International Trade PDF

International Trade
Mujahid Niaz Syed 1

Mujahid Niaz Syed 2
Trade Finance.
Foreign Exchange:
The system by which commercial nation

discharge their debts to each other.
Britannica
Mujahid Niaz Syed 3
Trade Finance.
What is Trade???
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Trade
• Exchange of commodities is known as

Trade.
• Exchange of Goods either against

– Goods
or
– Money
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Trade Finance.
Trade Can be categorized into two

types:
• Local
Or
• International
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Trade Finance.
• International Trade:
Before entering into International Trade

contract the seller & Buyer take into
account the following factors.
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Seller’s Considerations
• Demand for his products in buyer’s country.
• Who are the competitors in buyer’s country.
• Local laws prevailing in his ( buyer’s) country.
• Country / Currency Risks.
• Time period for shipment.
• Pricing.
• Credit worthiness of buyer.
• Terms of settlement.
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Buyer’s Considerations
• Demand for the products in his country / industry.
• Who are other sellers of the same product in local &
international market.
• Local laws prevailing in seller’s country.
• Country / Currency Risk.
• Time period for shipment.
• Pricing.
• Credit worthiness of seller.
• Terms of settlement.
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Modes of Trade
• Barter
• Advance Payment
• Consignment Basis
• Letter of Credit
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TRADE
Barter:
• Trading of products & services from other
products & services.
• Simple method of transaction, in which no
money is used.
• More convenient for those nations who have
difficulty in currency conversion.
TRADE
Difficulties:
• Mismatch with wants of both sellers & buyers.
• No common measure(unit) of value. In what
proportions two goods are exchanged.
• Difficulty in future payment. No concept of
borrowing or lending.
• Difficult to store purchasing power for future.
• Lack of divisibility of goods.
Trade
Advance Payment:
• The goods will not be shipped until the buyer

has paid the seller.
• Time of payment: Before shipment.
• Goods available to buyers: After Payment.

Trade
• Risk to Exporter:
– None ( Maximum security for the Seller.)
• Risk to Importer:
– Relies completely on exporter to ship goods as
ordered.
– Used For:
• Small amounts
• New Customers.
• One-time sales.

TRADE
Consignment:
• Exporter retains actual title to the goods that

are shipped to the importer.
• Time of Payment: At time of sale to the third

party.

TRADE
• Risk to Exporter
– Allows importer to sell inventory before paying

exporter.
• Risk to importer
– None.

TRADE
• Quite often, the buyer does not pay on the
agreed time.
• Unless the buyers integrity is unquestionable,

this trade arrangement is risky to the seller.

TRADE
Time of Payment:
• As agreed upon.
• Goods available to buyers.
• Before payment.

Collection.

Trade.
Collection:
• Clean.
• Documentary.

Trade.
Collection:
• Documents Against Payment.
• Documents Against Acceptance.

TRADE
Documentary Collection.
• Documents against Payment(D/P).
– The buyer may only receives the title and other

documents after paying for the goods.

TRADE
• Documents against Acceptance (D/A).
– The buyer may receive the title and other

documents after signing a time draft promising to
pay at a later date.

Trade.
Advantages of a Documentary
Collection.

Trade.
Exporters(Advantages).
• Give considerable payment warranty.
• Less complicated than letter of credit.
• Less expensive than letter of credit.
• Faster collection time.
• Exporters remain title of goods( sea shipment
under negotiable B/L.)

Trade.
Importers (Advantages).
• Less expensive.
• Less complicated.
• Importers make sure that they will pay to their
suppliers after shipment of goods.
• Importer may be able to review copy of shipment
before payment.
• Importers can pay with a “deferred payment”
option.
International Methods of Payment-
Advantages & Disadvantages.
Method Risk Advantage Disadvantage
Advance cash L No credit extension Can limit sales potential,
required. disturb some potential
customers.
Sight Draft M/L Retains control & title: If customer does not
Ensures payment before accept goods , goods
goods are delivered. remain at port & no
payment is due.
Letters of Banks accept If revocable, terms can
Credit responsibility to pay; change during contract
Irrevocable M Upon presentation of work.
paper: Costs go to buyer.
Revocable M/H

Types of Credit Facilities
• Fund Based
• Non Fund Based

Types of Non Fund Based Facilities
• Letter of Credit
• Letter of Guarantee
• Acceptance

Letter of Credit:
• Most important segment of Non Fund Based

business of banks.
• Also known as Documentary Credit.

