The Exporters' Pocketbook
I. The Export Transaction and Its Documents
a.. Finding a market for the goods (market research)
b.. Selecting the marketing channels
e.. Distribution channels
h.. Commercial Invoice
Commercial Invoice must include (minimum):
a.. Payment Terms
b.. Mode of Payment
c.. Division of Costs
d.. Details of Carrier
e.. Details of Receiving Party
f.. Details of Buyer
g.. Other Details
For best results use the ECE (Economic Commission for Europe) Standard
Packing List must include (minimum):
a.. Contents of the Packaging (=of the shipment)
b.. If more than one package or outer and inner packing - all contents per each packing and per each package must be detailed separately
c.. Permits and Licenses
d.. Export licenses if needed
e.. Standards certificates
g.. Quality control certificates (highest is ISO, such as ISO-9002 or
h.. Health and phytosanitary certificates
i.. Veterinary certificates
j.. Other permits, licenses and certificates
k.. Service Providers
l.. Marine Transport
m.. Air Transport
n.. Land Transport (lorry, train)
q.. Banking and other Financial Services (factoring, forfeiting, etc.)
r.. Airway Bill of Lading (ABL)
s.. (More details later - see appendices for samples)
t.. Holder of ABL does not own goods
u.. Air Transport Contract not effected - but ABL proof of existence of
such contract, including weight, measurements, number of packages and
v.. Marine Bill of Lading (MBL)
w.. Proof of receipt of goods in a certain condition
x.. Proof of existence of transport contract
y.. MBL facilitates the transfer of ownership
Negotiable, transferable and assignable
Subject to the Hague conditions and MUST INCLUDE:
a.. Name and address of sender
b.. Port of loading and Port of discharge
c.. Date of lading and place of issuance of bill of lading
d.. Name of vessel and number of voyage
e.. Identity marks of cargo
f.. Description of goods - number of packing units, weight, volume
g.. Condition of goods - statement of carrier (if not stated - the goods
are in good condition)
h.. "Clean on Board" not "Foul"
Types of Bills of Lading (BL)
a.. Shipped BL - Goods are on deck of ship
b.. Received for Shipment - Prior to loading onto ship
c.. Direct BL - From origin to destination, transshipment not allowed
d.. Ocean Through BL - In case of transit involving a few carriers. In
such a case, each carrier imposes its own conditions on each leg of the
voyage and for the limited duration it handles the cargo.
e.. Pure Through BL - First carrier must transport from port of loading to
a mid-point and is responsible for damages to the goods.
f.. Combined Transport BL - Pure BL which covers shipment by all means of
transport (sea, air, land).
g.. Forwarder BL - An agent's BL. Issued by an international forwarder.
h.. Freight Forwarder BL - BLs of the International Forwarders
Association - FIATA
Types of Insurance Policies (IP)
The IP is prepared by the insurance agent or the insurance company.
a.. Open Time IP - One time IP, used in air/marine transport. Policy
expires with the completion of the transport (with delivery).
b.. Open IP - Open or current policy used to insure a number of shipments.
Payment of premium only for actual shipments. Entails a declaration by the
insured to the insurer pertaining to each and every shipment on a
pre-determined basis (ad hoc, weekly, monthly and so on).
The rights of the insured party are NOT effected if it BONA FIDE forgot or
had no time to declare to the insurer as per above, or if it gave the
insurer a declaration containing wrong information. The right declaration
can be filed even after the goods are lost or delivered.
Types of Certificates of Origin (CO)
Required by the authorities as a basis for customs duties and taxes
discounts or exemptions under trade agreements.
Some destination require CO per each shipment. Others require CO only for
specific goods. Sometimes the buyer demands a CO.
The exporter sends the CO to the buyer separately or with the goods.
Issued by the Chamber of Commerce, or by the Customs, or by the exporter
itself or by its forwarder in trust.
a.. EUR1 - To the European Union
b.. FORM A - To the USA / NAFTA (the customs union of the USA, Canada and
Warehouse Receipt proves warehousing of goods in the port area. Needed prior
to commencement of the release of the goods by the customs.
c.. Indication / Quotation
e.. Firm Order
f.. Acceptance (the order becomes a contract by accepting it)
g.. Revolving Orders are considered contracts
Order through an agent - identical to order issued directly by a buyer
(Important: demand from the agent proof of agency or representation, such as
a power of attorney)
1. Price of Goods (including price ex factory, shipment / transport -
freight costs, insurance, port taxes and expenses, other taxes, customs
costs, forwarding costs, costs of issuing certificates, permits and
IMPORTANT: Make sure WHO pays WHAT
2. Specifications of Goods - Type of goods, quality, packing, number of
units / quantity per package, packing sub-units
IMPORTANT: Prepare a sample for the buyer - which will be WORSE than
actually delivered goods.
3. Quantity and Delivery Terms
If it is an on-going (revolving) order - get from the buyer a projection of
its purchases in the future.
TIME OF DELIVERY IS CRITICAL !!!
4. Mode and Method of Payment
a.. Documents demanded by the authorities (permits, licenses, standards
and quality certificates, veterinary certificates, health certificates,
b.. Transaction documents (bill of lading, certificate of origin,
commercial invoice and specifications, port and customs clearances, banking
c.. Packing, Freight and Insurance
d.. Define outer and inner packing and sub-packing (materials, shape,
IMPORTANT - Get freight offers from a few forwarders/carriers and make sure
ALL the components are included in the price quoted!!!
All costs, including the insurance premiums, are negotiable.
USE an insurance agent or an insurance expert within your company. Insurance
is a complicated subject and the insurance companies do their best not to
pay on claims.
Proforma Invoice (PI)
Is actually an order and constructed as a commercial invoice -
But a commercial invoice MUST be provided separately.
Seller sends PI in duplicate (=2 copies)
Buyer signs one copy and returns it to seller
Buyer can prepare order or PI on its letterhead and send it to seller
Must include mode of payment
Use in case of a complicated transaction, the provision of services (or of
goods which contain a service element - for example, maintenance or
Sole Distributorship Contract
In case of doubt, use the ICC (international Chamber of Commerce) Model
Contract (see appendix).
A distributor BUYS the goods and distributes them through a network of
sub-distributors. He participates in advertising, marketing and sale
promotion of the products he distributes. In return, he gets exclusivity for
a certain territory, for a prescribed period of time and under certain terms
and conditions. He does not distribute competing products and he uses a
An agent get a commission on sales generated through him - but does NOT buy
The Sole Distributorship contract MUST include:
a.. Definition of territory and products
b.. Commitment to act bona fide and with best efforts
c.. Roles of the distributor
d.. Non competition clause
e.. Distributorship and distribution channels
f.. Fairs, exhibitions, advertising, marketing and sales promotion
g.. Delivery terms and retail price list
h.. Sales plan and minimum sales obligations
i.. Sub-distributors and agents
j.. Information exchange
k.. Prices to distributor (distributor price list)
l.. Sales outside the territory
m.. Brandnames and Trademarks - protection and allowed usage
n.. Inventories and spare parts levels, maintenance and service
p.. Direct sales (by the supplier in the territory of the distributor)
q.. Updates and upgrades
r.. Validity and Expiry of the contract
s.. Termination of the contract
t.. Compensation for damages in case of early termination of the contract
u.. Obligation to return documents and inventory to supplier in case of
termination of the contract
In case of doubt, use the ICC Model Contract (see appendix).
A Del Credere Agent undertakes to compensate the producer / manufacturer if
the buyers (clients) default.
MUST include as a minimum:
a.. Appointment of the agent by the seller
b.. First right of refusal regarding new products
c.. Exclusion of OEM (sale to a third party which rebrands the goods with
his own brand)
d.. Type of clients the agent may sell to
e.. Exact geographical definition of the territory
f.. Exclusivity (or lack of it)
g.. Bona fide collaboration and commercial fairness
h.. The roles and functions of the agent
i.. Endorsement and adoption of orders concluded by the agent with buyers
j.. No competition clause
k.. Marketing, advertising, fairs and exhibitions
l.. Minimal sales targets
n.. Obligation to exchange information
o.. Financial arrangements (Del Credere, other)
p.. Trademarks and brandnames
q.. Complaints of clients and buyers
r.. Right of seller to sell directly in territory of the agent
s.. Special clients / buyers
t.. Fees and commissions and formulas for their calculation
u.. Right of seller to reject business
v.. Expiry or termination date or absence thereof
w.. Survival clauses and unfinished business in case of termination of the
II. The Process of Exporting
Generalized Process of Export
Letter of Credit or other payment document opened
Production and pre-export phases
Preparation of documents (EUR1, FORM A, specified invoice, licenses and
permits, certificates of origin, etc.)
