1. © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved PowerPoint® Presentation Prepared By Charles Schell International Trade Finance Chapter 19

2. Slide 19-1 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Chapter Outline A Typical Foreign Exchange Transaction Export Finance Government Assistance in Exporting The Export-Import Bank and Affiliated Organizations Intra-Firm International Trade Countertrade Forms of Countertrade Generalizations about Countertrade

3. Slide 19-2 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved 19.1A Typical Foreign Exchange Transaction Over the years, (centuries, really) an elaborate process has evolved for handling exports and imports. Figure 19.1 illustrates this process

4. Slide 19-3 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Process of a Typical Foreign Trade Transaction Importer’s BankExporter’s Bank ImporterExporter Money Market Investor Purchase order 1 L/C application 2 Letter of Credit 3 L/C notification 4 Shipping documents and time draft 6 Payment discounted value of B/A 9 5 Shipment of goods Payment face B/A 14 Signed promissory note for face value of B/A 10 Shipping documents 11 Shipping Documents and time draft accepted 7 Payment-discounted value of B/A 8 B/A 12 PV B/A 13 Face Value B/A 16 B/A presented at maturity 15

5. Slide 19-4 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Letter of Credit A guarantee from the importer’s bank that it will act on behalf of the importer and pay the exporter for the merchandise if all relevant documents specified in the letter of credit are presented according to the terms of the letter of credit. In essence the importer’s bank is substituting its creditworthiness for that of the importer.

6. Slide 19-5 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Time Draft A written order instructing the importer or his agent, the importer’s bank, to pay the amount specified on its face on a certain date.

7. Slide 19-6 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Bill of Lading A document issued by the common carrier specifying that it has received the goods for shipment; it can serve as title for the goods.

8. Slide 19-7 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Banker’s Acceptances The exporter’s bank presents the shipping documents and the time draft to the importer’s bank. After taking title to the goods via the bill of lading, the importer’s bank accepts the time draft. At this point the banker’s acceptance is created. It is a negotiable money market instrument. A secondary market exists for banker’s acceptances.

9. Slide 19-8 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Banker’s Acceptances Banker’s acceptances can be held to maturity by the exporter. The exporter can also sell it (at a discount) in the money market. Since the risks are similar, B/As trade at rates comparable to certificates of deposit.

10. Slide 19-9 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved 19.2Export Finance Buyer Credits Direct loans Allocations under lines of credit Supplier Credits Note purchase agreements Forfaiting: applies to promissory notes (similar to factoring of accounts receivable)

11. Slide 19-10 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Forfaiting Forfaiting is a type of medium-term financing used to finance the sale of capital goods. It involves the sale of promissory notes signed by the importer in favour of the exporter. The forfait, usually a bank, buys the notes at a discount from face value from the exporter. The exporter gets paid and does not have to carry the financing.

12. Slide 19-11 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved 19.3Government Assistance in Exporting For political reasons (having to do with mercantilism) most developed countries offer competitive assistance to domestic exporters. This assistance often takes the form of subsidized credit that can be extended to exporters. Also credit insurance programs that guarantee financing extended by private financial institutions are common.

13. Slide 19-12 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved The Export-Import Bank and Affiliated Organizations In 1934 the Eximbank of the United States was founded as an independent government agency to facilitate and finance U.S. export trade. Export Development Canada provides Exim bank services in Canada www.edc.ca www.edc.ca Export Guarantee Program Note purchases Lines of credit Factoring Security compliance loans Bank guarantee program Commercial Interest Reference Rates (CIRRs)

14. Slide 19-13 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved The Export-Import Bank and Affiliated Organizations An EXIM bank’s purpose is to provide financing in situations where private financial institutions are unable or unwilling to because: The loan maturity is too long. The amount of the loan is too large. The loan risk is too great. The importing firm has difficulty in obtaining hard currency.

15. Slide 19-14 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved 19.4Intra-Firm International Trade A large and growing part of international trade flows across borders but within firms. The North American automotive industry is a good example. Linked to foreign direct investment.

16. Slide 19-15 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved 19.5Countertrade Countertrade is an umbrella term used to describe many different types of transactions each in “which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer”. Countertrade may or may not involve the use of currency, as in barter.

17. Slide 19-16 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Forms of Countertrade Barter The direct exchange of goods between traders. Barter requires a double coincidence of wants. A buy-back transaction involves a technology transfer via the sale of a manufacturing plant. The seller of the plant agrees to buy back some of the output of the plant once it is constructed.

18. Slide 19-17 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Forms of Countertrade A counterpurchase trade agreement is similar to a buy-back transaction, but differs in that The output that the seller of the plant agrees to buy is unrelated to the plant. An offset transaction can be viewed as a counterpurchase trade agreement involving the aerospace/defense industry.

19. Slide 19-18 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Disadvantages of Countertrade It is inefficient. Some claim that such transactions tamper with the fundamental operation of free markets, and therefore resources will be used inefficiently. Transactions that do not make use of money represent a huge step backwards in economic development.

20. Slide 19-19 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Advantages of Countertrade Countertrade conserves cash and hard currency. Advantages also include the improvement of trade imbalances, the maintenance of export prices, enhanced economic development, increased employment, technology transfer, market expansion, increased profitability, less costly sourcing of supply reduction of surplus goods from inventory, and the development of marketing expertise.

21. Slide 19-20 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Generalizations about Countertrade There are advantages and disadvantages associated with countertrade. It can benefit both parties and in some circumstances is the only trade possible. Whether countertrade transactions are good or bad for the global economy, it appears certain that they will increase in the near future as world trade increases.

22. Slide 19-21 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved Summary International trade is more complex and riskier than domestic trade; A typical foreign trade transaction requires three basic documents: Letter of credit; Time draft –can be converted into a banker’s acceptance; Bill of lading. Forfaiting involves a bank purchasing a series of promissory notes in favour of an exporter at a discount; EDC provides assistance to exporters through direct loans, loan guarantees and credit insurance; Countertrade transactions typically involve a reciprocal promise in exchange for goods and/or services.