Letter of Credit.
• Letters of Credit
• Are the means by which the majority of

international transactions occur.
• This is a letter written to the seller , signed by

the buyer’s bank.

Letter of Credit:
• Written instrument issued by the bank.
• Backed by the request of customer,

Importer(buyer).
• Issued in favor of Exporter(seller).

Letter of Credit:
• Bank promises to pay to beneficiary for goods &

services.
• Provided:
– Exporter submits all documents called for.

– Exactly as stipulated in the Letter of Credit.
– Meet all the terms & conditions set out in the Letter
of Credit.

Letter of Credit.
What is Letter of Credit?
An arrangement that is irrevocable &

thereby constitutes a definite undertaking
of the issuing bank to honor a complying
presentation.

Letter of Credit
• Undertaking is Conditional & abstract.
• Conditional because it is subject to fulfillment

of certain terms and conditions.

Letter of Credit.
Definition:
Undertaking issued by issuing bank to honor &

reimburse the value of draft to negotiating bank
if documents drawn are strictly as per Letter of
Credit complying with all terms & conditions.

Letter of Credit
• Letter of Credit-Definition.
• Letter addressed to a beneficiary(exporter) by

a bank(issuing bank).
• Wherein bank undertakes , on behalf of an
applicant(importer)
• To effect payment to the beneficiary for
merchandise shipped or services performed
Letter of Credit
• Provided:
• That the beneficiary presents the required

documents in compliance with the terms of
letter of credit.

Letter of Credit.
Advantages (Buyer/Importer):
• Certainly that goods have been shipped.
• Goods are shipped in definite time frame.
• Payment is made only when the goods have been

shipped.
• Finance facility available in case of usance LC.

Letter of Credit.
Advantages (Seller / Exporter).
• Security of receiving payment.
• Immediate receipt of payment.
• Pre / Post shipment finance facility.
• No concern after receipt of payment.

Advantages ( Banks)
• Source of earning in shape of commission,

charges, exchange difference.
• Opportunity to capture ancillary business.

Mechanism of Letter of Credit
Opener Shipment Beneficiary
Contract
LC Application
Documents
Payment
LC Advised
Acceptance
Documents
Payment/
Letter of Credit
Advising/
Opening Nominated
Documents
Bank Bank
Reimbursement

Letter of Credit-Clauses
• Type of Credit
• Value of Credit
• Specification of Documents.
• Description of Goods.
Letter of Credit-Clauses
• Part Shipment.
• Trans Shipment.
• Collection of Charges.
• Validity Period.
• Reimbursement Clause.
Letter of Credit-Types.
• By Availability.
–Sight Payment
–Deferred Payment
–Acceptance Credit
–Negotiation Credit

• By Characteristics
• Revocable.
• Irrevocable.
• With recourse.
• Without recourse.

• By Specific Purpose.
– Confirmed
– Back to Back
– Stand by
– Transferable
– Revolving
– Restricted.

• By specific Purpose
–Red Clause Credit.

–Green Clause Credit
–Transit Credit
–Omnibus Credit

Sight Payment Credit
• Payment available at sight, against
presentation of sight draft and / or
documents.
• Presentation at Nominated Bank.
• Nominated / Paying Bank must have authority

to claim reimbursement directly from a
reimbursing bank.
Deferred Payment Credits
• Draft is not required.

• Payment after a period specified in the
documentary credit, often calculated as
number of days after the date of presentation
of the documents or after the shipping date.
• Issuing / confirming bank, if any, are required
to make payment on due dates only.

Acceptance Credit
• Usance draft is required along with
documents.
• Draft is required to be drawn on bank

nominated as accepting Bank.
• Maturity of time draft should essentially be

determinable.