Instructions to forwarder and customs agent
Checking the prices of freight, insurance and forwarding
Commercial export (at the port facilities or customs terminal)
Receipt of documents (bill of lading, confirmed certificate of origin, etc.)
Presentation of documents at the bank and their transfer to the buyer's bank
The Phases of the Export Process:
Phase A - Decision
Phase B - Preparations
Phase C - Performance
Phase D - Post shipment
Phase A - DECISION
Collect Information (internet, specialized databases, market research,
meetings, travel, fairs and so on)
Production, quantity, quality, delivery terms, licensing
Price offer (firm offer)
Sale or Supply Contract
MAKE SURE THAT .
You are allowed to export the goods (no export restrictions on your goods)
Is there credit available for purchasing imported and domestically produced
raw materials and parts - going into your exported goods?
Can you honour the order? Do you have sufficient capacity, the right
manpower, the needed financing? It is better to say no than to renege on a
Phase B - PREPARATIONS
Import of raw materials / parts (imported or foreign inputs)
Purchase of imported raw materials / parts in the local markets (domestic or
Financing the imports
Financing the production
Preparation of documentation
Engaging customs agents and international forwarders
Freight and transport arrangements
Certificate of origin
Phase C - PERFORMANCE
Forwarding instructions to the customs agent
Withdrawal by customs agent
Preparation of invoice and specifications
Preparation of VAT claimback
Inspection of exported goods by authorities
Warehousing at the port
Inspection of exported goods by the client
Authorization to load
Loading and release of documents
Receipt of bill of lading
Receipt of confirmed certificate of origin
Receipt of other documents
Phase D - Post Shipment
Financing the documents (=receiving payment)
Presentation of documents in local bank
Tax and port tax rebates (in some countries)
Pricing the Exported Goods
Fixed Costs (Overhead) - Administration, rent, accounting, amortization /
depreciation, etc. Should be divided by man-hours or product units to
determine their contribution to the costs.
Variable Costs - Directly related to the production process. Wages, raw
materials, fuel, etc. Increases with increased production.
Incoterms Costs - See Incoterms hereunder
Transporting the goods from factory to export port or terminal
Shipping the goods from export port or terminal to import port or terminal
Transporting the goods from import port or terminal to buyer.
Last determined by the ICC in 1994. There is also a 1936 American version.
Used by all parties to an international trade transaction: buyer, seller,
banks, financial institutions, agents, forwarders, insurance companies,
carriers, government authorities, lawyers and courts.
See Appendix for detailed analyses of all 13 Incoterms
EXW (Ex Works) - Seller provides goods in his factory yard. Buyer is
responsible for all the rest, including loading the goods onto trucks in the
seller's yards. Best to add: "loaded upon departing vehicle".
FCA (Free Carrier) - Seller provides export licenses, customs clearances and
port documents to first carrier (determined by buyer) in an agreed location
within the export country. Useful for MultiModal Transport (MMT) in land,
air, or sea. Seller pays all port and customs inspection expenses. Seller's
responsibility ends with delivery to carrier. Buyer pays all expenses from
point of delivery (transport, insurance, special inspections).
FAS (Free Alongside Ship) - Seller delivers goods to a loading quay,
alongside a ship, in an agreed port in export country. Buyer obliged to
clear goods for export after having received loading documents from seller.
Buyer pays all port expenses and expenses related to required documentation.
Use only for marine freight.
FOB (Free On Board) - Seller delivers customs-cleared goods with bill of
lading, export license, all taxes and duties paid clean (unharmed) on board
a vessel. Seller pays all expenses until goods are clean on board. Buyer
determines carrier and pays the carriage (including loading expenses if part
of the transport costs). Marine freight only. Best to add: "stowed and
Buyer must insure itself when using an "F" Incoterm.
CFR (Cost and Freight) - Seller pays all expenses and transport costs to
port of discharge. But responsibility for damage or loss or additional
expenses is buyer's after goods loaded and stowed under deck. Seller obtains
customs and port clearances, licenses, contracts with the carrier and with
the insurance company regarding transport of goods to the point of loading.
Buyer must obtain the import licenses, release the goods in port of
discharge, issue insurance and pay for transit and inspection of goods.
Marine freight only.
CIF (Cost, Insurance, Freight) - Seller arranges marine freight insurance
for buyer and provides buyer with valid insurance policy in addition to
obligations under CFR. Unless otherwise agreed, seller buys a limited "C"
policy. Best to add: "free out". It is important to mention the type of
insurance and coverage sought by buyer.
CPT (Carriage Paid To) - Similar to CFR but when MMT involved (car, train,
ship and then airplane, for instance). Instead of On Board - use First
CIP (Carriage and Insurance Paid To) - Similar to CIF but when MMT is
involved. Responsibility reverts to buyer when goods delivered to First
DAF (Delivered At Frontier) - Seller to deliver export cleared goods at a
precise point at the border of either import or export country. Buyer
obliged to clear goods through customs terminal, to obtain import license
and to bear all import related duties, fees and charges. Seller must inform
buyer ETD (Expected Time of Delivery) and precise location of delivery.
If preceded by international marine or air transport, point of delivery will
follow the Main Carriage (used in train transport).
DES (Delivered Ex Ship) - Marine freight only. Seller must deliver export
cleared goods to buyer on board a ship in port of discharge but has no
responsibility to clear the goods for import in the destination country, to
unload them and to ship them to final destination within the buyer's
DEQ (Delivered Ex Quay) - Marine freight only. Seller must deliver goods
buyer outside the quay after unloading them from the ship and clearing them
for import through port authorities and customs. Seller pays import taxes
and port expenses. Seller must provide buyer with bill of lading and gate
pass. Buyer must transport goods to his yards and if he does not must pay
demurrage and warehousing.
DDU (Delivered Duty Unpaid) - Seller must deliver goods to buyer in a
location within the destination country but buyer must clear them for import
through the port and customs authorities. Buyers must pay all taxes and
expenses related to the clearance.
DDP (Delivered Duty Paid) - Seller must deliver goods directly to buyer's
location (or to any other address) after having fully cleared them for
import and fully paid all taxes and expenditures related to such clearance.
Best to add: "DDP-VAT unpaid" in case seller does not agree to pay the VAT.
The buyer and the seller must include all special conditions, not covered by
the Incoterms - in their sale contract or order or commercial invoice.
Even if you include an Incoterm in a contract it is advised, to remove
doubt, to also include a detailed list of rights obligations of the parties
(=an agreed interpretation of the Incoterm). Always mention the version of
Incoterms used (for instance: "FOB - Incoterms 1990").
The transfer of responsibility to the goods from seller to buyer does NOT
constitute a transfer of title (ownership) to the goods.
There are Exit Contracts (seller delivers to buyer's carrier in country of
origin of the goods and such a delivery ends the seller's responsibility) -
All the Incoterms which start with the letters E, F and C. For example: CIF
does NOT mean that the seller is responsible to deliver the goods in a port
in the destination country - only that it has to pay for the voyage and for
There are Delivery Contracts (seller delivers to buyer in country of
destination and is responsible to them until they are delivered there) - All
the Incoterms, which start with the letter D.
This is why insurance is critical (policy types A, B, or C).
It must include:
a.. Location in which the policy becomes valid
b.. Location at which the policy expires
c.. Extensions to the basic policy
d.. Political risks
e.. Value of coverage and types of coverage (replacement value, damages,
f.. Insurance of loss of profits
g.. The policy's currency
h.. Currency hedging
The buyer must provide full specifications of packing of goods
If the parties use a C Incoterm, the buyer is usually responsible for costs
associated with an inspection of the goods by the authorities of the country
of origin (PSI - Pre Shipment Inspection). If the buyer demands an
inspection (quality and quantity controls) - it must be stated clearly who
will bear the cost. If not specified - the buyer shall bear it.
It is recommended to use FCA when goods are not delivered to the carrier on
quay or on board. Buyer must arrange the transport and provide the seller
with exact instructions.
"FOB Airport" should not be used. FOB is ONLY for marine transportation. For
air transport use FCA.
Incoterms in conjunction with Bill of Lading (BL)
When CIF or CFR is used, use "on board BL" (goods have been loaded on board
If goods shipped in containers, carrier may issue "Received for Shipment"
(when he receives the goods and prior to their loading on board) - instead
It is preferable to use CPT or CIP if BL not required to conclude the
If goods arrive prior to original BL - they are delivered to buyer against a
bank guarantee. Avoid it as it negates the function of the BL.
Non Negotiable Waybills and Receipts
If a waybill is non-negotiable, there is no need to present its original to
obtain delivery of the goods.
