Parties involved in international trade

The Buyer, who places orders and imports goods (meaning to bring into the country). The Seller, who manufactures and exports goods (meaning to ship out of the country) and issues invoices. The Manufacturer, if the seller does not make his own goods. The Shipping Company, (or Airline Company) who transport the goods overseas and issue Bills of Lading (or Air Waybills) as receipt of goods. The Insurance Company which insures the goods against risk. An insurance policy or certificate is issued to this effect. Governments and Embassies who give permission to import or export specific types of goods by issuing Import and Export Licenses, and Consular Invoices respectively. The Customs and Excise, who levy import duty and issue Custom's Invoices. Various professional bodies, who issue Inspection Certificates certifying that the goods have been inspected and meet certain quality standards. Lawyers, who draw up contracts of sale. Agents, who represent either the buyer or seller overseas. Shipping Registries, who ensure that the carrying ship is seaworthy. Chambers of Commerce, who issue Certificates of Origin. Banks, who participate in most trade transactions to some extent, from full finance to the processing of simple remittances.

Payment methods
There are four main ways for importers to make payment to exporters in international trade: Advance payment Open account trading Documentary credits Documentary collections

Advance payment The buyer agrees a price for goods from an overseas exporter and sends his payment with the firm order i.e. before the goods are shipped: The importer must be confident of: the reliability of the exporter the stability of the exporter's country The risk is borne by the importer. In return the importer may be allowed a discount which is a deduction from the price of goods in consideration of its being paid in advance. This method would be used when: an importer is unable or unwilling to open a documentary credit an importer has a good cash position and can negotiate a cash discount an individual is buying from a mail order company Importers can arrange to make advance payment through a bank.

Open account trading This is basically payment in arrears, the opposite of advance payment and usually covers a regular flow of shipments. The importer usually agrees with the exporter to pay at the end of each month or, say, one month after each shipment. There is usually a long-standing or regular business relationship between the two parties: The exporter must be confident of: the reliability of the importer the stability of the importer's country

The risk is borne by the exporter. Governments sometimes support their exporters to protect them against these risks.

Banks as intermediary between buyer and seller As mentioned in the previous two methods, there are problems of trust and risk for both the buyer and the seller. In fact, trade will be difficult between companies who do not know each other well. Banks act as a trustworthy third party or intermediary between the buyer and the seller. The reasons are: A bank is acceptable to both the buyer and the seller. By issuing a documentary credit, the buyer's bank guarantees payment to the seller if he presents the correct documents. The buyer has to pay for the documents, but not until his bank receives them. A bank is a financial institution and therefore has the necessary expertise in handling international trade transactions. A bank is able to supply trade and credit information, which is very important to both buyer and seller. A bank is ready to provide finance to help the buyer and the seller fulfil their commercial obligations. Documentary credits are covered in detail later.

u g Documentary collections c e the case of a collection, no documentary credit is issued and the bank is not involved In t s any undertaking to pay the seller. The bank acts as an agent. in i o i The collection cycle starts when the seller, having shipped the goods and obtained the n n necessary documents, presents the documents together with his instructions to his bank s c (remitting bank). The bank will send these to its branch/correspondent bank (collecting l bank) in the buyer's country for payment. o u n d risk to the importer is little more than in documentary credits: he can inspect the The e documents before paying for them. a t The risk to the exporter is much greater because he does not have a bank's guarantee c h in the case of a documentary credit; but he may have control over the goods through as o e collecting bank. the l l d Documentary CollectionThis is a Bill of Exchange/Draft with shipping documents etc.The e o following pages include the document(s) of title (Bill of Lading) which the importer needs c c clear the goods with. to t u i m Collection orderWhichever documents the exporter presents to his bank, he always o e attaches his instructions on a collection order. These instructions are passed on to the n n importer telling him how and when to pay. t o (

Government organisations supporting the export business

In some developed countries, government or quasi-government organizations are established to help exporters in their export business e.g. Export Credits Guarantee Department (ECGD) in Britain and Export Credit Insurance Corporation (ECIC) in Singapore and Hong Kong. The primary function is to provide insurance to exporters to cover them against the risks of non-payment they may face when dealing with overseas buyers/countries. For example, the buyer (ie the importer) may refuse to accept the goods and it may then be difficult to dispose of them. Or the importing country may impose import restrictions after the goods have been shipped, so that the importer is unable to pay. The government agency will issue an insurance policy covering the exporter against such risks - this kind of policy can be assigned to a bank will be much happier to finance the export. These organisations also provide the local exporters with trade and credit information on overseas importers and their countries so that they are better informed before they conclude a sales contract with the importer. In carrying out these functions, these organizations are in fact encouraging export business and facilitating international trade. Some countries have schemes designed to assist importers find suitable sources of import commodities from overseas, usually due to trade agreements between particular countries. All governments are keen to increase exports and restrict imports - this is because exports mean that money comes into the country and imports mean that money leaves the country. More and more countries now arrange part of their "barter" or 'counter trade' basis (usually large transactions only) - this means that the two countries exchange goods or services of equivalent value and no money changes hands.