Acceptance Credit
• After acceptance the nominated / accepting
bank may return the draft to the beneficiary.
• Beneficiary may get the draft discounted by

accepting or any other Bank.
• Acceptance Credits, provide finance to buyer,

and when discounted provide immediate
source of fund to seller.
Negotiation Credit
• Sight or Usance drafts are required to be drawn
on issuing or confirming banks.
• A bank is nominated to negotiate the draft,
unless credit is freely negotiable. Nominated
Bank, by negotiating in fact provides funds to
beneficiary until receipt of funds from issuing
bank.
• Issuing bank engages itself with drawers /
endorsers and bona fide holders of drafts to
honor on due presentation at sight or future
determinable date.

Revocable Credit:
• One which can be amended or cancelled at any time
without prior notice to seller but before the draft is
presented for acceptance or payment.
Irrevocable:
• Can be amended or cancelled only with the agreement of
all the parties to it.
• All credits should clearly indicate whether they are
revocable or irrevocable.
• If there is no indication the credit will be treated as
revocable.

Confirmed Credit:
• One which has been confirmed by the advising
bank.
• By confirming , the bank agrees to take the
liability of making payment to the seller if the
issuing bank defaults for any reason.
Un confirmed Credit:
• One which exclusively depends upon the issuing
bank’s obligation to accept.

• Back to Back L/C.
• Where the exporter , as beneficiary, offers its

credit as security in order to finance the
opening of a second credit.

Back to Back LC;
CONTRACT FOR 1000 DZN @ $8/DZN
LC US$ 8000
TRADER IN TRADER IN
Doc for $8000 GERMANY
PAKISTAN
LC for
$5000
Doc for
$5000
TRADER IN TAIWAN
Contract for 1000 Shipment
DZN @ $5/DZN

Stand-by L/C.
• Very similar in nature to a guarantee.
• Beneficiary can claim payment in the event that the

principal does not comply with its obligations to the
beneficiary.
• Payment can usually be realized against presentation of

a sight draft and written statement that the principal
has failed to fulfill his obligations.

Transferrable L/C.
• One which can be transferred by the original
first beneficiary to one or more second
beneficiaries.

Revolving L/C.
• Where the tenor or amount of the L/C is
automatically renewed pursuant to terms and
conditions.
• These can be cumulative or non cumulative.
• Issuing bank undertakes to reinstate the credit
after each drawing or time period (e.g.
monthly).

Restricted Credit:
• One which is restricted to be available at the counter of one
particular bank in beneficiary’s country.
Transit Credit:
• Type of credit where both beneficiary and applicant are resident
outside Britain.
• British bank is requested by overseas bank to advise or confirm
because the issuing bank is not known in exporter’s country.

Red Clause L/C:

• Credit with a special clause, typed or printed in
red ink, authorizing the negotiating bank to make
advances to the beneficiary.
• Finance is used for the purchase of raw material
or movement of commodities from interior for
export purpose.
• Issuing bank takes the responsibility for advance.

Green Clause Credit:
• Another type of pre-shipment credit.

• Finance clause is printed or typed in green.
• Used mainly in Australian wool trade.
• Refinement of Red Clause Credit.
• Permits not only the pre-shipment credit but also
cover storage in the name of opening bank.

Omnibus Credit:
• Credit enables the exporter to obtain funds for

further transactions.
• Packing credit is allowed in terms of an
irrevocable confirmed credit.
• Under this credit general lien is marked over the
goods & other movable and immovable property
of the exporter as security.
• Finance is paid as soon as the goods are shipped.

Parties to Letter of Credit
• Buyer / Importer.
• LC Issuing Bank / Importer Bank.
• Advising Bank / Correspondent Bank.
• Negotiating Bank / Paying Bank.
• Beneficiary / Seller / Exporter.

Parties to a Letter of Credit
Opener Beneficiary
Confirming Advising Bank

Bank
Opening
Bank
Reimbursing Nominated
Bank Bank

Letter of Credit.
Benefits of Letter of Credit
• Exporter:
– Payment protection.
– Reliance on issuing bank’s credit rather than
buyer.
– Rapid, local source of repayment, if payable at a
local bank.

Letter of Credit.
Importer
• Documentary evidence that the ordered
goods have been shipped on time.
• Assurance that necessary clearance
documents will be provided.
• Payment deferred until goods are shipped and
documents presented(use of funds).