The following are non-negotiable:
a.. Liner Waybill
b.. Ocean Waybill
c.. Data Freight Receipt
d.. Cargo Key Receipt
e.. Sea Waybill
All air waybills are non-negotiable. Only the seller can instruct the
carrier (not the buyer or his bank). Importers dislike non-negotiable
waybills (unless explicitly stated that they are irrevocable). The names of
the parties in the waybill must be irrevocable - otherwise, the seller can
BLs, Receipts and Waybills
Let us call all waybills and receipts - as well as bills of lading -
transport documents (TD).
TDs are delivered to the buyer or to the seller according to instructions
given to the carrier (never mind who paid for the carriage). The seller
might get them to prove delivery. The buyer needs them to release the goods
(to instruct the carrier).
TDs can be divisible (article A8 of Incoterms) in case one TD covers goods
deliverable to many buyers.
Buyers responsible to release the goods and accept delivery - or to
compensate seller for any damages.
Buyer is liable for damages to the goods after the transfer of
responsibility from seller to buyer ("Price Risk").
It is recommended to use "Force Majeure" articles in sales contracts.
Some countries oblige exporters and importers to insure the goods in their
own countries (to minimize foreign exchange outlays).
Rules of Use of Incoterms
1.. Use DEQ, DES, CIF, FOB and FAS only in marine carriage and for marine
2.. Use CPT, CIP, FCA universally except if goods are in bulk of carried
in chartered vessels.
3.. Be clear: how are the goods to be transported, who has the obligation
to have them loaded, who pays for what, who is responsible to clear the
goods, to release them and to unload them and so on.
4.. Be clear: how much insurance you require and what type (A, B, C)
5.. What restrictions and special demands would you like to impose on the
carriage and the carrier.
6.. Include "Force Majeure" and validity, expiry and termination clauses
7.. Indicate which Incoterms version is used (example: FOB-Incoterms
8.. The Incoterms CPT, CIP, CFR and CIF deal only with the transport
aspect of the transaction - not with the transfer of responsibility or
Payments schedule (when?)
Payment mode or method of payment (how?)
Place of payment (where?)
Currency of payment (which?)
Advance payments (cash in advance)
Open account credit
Cash Against Documents (CAD)
Documents for collection, Cash on Delivery (COD)
Letter of Credit or Documentary Credit (L/C)
General Principles of Payment
If cash was paid in advance by buyer, seller will give buyer the documents,
courier them to the buyer or airmail them (Captain Mail them).
COD - the carrier delivers the good against cash (collect).
But in all other forms of payment:
The carrier of the goods is hired by either the seller or the buyer to carry
the goods, in accordance with instructions, to a destination.
The seller sends the goods to a bank in geographical proximity to the final
destination of the goods.
The transport documents (bill of lading, waybill, receipt) are sent to that
The consignee bank - having received the transport documents, the commercial
invoice, the certificate of origin, the insurance policy and other
documents, invites the buyer to buy (to redeem) these documents (with which
he can get the goods).
The buyer pays the bank and the bank endorses the bill of lading and
instructs the carrier (if the BL is non-negotiable) to give the goods to the
The buyer pays the carrier, presents the endorsed bill of lading and gets a
delivery order with which the buyers releases the goods, having paid
customs, duties, taxes and port expenses. He receives a gate pass which
allows him to load the goods to his lorries and transport them to his yards.
Either with big, reliable clients, or with agents, distributors,
subsidiaries which maintain a consignment warehouse or a forward warehouse.
Use Exchange Note - A financial instrument in which the seller instructs the
buyer to pay his bank for the goods. The buyer signs the note. Buyer's
signature confirms receipt of the goods in good order and the buyer's debt.
Exchange notes are transferable, negotiable, endoreseable and assignable.
It is a stand-alone document which does not refer to the underlying
It is recommended to date the exchange note (on its back) and thus transform
it into a Time Note.
Cash On Delivery (COD)
Payment with delivery of goods.
Exporters which maintain warehouses in destination countries - use COD.
Payment can be in cash, deposit receipt, bank guarantee, bankers'
Be careful to receive payment only by your authorized representative.
Cash Against Documents
2.. Carriage of goods to port of discharge
3.. Documents (commercial invoice, bill of lading, insurance policy,
certificate of origin) transferred by to seller's bank for collection
4.. Seller's bank (usually through carrier) transfers documents to buyer's
5.. Buyer's bank (the consignee) invites buyer to receive endorsed
(ownership transferred to buyer) documents
6.. Buyer deposits payment (or arranges credit line) for the goods in his
7.. Goods delivered to buyer (using the endorsed documents)
8.. Buyer's bank transfers the payment to seller's bank
9.. Seller's bank credits seller's account with the payment minus fees and
charges and commissions
If bank endorses documents to buyer prior to receipt of payment - the bank
assumes the buyer's obligation to pay.
CAD not to be used with branded or customized goods (buyer might refuse the
goods and if they are branded or customized - they cannot be sold to another
Banker's or Bank's Acceptance (Accept)
Exporter can ask buyer to provide a bank draft. An acceptance stamp and
signature on the draft ("Accept") transforms it into an obligation of the
bank itself to pay, on a given date to bearer.
Both Exchange Notes and Bankers' Acceptances are traded in special exchanges
in the world.
Letter of Credit and Documentary Credit
A letter in which a bank undertakes to pay the exporter if and when the
exporter meets certain terms and conditions enumerated within the L/C.
The bank's commitment is usually irrevocable (the L/C should contain this
word: "irrevocable" - although it is irrevocable even by default).
If the exporter fulfils all the conditions of the L/C - the bank will pay,
regardless of the situation of the buyer. If the seller did not comply with
the conditions in the L/C, the bank will pay only if buyer expressly agrees
1.. The letter of credit is only as good as the issuing bank
2.. Check: are the conditions of the L/C identical to the conditions
specified in the sale contract, the commercial invoice or the order?
These are the uniform rules of international payments determined by the ICC
in Paris, France:
1.. Importer signs sales contract which includes prices, schedules of
delivery and payment, types of packing, modes of carriage, volume, documents
to be exchanged and more. Importer gets pro-forma invoice from exporter.
2.. Based on the pro-forma invoice, Importer asks his bank to open letter
of credit in favor of Exporter. Importer instructs the opening bank which
details to add to the L/C which are not included in the Sales Contract or in
the pro-forma invoice. Such details may include: permission or prohibition
of transit, transshipment, division of the L/C, part shipment, the number of
copies of the documents, certificates of origin, the coverage amount of the
insurance policy, should the policy be endorsed and so on.
3.. The bank uses its letter of credit form and incorporate all the terms
and conditions of the sales contract in the letter of credit.
4.. The Importer's bank send the details of the L/C to the Exporter's bank
(the Correspondent Bank).
5.. The Correspondent Bank informs the Exporter that an L/C was opened in
the Exporter's favor and conveys to the Exporter the details of the L/C.
6.. Exporter compares the conditions of the L/C to the conditions of the
sales contract and especially whether the Importer's Bank has irrevocably
agreed to accept the Correspondent Bank's signature regarding the receipt of
7.. Exporter consults his bank and others whether the Importer's bank is a
prime, world bank of good standing.
8.. Exporter makes sure the L/C is valid and corresponds to the timetables
agreed with the Importer regarding both the delivery of the goods and
payments. Another question: can the documents be negotiated or transferred
within the term of the L/C? Can the Exporter accept all the restrictions and
limitations of the L/C? Are there any impossible conditions (for instance,
in contravention of the foreign exchange regime) or wrong details (name of a
port which does not exist, etc.).
9.. If the L/C is accepted by the Exporter, he starts production and
manufacturing operations. When the goods are ready, Exporter contacts a
carrier. After the goods are loaded, Exporter gets a bill of lading, a
certificate of origin EUR1 or FORM A signed by the Customs, an export list
and other documents.
10.. Exporter presents documents to his bank which checks whether all
required documents have been presented and whether they comply with the
conditions of the L/C. The correspondent bank then issues an ACCEPTANCE. The
L/C then becomes a bank guarantee.
11.. If the correspondent bank is also the confirming bank, it also pays
12.. The correspondent bank transfers the documents and the acceptance to
the opening bank.
13.. The opening bank checks the documents. But if the correspondent bank
is also the confirming bank - even if the documents are wrong or faulty -
the opening bank must pay.
14.. The opening bank transfers the payment to the correspondent and
15.. The opening bank informs the Importer that the documents arrived.
Importer deposits payment with the opening bank (or opens a credit line with
16.. Importer gets from the opening bank the documents endorsed.
17.. Importer clears the goods and takes delivery of them through the
carrier (he gets a delivery order from the carrier, having settled all
outstanding accounts with carrier).
