CHAPTER SIX THE BUSINESS OF FOREIGN TRADE

Facilitating international trade is one of the most important activities of a bank’s international department. In this chapter we are going to see the various alternatives to financing international trade and then examine the documents of international trade.

1- THE CONTRACT Trade transactions begin with negotiations between a buyer and seller. Before concluding the negotiations the buyer and the seller have to agree on mutually acceptable means of payment. The payment options are: -Prepayment by the buyer -Open account shipment by the seller -Collection -Letter of Credit Prepayment (cash in advance) The buyers pay for the merchandise in advance of the shipment. This is made when there is a heavy demand for seller’s merchandise or the buyer has a poor credit reputation. In this transaction the buyer is at risk. He is running the risk of paying the goods but not receiving them, if the seller does not ship them. The bank assists transactions by transferring funds on the order of the buyer to the seller through a foreign draft.

Open Account: In this transaction, the seller ships the goods and the buyer pays them after the merchandise is received and found to be satisfactory. This is made when the buyer is large and has a good reputation. The risk here is with the seller. A variation of this type of sales basis is a “consignment” sale. In a consignment sale the merchandise is shipped to the foreign buyer, who does not have to pay until he has sold the product. “Collection and Letter of Credit” will be discussed in detail in chapters 7 & DOCUMENTS Banks deal only in documents. 2.1 Transport Documents (Bills of Lading) Bill of lading is one of the most important documents in international trade, which is issued by the transportation company when moving the goods from the seller to the buyer.

-Bills of Lading -Ocean bill of lading (vessel) -Rail bill of lading (rail) -Truck bill of lading (truck) -Air way bill (air) -Certificate of posting (mail) -Inter modal bill of lading (combined transportation) The bill of lading is prepared by a shipping agent and signed by the shipping company and given to the exporter. Bill of lading indicates that: The shipping company received the goods The shipping company will deliver the goods to the foreign buyer or others The shipping company’s terms and conditions The weight and dimensions of cargo The charges for shipment and The shipping marks on the crates

Ocean bills of lading fall into 2 categories, received for shipment and on board bills of lading. The latter means not only the cargo has been received but also that the goods are actually loaded on board of the resell. The bill of lading specifies who is to receive the goods at the port of destination. Straight bill of lading: Shipper directs the shipping company to deliver the shipment directly to the buyer. Order or negotiable bill of lading: Anyone in possession of an order bill of lading can obtain the merchandise. ‘Consigned to the order of shipper’ means the shipper should endorse it. ‘Multiple Original’ means more than one original. ‘Clean bills of lading’ means that the merchandise was received by the shipping company in apparent good order (no damage). ‘Foul bill of lading’ means goods received not in good order (damaged) ‘Liner Vessel’ means the vessel is operating on a regular route. ‘Charter party bills of lading’

2.2 Insurance All merchandise should be covered by insurance. This is good for exporters, importers and bankers. Marine insurance covers merchandise transported on a vessel. “General Average” the captain of the vessel can throw some of the cargo to the sea if the vessel is in danger of sinking. When the vessel arrives safely in port, those shippers whose cargo got through safely must reimburse those whose cargo was sacrificed to save the common venture. “All risks” coverage gives a good protection to the merchandise owner. 2.3 Invoice A statement prepared by the seller for buyer describing the goods sold, price and other details (date, ref no, shipping date, etc). Consularized commercial invoice See figure 6.3

2.4 OTHERS A certificated of origin: It shows where the goods are grown or manufactured. A weight list (gross weight, net weight) A packing list An inspection certificate Draft (Bills of exchange) Although not a document directly related to the movement or protection of merchandise, it is an important document in L/C and collections. The draft is the document by which the seller demands payment from the buyer, the buyer’s bank or some other bank. It is drawn by the seller for the amount of money due and the terms of the L/C. A draft drawn “at sight” is payable when presented to the drawee. Parties are; drawer (exporter), the drawee (importer) and the payee (exporter). See figure 6.4

3. Trade Terms C.I.F (cost, Insurance and Freight) F.O.B (Free on Board) F.A.S (Free Along Side) C&F (Cost and Freight)