Letter of Credit.
Problems of L/C.
• Shipping schedule is not met.

• Stipulations concerning freight cost are
unacceptable.
• Price is insufficient due to FX rate changes.

Letter of Credit.
• Un expected quantity of product.
• Description of product insufficient or too

detailed.
• Documents are impossible to obtain specified

in L/C.

INCOTERMS.
• Incoterms are International Commercial Terms.
• Developed by ICC, International Chamber of

Commerce.
• ICC regularly revised Incoterms to catch the

changing market conditions & trade practices.
• Internationally recognized standards .

INCOTERMS.
• Used worldwide in International & Domestic
contracts for sale of goods.
• Incoterms 2000 was the previous set of rules

that was made effective on 1st January 2000.
• Latest Incoterms 2010 has been effective since

1st January 2011.
INCOTERMS.
Difference between Incoterms 2010 & Incoterms
2000.
• Number of Incoterms rules reduced from 13 to

11.
• Two new Incoterms DAT & DAP has replaced the

Incoterms DAF, DES, DEQ.& DDU.

INCOTERMS 2000
INCOTERMS 2000 Classification
Group E EXW EX WORKS (------named place)
Group F FCA FREE CARRIER (………….named place)

FAS FREE ALONGSIDE SHIP (………..named
port of shipment)
FOB FREE ON BOARD (……………..named port
of shipment)
INCOTERMS 2000
INCOTERMS 2000 CLASSIFICATION
Group C CFR COST AND FREIGHT (………………….named port of
destination)
CIF COST INSUTRANCE AND FREIGHT(……….named
port of destination)
CPT CARRIAGE PAID TO (……….named place of
destination)
CIP CARRIAGE AND INSURANCE PAID
TO(…………named place of destination)

INCOTERMS 2000
INCOTERMS 2000 CLASSIFICATION
GROUP D DAF DELIVERED AT FRONTIER(………..named

place)
DES DELIVERED EX SHIP (…………named port
of destination)
DEQ DELIVERED EX QUAY(…………..named
DDU DELIVERED DUTY UNPAID(……….named
place of destination)
DDP DELIVERED DUTY PAID (…………named
place of destination)
INCOTERMS 2010.
INCOTERMS 2010 Classification.
RULES FOR EXW EX WORK (……….named place)
ANY MODE FCA FREE CARRIER (……….named place)
OR MODES CPT CARRIAGE PAID TO (………named place of
OF destination)
TRANSPORT, CIP CARRIAGE AND INSURANCE PAID TO (
….place of destination).
DAT DELIVERED AT TERMINAL (…..place of
destination)
DAP DELIVERED AT PLACE ( …..place of
destination)
DDP DELIVERED DUTY PAID (…….place of
destination)
INCOTERMS 2010.
INCOTERMS 2010 Classification.
RULES FOR FAS FREE ALONGSIDE SHIP(….port of

SEA AND shipment)
INLAND FOB FREE ON BOARD (……port of
WATERWAY shipment)
TRANSPORT. CFR COST AND FREIGHT (……port of
destination)
CIF COST, INSURANCE AND FREIGHT(

Documents
• Commercial Documents.
• Official Documents.
• Insurance Documents
• Transport Documents
• Financial & Financing Documents.

Commercial Documents
• Invoices
• Certificate of Origin
• Weight Notes.
• Packing List & Specifications.
• Quality & Inspection certificate.

Official Documents
• Consular Invoice.
• Legalized Invoice.
• Black-listed Certificate.
• Health, Veterinary and Sanitary Certificate.

Insurance Documents
• Letter of insurance.
• Insurance certificate.
• Insurance Policy.

Transport Documents
• Air way Bill / Air Consignment Note.
• Mate Receipt.
• Bill of Lading.

Transport Documents
• Rail Consignment Note.
• Road way Bill.
• Post Parcel Document.
• Courier Receipt.

Financial & Financing Documents
• Bill of Exchange.
• Promissory Note.
• Trust Receipt.

Common Documents
• Draft or Bill of Exchange

• Commercial Invoice.
• Packing List
• Insurance Policy ( In case of CIF)
• Certificate of Origin
• Bill of Lading / Airway Bill / Railway Receipt
• Any other document called in LC.