Settlement by Acceptance
1.. Seller transfers documents to correspondent bank with a note made out
to the bank (the bank is the note's beneficiary).
2.. Correspondent bank confirms acceptance of dated note to the seller.
3.. Opening bank gets the document.
4.. Opening bank credits correspondent bank.
Settlement by Negotiation
1.. Seller transfers documents to correspondent bank with a note made out
to the buyer (the buyer is the beneficiary of the note).
2.. The correspondent bank pays seller against documents and note.
3.. Correspondent bank transfers documents and note to opening bank.
4.. Opening bank credits correspondent bank.
Letters of Credit - Form, Structure and Details
1.. Number and ID (this number must be placed on all subsequent
documentation pertaining to the same transaction.
2.. Names and details of buyer, seller, opening bank (buyer's bank),
3.. Description of goods - usually the proforma invoice is attached and
this sentence is then added: "In accordance with proforma invoice number .
dated . herewith attached to this letter of credit and which constitutes an
integral and inseparable part thereof".
4.. Total cost or price.
5.. A list of documents (with the presentation of which by the seller
payment to the seller will be effected):
1.. Commercial invoice, including a list of the goods, details of buyer
and seller and signatures.
2.. Packing list signed by seller.
3.. Insurance policy including its type, the coverage it affords, amount
covered. The policy's beneficiary must be the opening (importer's) bank and
it must be fully endorseable.
4.. Detailed billways, receipts or bill of lading: who is entitled to
receive delivery of the goods, who pays for the carriage, is carriage
prepaid and where, etc.
5.. Other documents.
6.. Dates - when was the L/C opened, how long is it valid, date of loading
and date of presentation of documents at the bank (maximum 21 days after
loading of goods, if not otherwise specified).
7.. Special instructions: is transit or transshipment allowed (best to
write "transshipment allowed"), is part shipment allowed (best to write
"part shipment or partial shipment allowed").
If carriage or delivery not according to L/C - L/C will NOT BE PAID!!!
Types and Specifications of Documentary Credits
Confirmed versus Unconfirmed
Opening bank uses a bank in the Exporter's country (usually the
correspondent bank) to interface with the exporter.
The corresponding bank informs exporter about opening of L/C and checks and
verifies the exporter's documentation after goods have been loaded (such
verification subject to opening bank's consent).
Sometimes the correspondent bank verifies the documents AND pays for them -
this is known as CONFIRMATION. With a confirmed L/C, the correspondent bank
must pay the exporter upon verification of the documents. The exporter pays
a confirmation fee.
Transferable and Divisible
An L/C that can be transferred to or be paid in parts to sub-contractors and
suppliers of the Exporter. Only one transfer is allowed:
1.. The name and details (address, etc.) of first beneficiary can be
changed to name and details of second beneficiary.
2.. The amount of transferred credit must be smaller than original amount
3.. The period of validity of the L/C or its parts can be altered.
4.. The percentage of insurance can be increased.
5.. The details of the new L/Cs issued on basis of original L/C can be
different to details of original L/C - as long as new L/C are less (in
amount) or shorter (in period) or partial and do not expand the original L/C
or otherwise enhance it.
For a series of identical transactions with known delivery and payment
If irrevocable, cannot be revoked even if revolving and even if the buyer
went bankrupt. The bank is responsible to pay.
Counter Credit (Back to Back)
The L/C is pledged by the Exporter to his bank (the corresponding bank) or
(more often) to another bank against receipt of credit from the bank. This
credit is then used to pay suppliers.
The exporter's obligation to pay the back to back credit it received from
its bank - is NOT dependent upon the payment of the L/C used as a
1.. Packing and transportation of goods to port or terminal
2.. Marine transport
3.. Air transport
4.. International forwarding and customs agency
5.. Cargo insurance
6.. Credit insurance
7.. Prevention of loss and damages
9.. Land export and import
Cardboard (two or three waves)
Crate (wood with or without cardboard)
Wooden boxes (heavy and expensive)
Barrels (metal, plastic, wood; for the transportation of fluids; fluids must
fit the material of the barrel)
Sacks (jute, paper, plastic, cloth)
The Goods can be transported .
Loose (each unit - box, barrel, etc. - separately)
Unitizing (one unit composed of sub-units) - shrink, containers, big bags or
semi bulk, stretch, etc.
The carriage fee or rate + charges, fees, levies, duties and commissions =
Fixed and variable transport costs
(such as the distance traveled, expenses and fees in various ports,
balancing the cargo, frequency, size and type of vessel, properties of the
goods, modes of loading and warehousing, volume/weight ratio, transport
risks, possible damage to cargo, size of cargo and its composition, etc.)
But "Likes are not treated as likes" - different prices are quoted for
This is because of additional costs related to the market in the goods and
to the marine transport marketplace.
The carriage fee is determined also by "what the traffic can bear" - how in
demand are the goods, how valuable they are, etc.
The conditions of the global marketplace in marine transport and the
competition in it also determine the quoted price - as well as fees, levies,
charges, commissions and taxes in the various ports and in the various
origin and destination countries. Changes of technology also influence
Tariffs are determined as CLASS RATE - a class of transport, which includes
many types of cargo with the same rate or
A COMMODITY RATE - specifically tailored to every type of cargo and
multiplied by the weight or the mass (volume). Payment is according to the
higher of the weight and the mass.
To this the exporter should add charges (such as the Heavy Lift Charge or
the Extra Length Charge) and other levies.
...such as the CAF (Currency Adjustment Factor - a currency hedge in favor
of the shipowner);
...the BAF (Bunker Adjustment Factor - a percentage of the rate intended to
offset certain expenses of the ship operator);
War Risk (or Political Risk - to offset a high insurance premium);
Congestion Surcharge (to offset expenses which are the result of long
periods of waiting at the port) or
THC (Terminal Handling Charges - imposed by the port itself for the right to
Door to Door (House to House)
An empty container is deposited with the exporter in a pre-determined date.
The Exporter fills it and transports it to the harbor.
In the destination country - the container is deposited with the importer.
He empties it, returns it to the port.
Pier to House
In the port of discharge, cargo and goods from different suppliers are
concentrated in one container which is then sent to the importer / buyer.
House to Pier
Like House to House - but because the container contains goods for various
buyers, the container itself is not sent to any single buyer.
Pier to Pier
Cargoes reach the port, get containerized by the agent in the port of
loading. In the port of discharge, it is emptied and each cargo is sent
separately to each buyer.
Transporting the cargoes of a few sellers in one container.
Compare Prices - you will always find a cheaper alternative!!!
Types of Ships
Liner - operate in regular lines with regular vessels in pre-determined
Voyage Charter - Cargo owner charters a vessel to transport the cargo from
port of loading to port of unloading
Time Charter - Cargo owner or shipping company charters a vessel for a
defined period of time (upto a few years)
Bareboat Charter - Long term (5-15 years) charter (common in the transport
of fuel and grains). The lessee takes care of the cargo, of operating the
vessel and its crew
Container ships - Built like a beehive with cells the size of containers
RORO - Cargo rolled on wheeled carriages under deck (for transporting
Multi Purpose Boat
Tankers (fluids, liquids, fuel)
Bulk - Transports grains or chemicals in bulk
Lash - Carry with them big platforms or rafts
All shipowners are organized in a cartel called "Conference"
Marine Bill of Lading (MBL)
Serves as a receipt for the cargo, proof of existence of a carriage contract
and proof of ownership. It is negotiable and endorseable.
Under the Hague principles, a bill of lading (BL) must include the
1.. Name and address of shipper / exporter
2.. Port of loading and port of discharge
3.. Date of loading and place of issuance of BL
4.. Name of vessel (ocean liner, etc.) and voyage number
5.. Cargo identification marks
6.. Description of goods - number of units, weight, volume (mass)
7.. Condition of goods (if not filled - no external or visible damage)
8.. BL must be "clean on board" not "foul"
A Marine Bill of Lading must include these to be valid:
1.. The words "bill of lading" and the words "lading" or "shipped" (which
prove that goods have been loaded on board vessel)
2.. Date of loading
3.. Confirmation of the shipping company
4.. Numbers of original bills of lading, if any
5.. The words "Clean on Board"
6.. Name of the shipper
7.. Name of the consignee or "To Order" (of the shipper) together with
endorsement of the shipper
8.. Name of vessel
9.. Port of loading, final destination and is re-loading required
10.. Name of parties to be notified upon arrival to the port of discharge
11.. Marks and numbers stamped on the packages
12.. Abbreviated description of the goods (weight, number of units and
volume / mass)
13.. How many original copies of the MBL are there and is the presentation
of all original copies required to in order to release the goods
Types of Marine Bills of Lading
Shipped MBL - Goods were loaded and carrier received them in good order
Direct MBL - No transshipment allowed
Ocean Through MBL - Transit MBL. When more than one carrier handles the
goods, each one is responsible for the goods only during his tenure and
under the terms and conditions of his contract
Pure Through MBL - Pure transit MBL. The first carrier must transport the
goods from the port of loading to the port of discharge through an
intermediate port and is responsible for damages
Combined Transport BL - Covering all modes of transport (not only sea)
Forwarder BL - Issued by an agent, an international forwarder
Freight Forwarder BL - Issued by FIATA, the international organization of
The Hague Principles regulate the legal relationship between carrier and
shipper from loading to discharge.
