing bank or the confirming banks accepts the documents or incurs a deferred payment undertaking to mature for payment on a certain due date. The forfeiting bank then discounts the acceptance under credit lines that it has on the issuing bank (that is the bank of the importer). The bank can hold these documents till maturity or rediscount them to a second market. Without recourse basis that is the forfeiter (or any other subsequent holder) takes the payment risk at maturity and the seller is under no obligation to refund the amount received by it in case payment is not made by the obligator. Fee structure: the commitment fee which would vary from 0.25% to 4% depending on the country risk to commit and as well as the kind of offer submitted to the counterparty (fixed rate or floating rate to be fixed before discounting). Sometimes it is included the cancellation fee as well. Advantages and disadvantage of the forfeiting It is flexible product that can be easily be modified to suit to exporter particular requirement. One advantage is that the forfeiter purchases the bill on a non-secure basis. Exporter is quoted a fix rate for payment against the bill. The discount rate will depend on the date of maturity and other risks and factors. However the discount may make the forfeiting options relatively expensive. Exporters should seek expert advice for the discount Main disadvantage is the strict documentary requirements, which involve obtaining the importers participation in obtaining the necessary bank guarantee or aval. Cross border finance Leasing It is a form of financing for the acquisition of equipment or suppliers which enables the importer, in this case referred to as the lessee, to obtain the desired goods without taking on a direct loan. The lessee takes possession of the goods, uses them, pays a monthly instalment on the lease and, at the end of the lease period, may require full ownership of the goods with the final payment. It is attractive because the lease payment can be deducted One of the primary legal concerns is the status of lesser in the event the lessee becomes insolvent before the end of the lease period!? Can the lesser recover the goods or will they first be subject to the liens of the lessees other creditors such as for example, those of local tax. The answer depends in particular on the national insolvency law. The transfer of legal title to goods in international transactions is covered by national law, consequently, the parties are free to specify how the title passes, but they should be careful that the method chosen is permitted by the applicable national law. So the Retention of Title (ROT) it is a common clause in international trade since it provides the seller retain legal ownership of the goods until the full purchase price is paid. In some countries the title will pass at the moment of physical delivery of goods, while in others title passes according to the agreement reached between seller and buyer. There are several variations of the ROT clause but two major types can be distinguished: The simple one, under which the seller retains title until the price is paid The extended one, under which the seller seeks to extend its title to include: o The incomes from any sale of the goods o Any goods commingles with, or manufactured from, the contract goods o Any other indebtedness owed to the seller by the buyer o Any combination of the foregoing Question 10: Special business operations, barters, reciprocal transactions, junktims, counter-purchases, co-operation on compensation basis, re-exports, switches, significance and role of special business transactions in trade with tangible assets licensing and franchising.

 Special Business Operations In many Special Business Operation the members of one of the parties can be governmental entities, especially in developing countries. Specific situations that make these forms of Special Business Operations necessary: One reason that these Special Business Operations take place is when countries lack sufficient hard currency, or when other types of market trade are impossible. 1. The world debt crisis has made ordinary trade financing very risky (large banks and financial institutions are "risk adverse" in many of the hostile regions of the world opening to trade) 2. Many countries cannot obtain the trade credit or financial assistance to pay for desired imports (the IMF and World Bank are increasingly restrictive in the way they allow governments to operate) 3. Countries are increasingly returning to the notion of bilateralism as a way to reduce trade imbalances (some multilateral blocks have developed - but politics is easier on a one2one basis so many nations find it easier to cur deals directly with another single country) 4. Countertrade is often viewed as an excellent mechanism to gain entry into new markets. The party receiving the goods may become a new distributor, opening up new international marketing channels and ultimately expanding the market (especially where 4X problems are challenging to solve) 5. Providing countertrade services helps sellers differentiate its products from those of competitors (flexibility is key to winning business in a global market that is more and more competitive to vendors) 6. Expand or maintain foreign markets 7. Increase sales 8. Sidestep liquidity problems 9. Repatriate blocked funds 10. Clean up bad debt situations 11. Build customer relationships 12. Keep from losing markets to competitors 13. Gain foreign contracts for future sales 14. Find lower-cost purchasing sources Types of Special Business Operations Counter-trade Counter-trade (lecture) - a general term used to describe a variety of commercial arrangements for mutual international trade between companies or other organizations in two or more countries. In principle, export sales to a particular market are made conditional upon undertakings to accept imports from that market. Counter-trade Types Counter-purchases Barter Barter by means of escrow account Buy-back or compensation deals Offset Switch trading Historical example of a countertrade: The first is the well known Pepsi/USSR trade whereby Pepsi-Cola delivers syrup that is paid for with Stolichnaya Vodka. Pepsi has the marketing rights of all Stolichnaya Vodka in the U.S. Barter Barter the direct exchange of goods and/or services for other goods and/or services without the use of money and without the involvement of a third party. Bartering is an important means of trade with countries using currency that is not readily convertible. Barter (simple definition) exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment. Example: In 2002, India and Iraq agreed on an oil for wheat and rice barter deal, subject to UN approval under Article 50 of the UN Gulf War sanctions, that would facilitate 300, 000 barrels of oil delivered daily to India at a price of $6.85 a barrel while Iraq oil sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million tonnes of Iraqi crude under the oil-for-food program. Barter is one of the most common methods of Countertrade. "In a barter deal, goods are exchanged for goods - the principal export is paid for with goods (or services) from the importing market. A single contract covers both flows and in the simpler case, no cash is involved. In practice, however, the supply of the principal export is often released only when the sale of the bartered goods has generated sufficient cash." o