Parties involved in the collection order There are a number of different parties involved: the Seller/Exporter the Exporter's Bank the Bank in the Importer's Country the Buyer/Importer

ICC rules on documentary credits and collections Documentary credits and collections are processed according to an internationally recognized set of rules. The International Chamber of Commerce (ICC) issues these in booklets from their headquarters in Paris. Publications Numbers 500 and 522 deal with credits and collections respectively. You will notice frequent references to these rules in this program, eg ICC 500 Art. 8. Every documentary credit and outward collection should refer to the appropriate ICC Publication signifying that the transaction is subject to the rules of the ICC, so that all parties involved know that the standard international rules are being followed. It is also important to be informed about decisions by the ICC Commission of Banking Practice and Technique on interpretation questions since their opinions could be persuasive in a court of law.

p r Parties involved in the collection order h a . e l . T b parties involved: There are a number of different W h Seller/Exporter u the h e Exporter's Bank y the a e the Bank in the Importer's Country t r B Buyer/Importer the u t y s h e u e r b y m m i d u t o s t d i o s c c : o u a n m g t e r r n e a t e c s

International trade documents h Almost every party to international trade issues documents. These documents are very e important in international trade because they serve as evidence that some actions have been carried out. b u For example, a Bill of Lading can prove that goods have been shipped on board, an y Inspection Certificate can certify that the goods have been inspected and meet certain e quality standards. r Based on these documents, as seller can prove to the buyer that he has fulfilled his obligations whilst the buyer is u assured of his request being carried out by the seller. In brief, the existence of these documents makes international trade possible. b m These documents may be called for under the terms of a documentary credit, or they i may be those which are required for documentary collection. t The following is a list of documents often used: d o Air Waybill c Bill of Lading u Certificate of Origin m Combined Transport Document e Draft (or Bill of Exchange) n Insurance Policy (or Certificate) t Packing List/Specification s

i e IncotermsWhen the buyer and the seller conclude a sales contract, they must have agreed upon terms regarding the responsibilities for the costs, These terms have been standardised and are internationally recognised. This avoids r insurance and freight covering the goods.they are known as Incoterms - fully explained in ICC booklet: ICC Incoterms 2000. Normally, the misunderstandings when these terms are used; Incoterms will appear on documentary credits and principal documents in standard abbreviation form eg FOB, CIF or CFR. Each shipping term is . T h e
discussed briefly* below, so you will understand what each term means, and what obligations it carries. *NB The following is a summary only - for full explanation of the terms, especially for advising customers, please refer to the ICC Incoterms 2000. To start we will list below the 3 most common terms: FOB, CFR and CIF. FREE ON BOARD (FOB) The Seller must deliver goods on board and provide an export license and pay export taxes. The Buyer must contract for carriage, pay freight and pay insurance premium. COST AND FREIGHT (CFR) The Seller must contract for carriage, pay freight to named destination, deliver goods on board and provide buyer with clean on board bill of lading and an invoice, obtain export license and pay export taxes. The Buyer must accept delivery of goods after documents are tendered to him and pay insurance premium. COST, INSURANCE AND FREIGHT (CIF) The Seller must do the same as CFR plus arrangement for insurance of goods, pay insurance premium and provide the buyer with insurance policy. The Buyer must accept delivery of goods on shipment after documents are tendered to him. Listed below are the other Incoterms in order of the exporter's responsibility, where EXW =least responsibility, DDP =most responsibility EX-WORKS (EXW) The Seller must deliver goods at his premises. The Buyer must make all arrangements, at his own cost and risk, to take goods to their destination. FREE CARRIER... AT A NAMED PLACE (FCA) The Seller must provide export license and evidence of delivery of goods to the carrier. The Buyer must contract for carriage, pay freight, nominate carrier and pay insurance premium. FREE ALONGSIDE SHIP (FAS) The Seller must deliver goods alongside ship, provide an "alongside" receipt. The Buyer must contract for carriage, pay freight, obtain export license, pay any export taxes and insurance premium. FREIGHT/CARRIAGE PAID TO ...(CPT) The Seller must contract for carriage, pay freight to named destination; deliver goods to the carrier, obtain export license and pay any export taxes; provide buyer with invoice and transport documents. The Buyer must after tender of documents, accept delivery of goods when they are delivered to first carrier, arrange and pay insurance premium. FREIGHT/ CARRIAGE & INSURANCE PAID TO ...(CIP) The Seller must do same as CPT plus arrangement of insurance for goods and pay premium, provide buyer with insurance policy. The Buyer must accept delivery of goods after documents are tendered to him. DELIVERED EX-SHIP (DES) The Seller must deliver goods on board at destination; provide buyer with documents for delivery of goods. The Buyer must pay discharge costs, import duties, obtain import license. DELIVERED EX-QUAY (DUTY-PAID) (DEQ) The Seller must make goods available on the quay at destination. Provide buyer with documents to take delivery, obtain import license and pay import duties taxes, unloading costs and insurance. The Buyer must take delivery of goods from the quay. DELIVERED AT FRONTIER (DAF) The Seller must deliver goods to frontier but before the customs border, provide buyer with documents to take delivery. The Buyer must pay for on-carriage, obtain import license and pay import duties. DELIVERED DUTY UNPAID (DDU) The Seller must obtain import license, arrange and pay insurance, provide documents to buyer to take delivery. The Buyer must take delivery of goods at named destination and pay import duties. DELIVERED DUTY PAID (DDP) The Seller must obtain import license and pay import duties, arrange and pay insurance, provide documents to buyer to take delivery. The Buyer must take delivery of goods at named destination.

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