It covers only exported goods, carried by vessels by sea
It applies only when a transport contract has been incorporated in the BL
It does not cover goods (such as animals) on deck
Types of Transport Tariffs
Air transport tariffs are indicated by IATA - but often these tariffs are
ignored. SHOP AROUND.
Minimum Rate - not in accordance with actual weight (when under 45 kg.)
General cargo Rate (GCR) - for all kinds of cargo
Specific Commodity Rate (SCR) - per a minimum weight of a specific type of
cargo and valid for a limited period of time. Cheaper than GCR.
Unit Load Device (ULD) - Special tariff for cargo transported as a unit on a
surface or in a container. Only weight is limited (maximum and minimum)
The tariff is derived from:
1.. Destination of cargo
2.. Type of goods - SCRs can be negotiated with the local IATA
3.. Minimum Rate
4.. Weight / Mass (volume) ratio (every 6 cu.m. equal 1000 kg.) - if W/M
exceeds this ratio - payment will be according to weight
Try to exceed the minimum rate and the minimum weight
Negotiate an SCR or a ULD wherever possible
Make sure that the W/M ration does not exceed the allowed ratio
Issued by the air carrier.
Mainly a confirmation of transport - not of ownership or any right to goods.
Absence of airway bill does not effect validity of contract of air carriage
or the applicability of the treaty - but may prevent carrier from resorting
to exemptions and other restrictions in the treaty.
Airway bill is proof of weight, measurements, quantity and packing. It is
also a carriage invoice, an insurance policy (if insurance taken out by
carrier) and a customs declaration (if no other declaration is required by
Not negotiable and ownership cannot be transferred by its endorsement or
Only consignee can accept delivery at discharge. Buyer appears under "also
notify" when bank is consignee and fiduciary on behalf of seller. Buyer
receives power of attorney from bank to release and clear the goods.
Issued in three original duplicates to shipper, consignee and carrier.
International Forwarding and Customs Agency
The international organization of forwarders - FIATA - created a document
system called FBL (Forwarder's Bill of Lading - equivalent to MBL). The
forwarder responsible for goods door to door (house to house).
FCR (Forwarder's Certificate of Receipt) - A receipt issued by forwarder
confirming receipt of goods at the factory to be carried to destination.
FWR (Forwarder's Warehouse Receipt) - Receipt issued by forwarder that it
received goods in a warehouse to be carried to destination.
Airfreight Forwarder - As opposed to marine forwarders, airfreight
forwarders have to comply with certain professional and financial
conditions. Some of them are IATA forwarders - with minimal volume of
activity, proven acquaintance with airfreight rules, skilled staff and so
on. IATA forwarders get 5% of carrier's rate and are allowed to issue airway
bills to shippers on behalf of air carriers.
An airfreight forwarder:
Arranges a number of shipments, unites them and passes them to the aircraft,
handles commercial export / import operations for exporter / importer,
prepares all paperwork, takes care of transit from one aircraft to another
and of air insurance (if client demands it), consolidates cargoes, issues
airway bills and selects routes.
Customs Agent deals with goods only within the port while an international
forwarder handles the goods from door to door.
Customs Agent deals with the following:
Reserving space in a vessel, coordination of acceptance of containers,
provision of information regarding prices, routes, schedules, preparation of
documents for exporter including BL, CO and all other documents demanded by
the customs. The agent appraises and classifies the goods for customs
purposes, obtains a gate pass and arranges the transportation of the goods
to the buyer's location.
The buyer is responsible for the activities of the agent.
About 0.15% of value of cargo, except if dangerous or fragile cargo.
One Time Policy expires with completion of transport.
Open Policy or Current Policy - see above.
Insurance is cheap - use it abundantly.
Insure the cost, the profit, the carriage rates, the marine insurance
premium, port expenses and land transport, customs agency, import taxes and
Double marine insurance is allowed.
Marine insurance is subject to the London Clauses. Institute Cargo Clauses
deal with general cargo.
A Clauses Coverage - All risks insurance against loss or damage caused by
random event which happens outside the cargo and effects it.
Does not cover loss or damage which is the result of intentional behaviour
of the insured, general leakage, loss or vaporization of mass or weight,
normal wear and tear, inappropriate packing or preparation of insured goods,
breach of contractual schedules and obligations by insured or owners,
charterers or operators of vessel, inherent defects, war, nuclear fusion or
fission, radioactive material, incapacitation of vessel known to insured at
time of loading.
B Clauses Coverage - loss or damage due to fire, explosion, shipwreck,
capsizing, derailment of a land vehicle, collision or contact with another
body except water, unloading in distress, earthquake, volcanic eruption or
thunder, general average, penetration of sea, lake, or river water into the
ship's warehouses, lift, etc., total loss of cargo which fell in the sea
during unloading of loading.
C Clauses Coverage - covers only catastrophic marine disasters such as fire,
explosion, shipwreck, drowning, capsizing, derailment, collision, unloading
in distress, general average or dumping in the sea.
Both private and state companies (such as ECGD in the United Kingdom, COFACE
in France and OPIC in the USA) provide insurance:
a.. Against the credit risks of the buyer
b.. Against political risks (war, terror, acts of state)
c.. Against financial risks (non convertibility, non repatriation)
Credit risks insurance policy serves as collateral. It is pledged against
credit, which goes towards financing the production of the goods and working
Credit insurance firms check and rate clients (or rely on credit rating
agencies such as Moody's, Fitch-IBCA for banks or Dun and Bradstreet). They
issue policies guaranteeing payment to the supplier / exporter in case of
the buyer's bankruptcy, refusal to pay, default, nationalization and
Insurance is provided mainly or only to firms registered in the domicile of
the insurance company or in another member of the same customs union or
trade block (EU, EFTA, etc.) - so, it is recommended to establish
subsidiaries in these territories to be eligible.
Premiums range between 0.5-0.7% per insurance unit for a period of 90 days.
Prevention of Loss and Damage
Use only new packings suitable to the goods
Fit crates and cardboard boxes with metal corners
Use shrink wherever possible, tie and strengthen everything massively
Do not paste labels with descriptions, pictures, brandnames, trademarks or
labels on the packages - these attract thieves. Mark the packing with
letters and numbers on at least two of its sides. Proper packing is an
implied warranty in the carriage contract and an expressed warranty in a
marine/ air insurance policy.
Mark the packages with instructions: "Fragile", "Printed", "Handle with
Care", "Avoid X-rays" and so on.
The standard marking of cargo should include:
1.. Initials or abbreviated name of consignee (full name and address
required in case of road or rail transport)
2.. Reference number (order number or similar). Avoid indicating the date
3.. Name of port and final destination and "via" in case of transit
4.. Package number out of total (example: 2/20)
5.. Mark the packages Big, Clear and Brief (BCB)
6.. Use metal, plastic or strong cloth tags - do not use cardboard or wood
7.. Marks bags and sacks with sealing liquid
8.. Mark dangerous and radioactive materials with warnings, the chemical
composition and the shipper's name
9.. Use Latin letters as well as local alphabets - a maximum of 10 lines
of 17 characters each
10.. It is advisable - but not required - to mark gross weight in case of
air transport. Net weight and measurements are not required at all - unless
chemicals or dangerous materials are involved.
11.. Some countries demand to mark the name of country of origin, number
of import license, etc. - pay attention to local regulations
Change your markings often.
Use big packages to pack smaller and non-uniform packages in.
Leave no empty space inside the package - fill empty spaces with paper,
Styrofoam, pad the goods and tie them tightly.
Do not overfill the crates, sacks, or boxes.
Do not concentrate the goods in one part of the package (internally) -
spread them evenly.
Place light cargo on heavy cargo.
Separate types of packings (cardboard boxes from crates, etc.)