Examples of Barter: this means if Country A sells mining equipment to Country B in return for cigars - they will probably hold some of the mining equipment back until they have made some good profit from the cigars. Reciprocal Transactions Reciprocal transactions serve the dual purposes of organizing material production and shoring up social relationships. By reciprocal transactions, we mean transactions in which the basic economic questions of what to produce, how to produce, and for whom to produce are answered by custom and are free of the quid pro quo mentality of market relationships. Junktims Junktims - package deal, combined deal, binding of several factors together; agreement between the government and the representatives of the employers and employees Counter-purchases Counter-purchases the agreement of an exporter to purchase a quantity of unrelated goods or services from a country in exchange for, and approximate in value to, the goods exported. Example of Counter Purchases: "A foreign supplier undertakes to purchase goods and services from the purchasing country as a condition of securing the order. Counterpurchase is generally imposed for two reasons: first, to stimulate exports and second, to lighten the balance of payment deficit resulting from imported goods." Co-operation on compensation Basis (Buy Back) Buy back (textbook) - A form of counter-trade under which exporters of, e.g., heavy equipment, technology, or plant facilities agree to purchase a certain percentage of the output of the new facility once it is in production. Buy Back (simple) occurs when a firm builds a plant in a country or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plants output as partial payment for the counter. Example of Buy Back: "Here, suppliers of capital plant or equipment agree to be paid by the future output of the investment concerned. For example exporters of equipment for a chemical plant may be repaid with part of the resulting output from the factory. This practice is most common with exports of process plant, mining equipment and similar orders. Buyback arrangements tend to be much longer term and for larger amounts than counterpurchase or barter deals." Re-export Re-exports goods imported into a country that are subsequently exported, either to the country of origin or a different country. Re-exports foreign goods exported in the same state as previously imported, from the free circulation area, premises for inward processing or industrial free zones, directly to the rest of the world and from premises for customs warehousing or commercial free zones, to the rest of the world. Switches (Swaps) Swaps the trading of almost identical products (such as oil) from different locations to save transportation costs. Switching practice in which one company sells to another its obligation to make a purchase in a given country. Example of Switches: "Imbalances in long term bilateral trading agreements sometimes lead to the accumulation of uncleared credit surpluses in one or other country, For example, Brazil at one time had a large credit surplus with Poland. These surpluses can sometimes be tapped by third countries so that, for example UK exports to Brazil could be financed from the sale of Polish goods to the UK or elsewhere. Such transactions are known as switch' or swap' deals because they typically involve switching the documentation (and destination) of goods on the high seas." Significance and role of Special Business Transactions in trade w ith tangible assets. Two particular situations include: Licensing and Franchising Licensing Licensing (textbook) A contractual arrangement in which the licensors patents, trademarks, service marks, copyrights or know-how may be sold or otherwise made available to a licensee for compensation negotiated in advance between the parties. Such compensation may consist of a lump sum royalty, a running royalty (based on volume of production), or a combination of both. Licensing enables a firm to enter a foreign market quickly and poses fewer risks than setting up a foreign manufacturing facility. Furthermore, it allows parties to overcome tariff and non-tariff barriers of trade. International licensing has become very popular in many high-technology or engineering firms, because they can generate substantial revenues in foreign markets by licensing the right to use their

patents, trademarks, copyrights, trade secrets and/or technical processes. Licensing can provide the exporter with a way of penetrating foreign markets with little or no direct investment. While from the importers side, many companies find that as licensees, or purchasers of licenses, they many acquire and profitably exploit in their homes markets new processes or products. Franchising Franchising (textbook) A system based on the licensing of the right to duplicate a successful business format or industrial process. The franchisor (licensor) permits the franchisee (licensee) to employ its business processes, trademarks, trade secrets and know-how in a contractually specified manner for the marketing of goods or services. The franchisor usually supports the operation of the franchisees business through the provision of advertising, accounting, training and related services and in many instances also supplies products required by the franchisee for the operation of the franchise. The franchisee, in return, pays certain money to the franchisor (in terms of fees and percentage commissions) and agrees to respect contractual provisions dealing, inter alia, with quality of performance. The two principal kinds of franchise contracts are master franchise agreements, under which the franchisor grants another party the right to sub-franchise within a given territory, and direct or unit franchise agreements, which are direct contracts between the franchisor or sub-franchisor and the operation of the franchise unit. Both of the franchising methods are relevant for a special business transaction is the Master franchise contract. A master franchise contract an agreement between the domestic franchisor and a foreign master franchisee. The master franchisee is granted the right to exploit a franchise for the purposes of concluding franchise contracts with franchisees in the territory. A master franchise structure is particularly suitable for international trade, because it allows for flexibility and local supervision. While direct franchise contract a direct agreement between the domestic franchisor and the franchisee who operates the foreign franchise. Furthermore, franchising has proved itself to be particularly useful in an international context, because it allows the franchisor to grow rapidly in foreign markets with a minimum direct capital investment. *Note - all countertrade, licensing and franchising are all part of international transactions and agreements. Thus they can all be used in special business transactions in different ways to maximize on global trade. *Note all the above listed strategies involve tangible assets thus is most of the cases above it is either a good/service in exchange for another the reason these special business transactions are critical for global trade is because without these special strategies some countries would not be able to trade with other countries or businesses. *Side Note: Tangible assets are those that have a physical substance and can be touched, such as currencies, buildings, real estate, vehicles, inventories, equipment and precious metals.