Common Documents
• Any other document can be

• Consular Invoice.
• Inspection Certificate.
• Certificate of Analysis.
• Certificate of age of carrying vessel.
• Visaed Invoice.

Bill of Lading-Types.
• Claused.
• Clean.
• Straight.
• Through.
• Charter Party.
• Short Form.

Claused:
• Bill of lading bears clauses or notation which
expressly declare a defective condition of the
goods and/or the packaging.
Clean:
• Bill of lading which acknowledges receipt of
goods in apparent good order and condition.

Straight B/L:
• Bill of Lading consigned to a specific party and
which may not be transferred by endorsement.
Through B/L:
• Sometimes the transportation of goods involves
passage through a land route and sea both.
• Covers the entire carriage of the goods from the
port of loading to the final destination.

Charter Party B/L:
• Parties exporting goods in bulk, charter the whole ship
or part of it and issue their own bill of lading.
• Does not contain all usual terms & conditions.
Common Short Form B/L:

• Which do not contain some or all the terms and
conditions.
• Shipping companies or their agents indicate some or all
the specific conditions of carriage which the parties
concerned might have agreed to.

• Combined or Multimodal Transport B/L:
• Use of 20 or 40 feet long container carrying
cargo from a place of taking in charge to a
defined place of delivery.
• Issuer is responsible for the proper combined

transport and must compensate for any loss
or damage to the goods.

Sea Way Bill:
• Transport document.
• Not a document of title /Negotiable document.
• Indicates the “On Board” loading of goods.
• Used where no document of title is required.
• For receipt of goods, presentation of the sea
way bill by the consignee named therein is not
required.
Settlement Under Documentary Credit
• Method-1
Claiming bank is authorized to debit
NOSTRO account of the issuing bank if the
submitted documents are strictly in
conformity to terms of Letter of Credit.

Settlement Methods
• Method-2
Claiming bank is authorized to claim
reimbursement from another nominated bank,
the Reimbursing Bank, if submitted documents
are strictly in conformity to LC terms.

Settlement Methods
• Method-3
` The opening Bank shall provide
reimbursement to claiming bank, on
receipt of documents, in accordance with
the instructions of the claiming bank,
provided the documents are strictly in
conformity to terms of Letter of Credit.


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International Trade

Mujahid Niaz Syed 1

The system by which commercial nation

Mujahid Niaz Syed 4

• Exchange of commodities is known as

• Exchange of Goods either against

Mujahid Niaz Syed 5

Trade Can be categorized into two

Before entering into International Trade

Mujahid Niaz Syed 7

Mujahid Niaz Syed 8

Mujahid Niaz Syed 9

Mujahid Niaz Syed 10

• The goods will not be shipped until the buyer

• Time of payment: Before shipment.

• Goods available to buyers: After Payment.

Mujahid Niaz Syed 15

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• Exporter retains actual title to the goods that

• Time of Payment: At time of sale to the third

Mujahid Niaz Syed 18

– Allows importer to sell inventory before paying

Mujahid Niaz Syed 19

• Unless the buyers integrity is unquestionable,

Mujahid Niaz Syed 20

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• Documents Against Payment.

• Documents Against Acceptance.

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• Documents against Payment(D/P).

– The buyer may only receives the title and other

Mujahid Niaz Syed 25

– The buyer may receive the title and other

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• Non Fund Based

Mujahid Niaz Syed 33

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• Most important segment of Non Fund Based

• Also known as Documentary Credit.

Mujahid Niaz Syed 35

• Are the means by which the majority of

• This is a letter written to the seller , signed by

Mujahid Niaz Syed 36

• Written instrument issued by the bank.

• Backed by the request of customer,

• Issued in favor of Exporter(seller).

Mujahid Niaz Syed 37

• Bank promises to pay to beneficiary for goods &

– Exporter submits all documents called for.

Mujahid Niaz Syed 38

An arrangement that is irrevocable &

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• Undertaking is Conditional & abstract.

• Conditional because it is subject to fulfillment

Mujahid Niaz Syed 40

Undertaking issued by issuing bank to honor &

Mujahid Niaz Syed 41

• Letter addressed to a beneficiary(exporter) by