Do not leave any space between the wall of the container and the packaged
VI. More on Documents
a.. Country of Origin
b.. Place and date of preparation, number of invoice, reference to order
c.. Names, addresses and other details of buyer and seller (and consignee
if not the buyer), address for delivery of documents
d.. Type of carriage (sea, land, air, multimodal)
e.. Port of loading
f.. Port of discharge
g.. Final destination
h.. Commercial conditions and schedules (delivery and payment)
i.. Number of packages, their description and markings (numbers, etc.),
j.. Description of goods according to type, quality, special properties,
composition in percentages of each material
k.. Amount of goods in units / weight / volume
l.. Gross, net and net net and measurements of each package
m.. The price agreed between the parties, costs of freight and insurance
n.. Conditions of shipment, dispatch and payment, including all discounts,
fees, commissions and charges
o.. Exporter number if any
p.. Stamp and signature of seller plus declaration that all the above is
Packing List (Specifications)
The first part includes name of firm, date, address of buyer and, sometimes
name of bank, payment conditions, etc.
The second part contains very detailed description of the goods and their
packing. Some countries demand the inclusion of special units of weights and
measurements, method of marking, customs classification and so on.
Includes the value of the goods, details regarding the mode(s) of transport,
points of departure and arrival, details of the agency or insurance company
to be contacted in the destination country in case of damage.
Must include the following details to be valid:
a.. Name of insurer
b.. Policy number
c.. Details of carrier
d.. Route from exit to entry
e.. Total value insured and type of currency
f.. Conditions of the policy
g.. Details of agent in destination country
h.. Jurisdiction in case of disputes
i.. Description of goods and their packing
j.. Date of issuance of insurance
k.. Method of calculation of the premium (marine insurance, war surcharge,
registration, policy, credit if payment of premium is post dated)
Bill of Lading
Contains description of goods, their quantity and quality ("clean on board"
Airway bills include an invoice to be paid by buyer or seller.
If seller pays, the bill will say "prepaid" - if buyer is to pay, it will
In case of marine bill of lading, a detailed invoice is issued to seller.
Certificate of Origin
Issued at the request of the buyer.
Confirmed by the chamber of commerce, the customs, or the exporter or his
agent / forwarder - or any other body authorized by them.
Must be printed without corrections.
Must conform to commercial invoice.
a.. Name and full address of exporter
b.. Name and full address of consignee
c.. Description of goods and their packing
d.. Weight of goods in kg. Or volume in liters
e.. Numbers of relevant invoices
f.. Declaration of exporter that goods conform to rules of origin
stipulated in the agreement under which the certificate of origin is issued
Like EUR1 but:
a.. Authorities do not need to confirm it
b.. The percentage / amount of value added of the goods must be declared
(or "P" in case the goods are also produced in the destination country)
Consular Confirmation or Consular Invoice
Demanded mainly by developing countries.
Includes full description of goods in language of destination country -
including quantities, monetary values and a sworn affidavit of the exporter
attesting to the veracity of the data.
APPENDIX I: The World of the Internet
Buy a computer - including modem, graphic card with 2Mb buffer and
multimedia (sound card, speakers)
Open an account with one of the internet service providers - ISPs (PTT,
Unet, MOL, or others)
You will get:
1.. An installation software on a diskette (usually someone will come to
install it for you)
2.. A username (which is also the name of your account and part of your
3.. A password - keep this secret and change it often
4.. Certain ISPs will give you a separate password for communication
Let's Go Surfing
Click on the phone (connection) icon - a window will open
Type in your password and click with the left button of the mouse "OK"
Once connected to the network (you will be informed by a separate window
which will show you the status of your modem and how much time you are
connected) - you have opened the door to the world of the internet
The internet is like a huge city with many "addresses" of "sites". To visit
these sites, you need to have their addresses (which usually start with
- example: members.tripod.com/~samvak/guide.html)
You also need a "car" to take you to the sites - a special software called
"browser". The two best known are Microsoft Internet Explorer 5.0 and
Netscape Communicator 4.61. In this demonstration we will use the Explorer
because it is user friendly.
Click on the browser icon and study the browser. You can always click on the
"Help" button to get detailed help.
To visit a site you can either:
a.. Click on the address if it is active (in blue color in a computer
b.. Copy the address (mark it, click the right button of the mouse and
click copy in the menu)
c.. Click "file" in the browser toolbar, then click "open" (or click the
"open button of the browser directly)
d.. Paste the address that you copied (click the right button of the mouse
and click paste in the menu)
e.. Click "open"
The browser will find the site whose address you asked for and bring you
Once in a site, you can click on any COLOURED (hyperlinked) text to visit
But what if you don't have the address?
In other words, how do you find an address of a site? Or, even more
difficult, how do you find sites which deal with subjects you are interested
To do that, you need to use "Search Engines". These are special software
applications. Look at the list of addresses you received under the heading
"search engines". You have there the addresses of the 6 most important
Let us exercise.
You are interested to find the addresses of tobacco organizations in the
United States. You have no idea which sites deal with this subject, let
alone what are their addresses.
Open the "Alta Vista" search engine (or any other - the biggest are Alta
Vista and Northern Light, the best organized are LookSmart and Yahoo) -
using the address you have.
Type your search term: "tobacco organizations in USA" (use the "" marks).
You will get a list of sites.
Click on the colored text (the hyperlinked text).
Each title you click on will lead you to another site.
We will learn more advanced modes of searching in this seminar.
The internet is the biggest library in the world. It has everything you need
about any subject in the world. BUT, it is very chaotic.
Other Ways of Knowing Things
A more orderly way of obtaining information is by:
Subscribing to specialized providers of information through subscription
databases - such as DIALOG and NEXIS-LEXIS (let's find their addresses
through the internet)
Subscribing to specialty magazines and CD-ROMs (let's find a few of these
through the internet) - the biggest such providers are US agencies (the USDA
and even . the CIA!!!).
Electronic Mail (E-Mail)
When you open an account with an ISP - you get an email address. This is
YOUR address in cyberspace, in the world of the internet. It is NOT the
address of a SITE - it is your PERSONAL address and it looks like this:
firstname.lastname@example.org (all letters usually small).
a.. Send messages
b.. Receive messages
c.. Send and receive computer files (attached to the message as
attachments) - whole documents, pictures, diagrams, faxes, EVERYTHING and
you can send it at the price of a local phone call to anywhere in the world.
d.. Design a special signature
Good luck and welcome to the internet.
Appendix II: Incoterms In-Depth
Documentary Credits and INCOTERMS - International Commercial Terms
1. Incoterms are part of international sales contracts. They regulate:
1.. Carriage of goods from seller to buyer
2.. Export and import clearances
3.. Division of costs and risks between the parties
2. Important acronyms: Electronic Data Interchange (EDI), Electronic Data
Interchange for Administration Commerce and Transport (EDIFACT) and Uniform
Rules of Conduct for Interchange of Trade Data by Teletransmission (UNCID).
Internet: GE - TPN
3. Electronic Bills of Lading - use the CMI Uniform Rules.
4. As a result of the container revolution and cargo unitization, the
incoterms FCA, CIP and CPT were developed. Emphasis shifted from means of
conveyance to the place of carriage. FOR / FOT / FOBA were omitted.
5. Case Study: warehouse to warehouse insurance and the FOB point - where is
CIF - seller exposed to claims for failing to reach the ships rail on time.
6. The mirror method - the 10 headings - see Appendix of Incoterms.
7. INCOTERMS - part of larger picture (deal with delivery and with nothing
after delivery - not with quantity, costs of loading / discharging,
clearance, transport, risks of loss / damage and insurance against them,
title, quality breach of contract or price). There are: Contract of sale,
applicable law, custom of trade.
Example: an FOB Buyer would insure the goods despite the fact that Incoterms
do not oblige him to do so - difference between obligation and commonsense.
8. Specific reference required. Example: trading with a US firm (UCC -
9. CISG - Contracts for the International Sale of Goods: POD where breach is
determined in conjunction with Incoterms (concerning delivery).
10. D-terms: seller's delivery obligation is extended to the country of
destination (arrival contract).
E-terms, F-terms, C-terms: seller fulfils delivery obligation in his country
11. The common error: there is no connection between risks, costs and
12. F-terms: Free of risks
C-terms: Costs borne after critical risk point reached
C-TERMS: 2 points of interest: delivery and risk / costs
13. FCA buyer to instruct seller how to hand over goods - and wher
FCL Full loads (railway wagon / container) vs. LCL break bulk
14. FOB additional service
Seller contracts for carriage - though he has no obligation to do so
15. FOB The port decides how to distribute loading
16. FAS Seller does not have the obligation to clear goods for exports
17. C-terms Do not stipulate arrival date! seller obliged to ship good
so that they COULD ARRIVE!
18. CFR, CIF Only by sea! A8 demands bill of lading / sea waybill
If Buyer wants to sell in transit - he will be unable because of lack
the right document Þ breach of seller
19. CIF, CIP Minimum Cover vs. all risk and political
Appendix III: More about Modes of Payment
SIGHT DRAFT (=COD) - Document against payment
- Original shipping document attached --> CB (collecting bank)
- Original bill of lading made to the order of the shipper and endorsed by
him blank, or to the order of CB
- Notification to drawer of draft about payment
- Like sight drafts but paid X days after acceptance
- The CB holds and presents for payment
BANK GUARANTEE dependent on underlying obligation or independent (=note)
- Bid bonds } dependent
- Performance bonds } dependent
- Advance Payment bonds } dependent
- Payment Bonds } independent but with recourse and stoppable by court
DLC - Documentary
FLC - Financial
SLC - Standby
- CLEAN (Self-contained)
- REGULAR (Dependent on an event)
FACTORING AND FORFAIT / EMC
FINANCING (=LOAN / Credit line) on Approved Accounts
Recourse Factoring: Collection + Financing
How to choose a Factor?
Profile of Users of Factoring
Restricted access to credit
High or low net worth
Credit - worthy customers
Successful products / services
Conventional Min 2 ½ %, 3 days (5% per 30 day invoice)
Weekly agings, daily collection reports
Credit services, fees prorated daily,
2-weekly reserve releases, 24 hour funding
No hidden fees / long term contracts
Debt Consolidation Payment to creditors when company is in default
Maturity On pre-approved account debtors
Financing / Sale - Leaseback (for bankrupt companies) including equipment
How does It Work
Bring invoice + delivery slip
Receive upto 80% of the face amount
Receive the balance (reserve) when the invoice is paid
Appendix IV: International Trade - An Introduction
1. Globalisation - economic interdependence of nations.
2. Imported products = imported employment = internal unemployment
3. Ricardo's theory of Comparative Advantage
4. Absolute advantage - fewer resources to produce the same products
Comparative Advantage - it take less to produce the same in terms of other
5. Two country / two goods model - mutual absolute advantages
Phase A: Mutual absolute advantage
Wine 6 2
Tobacco 2 6
Phase B: Land allocation for equal unit production
Macedonia USA Totals
Wine 25 x 6 = 150 75 x 2 = 150 300
Tobacco 75 x 2 = 150 25 x 6 = 150 300
Phase C: International trading
Macedonia USA Totals
Wine 100 x 6 = 600 0 600
(Mac. sells 300 to USA)
Tobacco 0 100 x 6 = 600 600
(USA sells 300 to Mac.)
7. Trade enables countries to move beyond previous resource and productivity
8. Two country / two goods model - unilateral absolute advantages
Macedonia USA Totals
Wine 50 x 6 = 300 75 x 1 = 75 375
Tobacco 50 x 6 = 300 25 x 3 = 75 375
Phase B: Land allocation for equal unit production
Macedonia USA Totals
Wine 75 x 6 = 450 0 450
(Mac. sells 100 to USA)
Tobacco 25 x 6 = 150 100 x 3 = 300 450
(USA sells 200 to Mac.)
9. Explanation: The opportunity cost of 3 bales of tobacco in Macedonia is 3
litres of wine - in USA, only 1 liter.
The opportunity cost of 1 litre of wine in Macedonia is 1 bale of
tobacco - and in the USA it is 3 bales.
10. When countries specialize in production of goods in which they have a
comparative advantage - they maximize their combined output and allocate
their resources more efficiently.
11. Terms of trade: The ratio at which a country can trade domestic products
for imported ones.
In the above example: 1 litre wine = 2 bales tobacco
Macedonia benefits because its opportunity cost is 1 = 1
(it would get 1 bale domestically by giving up 1 litre)
USA benefits because its opportunity cost is 1 = 3
(it would have to give up 3 bales domestically to get 1 litre)
12. Exchange rates determine the terms of trade.
For any pair of countries, there is a range of exchange rates which can
lead to both countries realizing gains from specialization and comparative
Within that range, the exchange rate will determine which country gains
the most from trade.
13. Two country /two good world
Wine 3 DM $ 1
Tobacco 4 DM $ 2
Exchange rate Price of DM Result
$ 1 = 1 DM $ 1 Macedonia imports both
$ 1 = 2 DM $ 0.5 Macedonia imports wine
$ 1 = 2.1 DM $ 0.48 Macedonia imports wine -
$ 1 = 2.9 DM $ 0.34 USA imports tobacco
$ 1 = 3.3 DM $ 0.33 USA imports tobacco
$ 1 = 4 DM $ 0.25 USA imports both
14. Comparative advantage can be expressed in terms of exchange rates:
Instead of comparing goods directly - money is used.
In Macedonia - the production of 1 bale of tobacco costs 4/3 litres of
15. Exchanges rates in the right ranges drive countries to shift resources
into sectors in which they enjoy comparative advantages.
16. Factor endowments - the quantity of labour, land and natural resources
of a country
17. Heckscher - Ohlin theorem and the Learner corollary
A country has a comparative advantage in the production of a product if
that country is relatively well endowed with inputs (natural resources,
knowledge capital, physical capital, land, skilled and unskilled labour)
used intensively in the production of that product.
18. Why do countries import and export the same product?
Differentiation of products in response to diverse preferences / brand
19. Acquired (versus natural) comparative advantages (specific skills,
1. Protection - shielding a sector of the economy from (foreign) competition
2. Tariff - tax on imports
Export subsidy - payment to encourage exports
Dumping - sale of products at prices below the costs of production
Quota - limit on quantity of imports
(mandatory and legislated or voluntary and negotiated)
3. GATT, the Uruguay round, the WTO, latest multilateral WTO agreements
4. Free trade zones: EU, NAFTA, MERCOSUR, FTA (economic integration)
5. Trade barriers
Prevent a country from benefiting from specialization
Push it do adopt inefficient production techniques
Force consumers to pay higher prices for protected products
6. Protection Counter - Argument
(A) Saves jobs
a.. Reallocation - not disappearance
b.. Retraining and relocation
(B) Unfair trade practices
Underinvestment in environment
(C) Cheap foreign labour
Reflects lower productivity
This IS comparative advantage
(D) Protect national security
Every industry uses it
(E) Discouraging dependency
(F) Safeguarding infant industries
No infant industry asked for help (allows them to acquire comparative
(H) Protection against currency fluctuations
What is proper rate?
Temporary currency overvaluation
International Trade and Exchange Rates
1. International trade is determined by exchange rates.
2. History: The gold standard, Bretton Woods (1944-1971), the snake (EMS),
the Louvre accord (1985).
3. Influences on foreign exchange: central banks interventions,
macroeconomic policy, statements by policymakers.
4. Balance of payments: the record of a country's transactions in goods,
services & assets - current account and capital account.
5. (Merchandise exports - merchandise imports) = balance of trade (deficit
or surplus) + (exports of services - imports of services) = net export /
import of services + (income from investments) - (payments to investors) =
net investment income + net transfer and other payments = current account
6. Increase (-) or decrease (+) in private (and in Government) assets abroad
+ increase (+) or decrease (-) in foreign private (and in Government) assets
in the country = balance of capital account
7. (6) + statistical discrepancy = balance of payments
8. Debtor and creditor nations
9. The effect of a sustained increase in Government spending (or investment)
on income (= the multiplier) - is smaller in an open economy, some of the
extra consumption goes to imports.
Multiplier = 1 / 1-(MPC-MPM) (in open economy)
10. Anything that affects consumption - affect imports (income, aftertax
real wages, aftertax nonlabour income, interest rates, relative prices and
the state of the economy).
11. The trade feedback effect - export increases consumption which increases
imports. Imports in one country is exports in another which increases
consumption and so on.
An increase in one country's economic activity leads to worldwide increase
in economic activity which feeds back to that country. Its imports stimulate
other countries' exports which stimulate those countries' imports and so on.
12. Prices of exports / imports are influenced by inflation.
Export prices of other countries affect a country's import prices.
Inflation is exported through export. It affects a country's import prices.
13. An increase in the price of imports affects local prices:
(A) Through stagflation: rising prices and falling output
(B) Expensive imports lead to increased demand for domestic products
14. The price feedback effect
Inflation in one country is exported to another and then re-exported to the
15. The demand and supply for currencies
Firms, households and Government that import / export
Tourists in / out the country
Buyers of stocks, bonds or other financial instruments in / out the country
Investors in / out the country
Speculators who bet with / against a currency
16. What affects appreciation and depreciation of currencies?
The law of one price (for the same good everywhere)
For the same basket of goods - The exchange rate would be determined
by the relative price levels in the 2 countries
This is the purchasing power parity theory (PPP)
17. PPP does not account for transportation costs
Substitute products are not identical
Baskets of goods are different
18. Relative interest rates - higher rates lead to appreciation
19. Imports, like taxes and savings are a leakage from the income -
Exports are like investments and Government purchases (stimulate output).
20. A depreciation stimulates exports and domestic consumption = the GDP
21. The J curve: balance of trade gets worse before its gets better
following a currency depreciation.
Exports increase, imports decrease, currency price of exports doesn't change
very much (until domestic prices adjust), currency price of imports
The value of imports increases, even as volume decreases, initially.
22. Expansion of money supply ® decrease in interest rates ® investment and
consumption ® lower inventories ® rising income (output).
Lower demand for debt securities ® lower demand for currency ® more foreign
securities bough ® currency sold and depreciates ® stimulates the economy.
Appendix V: Countertrade
COUNTERTRADE - (A) GENERAL
1. Countertrade - a transaction which links exports to imports in place of a
1.. Trade financing risky (debt crisis)
2.. Tight import credits (because of low exports)
3.. Entry into new markets (both the exporter and the importer)
4.. Products differentiation and creating competitive advantages
5.. Convertibility or political - financial problems
3. Transaction phases
1.. Identify target country arrangements / regulations
2.. Evaluate their attractiveness and
3.. Find the most favored one from the buyer's perspective
4.. Match your strengths with current / potential countertrade (internal /
external uses for the goods, distribution network)
5.. Consider the accounting / taxation aspects
6.. Choose between in - house expertise and outside specialists
7.. Beware of risks:
1.. Quality and consistency of goods
2.. Delivery times
3.. Supplier reliability
4.. Changes in the value of goods over time
5.. Negative attitude of Governments and IFIs (e.g., EXIM bank in USA)
4. Countertrade is a marketing tool:
1.. Generating hard currency for clients
2.. Helping them to market their products
3.. Sharing (information, marketing, technology, production)
5. Countertrade components
1.. Piecing together sources of finance, services and supplies in
different countries to minimize hard currency net outlays of the importer.
2.. Creating FOREX income for the importer through unrelated protects /
3.. Partial payment in soft currencies through reinvestment of the
proceeds in the importer's country.
4.. Escrow accounts in foreign banks funded by the importer through export
revenues (hedge until counter delivered goods are sold).
6. Arguments in favour of countertrade
1.. International commerce - an extension of national (economic) policies.
2.. (Leads to) a preference to deal with trade competition through
bilateral accommodations favoring domestic exporters.
3.. Uneven recovery rates and protective import policies.
4.. A hedge against declining trade levels.
5.. The growing third world debts.
6.. Constraints on credits and debt rescheduling.
7.. Dependence of developing countries on import - led growth and export
expansion for debt servicing and unemployment.
8.. Tool of long term industrial policy and economic planning.
7. Factors affecting the future of countertrade
1.. Ability of world markets to accommodate counterdeliveries.
2.. Nature of assets offered (raw materials, components, finished goods).
3.. Streamlining of bureaucratic bottlenecks.
4.. Willingness of western exporters to engage in higher risk trade.
COUNTERTRADE - (B) FORMS
1. Countertrade and offset are reciprocal arrangements.
Countertrade is the exchange of goods and services intended mainly to
alleviate FOREX shortages of importers.
Offset is intended to advance industrial development objectives.
2. Assets exchanged include physical goods, services (e.g., tourism,
engineering or transportation), rights (licenses, leases, etc.), lien
instruments (e.g., sovereign promissory notes), or temporary ownership
(BOT - built, operate, transfer arrangements).
3. Developed industrialized countries emphasize technology and production
processes while developing countries emphasize additional exports.
4. The contractual arrangements include cashless exchange of goods of
comparable value, parallel import / export transactions with their own
separate finances, production sharing / equity position.
5. Countertrade ratio - percent of the value of export offset by
DISAGGIO - subsidy paid as a commission / discount by the exporter to a
broker responsible for marketing counterdeliveries (in the hands of the
broker it is AGGIO).
SWITCH - transfer of rights to countertrade goods to third parties
Protocol / link or framework contracts - side agreement linking the primary
and secondary contracts in a countertrade
6. Bilateral Government - To - Government trade agreements
Reciprocal market access privileges (preferential terms)
1.. To integrate the economies using clearing units - exporters and
domestic currency by their Central bank.
2.. Special political / regional trade relations.
3.. Trading interests for raw materials sources.
7. SWING - margin of credit allowed on a bilateral clearing account (beyond
which all trading stops ) - usually 30%.
Clearing SWITCH - DISAGGIO driven financial operations. Bilateral imbalances
are monetarised by brokerage networks through final sale products sourced
from the country with the clearing arrears (or rights to products).
8. Forms of compensatory trade arrangements
OFFSET - in cases of purchases of military / (high cost) civilian equipment,
counter - purchases are demanded as compensation.
Usually in the form of expansion of industrial capacity: coproduction,
licensed production, subcontracting, overseas
investment, technology transfer, countertrade.
(IN) DIRECT OFFSET - articles (not) related to the sale.
BARTER - one time exchange of goods / services of equivalent value.
[examples: US - Jamaica, the dissolution of COMECON, Brokers' swaps]
BUYBACK (Compensation) - exporter receives products derived from the export.
Each leg is regulated by a separate contract.
COUNTERPURCHASE - exporter receives products unrelated to the export.
Exporter not allowed to transfer his credits and some advance purchases by
UMBRELLA (Countertrade agreement) - includes multiple trading partners.
Between Western exporters and Government entity (Evidence account)
Between Governments concerning specific products (Bilateral clearing)
Countertrade used to release blocked currencies / funds
(Expatriation of profits against compensation)
OFFSHORE ESCROW ACCOUNTS - insulation from local banks ensure timely
payments to exporters
Allowance for insufficient cash flows (production / marketing slippage)
COUNTERTRADE - (C) ANALYSIS AND PLANNING
1. BENEFITS (mainly intangible)
1.. Locking in foreign market shares
2.. Circumventing export restrictions
3.. Supporting subsidiaries /affiliates
4.. Depleting surplus inventory
5.. Preserving production / employment levels
2. COSTS (mainly tangible)
1.. General and administrative (handling, documentation)
2.. Subsidy (DISAGGIO)
3.. Financing and insurance (including holding & escrow accounts)
4.. Performance / completion guarantees
1.. Expensive and partial insurance
2.. Political risks and bureaucratic delays
3.. Liability claims (personnel, product)
4.. Property risks (direct damage or time dependent)
5.. Lack of standardization
6.. Shortfalls in delivery and marketing of the products
7.. Losses due to delays: changes in production / export priorities
a.. sudden unavailability of raw materials
b.. crop failures
c.. inadequate transportation
d.. quality problems
e.. non-competitive pricing
f.. (arbitrary) marketing restrictions
g.. protectionist shifts
h.. contract failures of brokers / end users
1.. Analysis and viable pricing (maybe inflation of export prices)
2.. The right contract
3.. An insurance policy
4.. Information about the importer, the markets and potential competitors
brokers / end users
5.. Recognizing anticipatory purchases and additionality requirements
6.. Separate the contracts to insulate performance and to facilitate
financing, guarantees and insurance
5. The CONTRACTS
1.. Primary sale - standard export contract + countertrade clause
2.. Link contract - the countertrade contract includes:
1.. amount and period of obligation
2.. type, standards, pricing criteria of counterdeliveries
3.. names of companies providing counterdeliveries or: free choice
4.. transferability clause
5.. currency of payments
6.. notification and remittance procedures
7.. rights or restrictions affecting the marketing of goods
8.. non-performance penalties and damages
9.. disputes, termination, unavailability of goods
3.. Counterpurchase (buyback) contract includes:
1.. reference to primary contract
2.. standards, specifications, pricing, handling
3.. disputes, force majeure, arbitration, law, indemnities
COUNTERTRADE - (D) SUPPORT SERVICES
1. TRADING HOUSES have:
1.. Specialists and experience
2.. Financial resources
3.. Positions in markets and / or marketing networks
Can help with:
1.. Marketing and representation
2.. Transportation, warehousing, insurance
3.. Finance: credits and investment management
4.. Manufacturing, upgrading
2. BANKS - advisory services and matchmaking, switch trading of clearing
currencies and debt conversions
3. INSURANCE - state and private (LLOYDS, CHUBB, AIG)
4. OTHERS - law firms, trade consultants and information firms, export
management companies, government agencies, industrial giants
Sam Vaknin is the author of Malignant Self
Love - Narcissism Revisited and After the Rain - How the West Lost the East.
He served as a columnist for Global Politician, Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI)
Senior Business Correspondent, and the editor of mental health and Central
East Europe categories in The Open Directory and Suite101.
Visit Sam's Web site at samvak.tripod.com