International Trade Terms

8/16/2019 International Trade Terms

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International Trade Terms

Unit 4


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International Trade Terms•

Trade terms determines weather the exporter or the buyerswill bear the responsibility, cost & risk for each stage of the

business transaction.

• Although many trade terms seems self explanatory or easy to

understand, they can easily become a source of disagreement

between the exporter & the buyer unless they are carefully

defined.• In international Commercial terms(Incoterms there is a

uni!ersally recogni"ed set of definitions of International Tradeterms, such as #ree on $oard, cost & #reight , cost freight &

Insurance de!eloped by International Chamber of

Commerce(ICC)


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• It defines the trade contract responsibilities &

liabilities between the buyer & the seller.• It is an in!aluable & cost sa!ing tool

• The exporter & importer need not undergo a

lengthy negotiation about the conditions ofeach transaction.

• %nce they ha!e agreed on a commercial terms

such as #%$, they can sell & buy at it withoutdiscussing who will be responsible for the

freight, cargo insurance, & other cost & risk.


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Representation of Incoterms

Group Term Stand for E EXW Ex Work

F FCA Free carrier

FAS Free Alonside Slip

F!" Free on "oard

C CFR # C#F Cost and Frei$t

CIF Cost Ins%ranceFrei$t

C&T Carriae paid To

CI& Carriae # Ins%rance&aid

' 'AF 'eli(ered at Frontier

'ES 'eli(ered Ex S$ip

'E 'eli(ered Ex %a* ''U 'eli(ered '%t


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International Trade Contract

• The success or failure of the export business of the firm

depends entirely upon securing orders from buyers,

deli!ering products in a good condition at a correct time &

most important recei!ing payments.

• This depends upon the correct handling of export procedure.

• All documents & procedure must be carefully followed in

order to a!oid !iolations of the laws of the country in!ol!ed

& or refusal of the financial organi"ation to honour demandsfor payments.

• rror in paper work in export transactions can cause ma'or

delays & losses


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• International contract ser!es as the ground for

export transaction.• It is supposed to spell out the rights and liabilities

of both the parties in such a manner that there is

no room for ay confusion or misunderstanding.

• $oth the parties therefore must understand clearly

the agreement before they finally appro!e it.

• In addition to details of the goods & prices, the

sales contract will normally specify trade terms,such as matters as insurance, transport, freight

cost etc. & payment details


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+e* cla%ses for International Trade

Contracts

There are certain key clauses of International Trade contract

• )escription of the goods

• Contract price

• )eli!ery terms• Time of deli!ery

• *ayment condition

• )ocuments

• Inspection of the documents by the buyer

• +etention of the title


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Steps in International Trade

contracts

• Inuiry & offer

• Acceptance & confirmation of purchase order

• xport sales contract

• xport permission & licenses

• -anaging finance for export

• -anaging productionprocurements of goods

• +eser!ing shipping birth• *acking & marking

• *re shipment inspection


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&a*ments Terms

Introd%ction• The currency of our country is not a legal tender in

other country & hence it will not be accepted abroad in

discharge of debts & obligations.

• All importers faces this problem that their exporter in

other countries reuire payments in their homeland

currency.so, importer ha!e to arrange for this.

•

This problem is mainly sol!ed by foreign exchange todealers,banks,brokers,etc.

• Also the importer faces the problem to transfer the

foreign exchange to their exporter & trading parties in

other countries


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• To sol!e this problem ,different de!ices ha!e been

introduced. These de!ices are called instruments of

making foreign payment & these ensure the safe , speedy

& reliable transfer of money from one country to other.

• In order to get succeed in todays global market place the

exporter must offer their customer attracti!e sales terms

supported by appropriate payments method.• There are four primary methods of payments for

International transactions. These are

a Cash in ad!ance

b %pen accountc /etter of credit

d )ocumentary collections


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Factors to ,e considered -$iledecidin &a*ments Terms

• There are !arious important factors which ha!e to taken

into accounts while deciding payments terms these are as

follows

0. Correct payment mechanism1. 2ecure payments

3. 4egotiations with customers

5. Currencies

6. 7nowledge of !arious payment terms

8. Insol!ency of buyer

9. :nderstanding of insurance terms


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T*pes of &a*ment Terms

• T$ere are ,asicall* 4 t*pes of pa*ments terms-$ic$ are as follo-s

/. Cash in advance Cas$ in ad(ance a0ords t$eexporter t$e reatest protection ,eca%se pa*mentis recei(ed eit$er ,efore s$ipment or %pon arri(al oft$e oods. T$is met$od also allo-s t$e exporter toa(oid t*in %p its o-n f%nds. Recei(in pa*ments inad(ance of s$ipment mi$t seems ideal. In t$is t$e

pa*ments is recei(ed in t$e form of demand draftor c$e1%e denominated in forein c%rrenc* or ,*direct transfer aainst t$e s%ppl* of oods.


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2. Open Account In foreintransaction3 an open acco%nt can ,e a

con(enient met$od of pa*ment3 if t$e,%*er is -ell esta,lis$ed 3 $as a lon #fa(ora,le pa*ments records or $as ,een

t$oro%$l* c$ecked for credit-ort$iness.!pen acco%nt is concerned -it$ t$ecredit sales -$en t$is importer makes

pa*ments on a pre determined f%t%redate. t$e exporter s$ips t$e oodsdirectl* to t$e importer.


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5. Letter of credit /etter of credit refers to a writtenundertaking gi!en by the importers bank, at the reuest &

instructions of the importer(i.e the applicant, to theexporter that the payments shall be made to him against

stipulated documents pro!ided that the same appear on

their face to be in accordance with the terms & conditions

of the credit.

5. Documentary collections It in!ol!es collection of a

gi!en sum of money by a bank due from a importer against

deli!ery of certain documents at the instructions of the

exporter. The parties in!ol!ed in the documentary

collection are as follows exporter , Importer, Collecting

bank, remitting bank.

It may takes place in two forms documents against

payments, )ocuments against acceptance.


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Credit Risk 6anaement•

A credit risk may be defined as the risk that counterpartyto a transaction will fail to perform according to the

terms & condition of the contract, thus causing the

holder of the claim to suffer a loss, banks all o!er the

world are !ery sensiti!e to credit risk in !ariousfinancial sectors like loans, trade financing, foreign

exchange , bonds, euities & inter bank transactions.

• It is generally difficult for the exporter to !erify the

creditworthiness & reputation of an importer.• If the creditworthiness of the importer is unknown there

is a the increased risk of non payment, late payments or

e!en fraud.


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• It is essential t$erefore3 t$at t$eexporter s$o%ld stri(e to determine t$e

credit-ort$iness of t$e forein ,%*er. T$ere are man* commercial 7rms t$atcan pro(ide assistance in credit

c$eckin forein companies.• In addition3 t$e exporter s$o%ld insist for

a sec%red met$od of pa*ments s%c$ asan irre(oca,le doc%mentar* credit. T$e

exporter co%ld approac$ $is ,ank in$ome co%ntr* for assistance reardininternational pa*ments proced%res.


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• Credit risk is t$e possi,ilit* ofocc%rrence of a loss for an exporter-it$in t$e international trade3 as ares%lt of an %npredicta,le sit%ationfor a de,tor.


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Introd%ction of EC8C

• For pro(idin credit n 7nance # in%rinexport credit risk3 t$ere are t-o primar*instit%tions -$ic$ are EC8C # EXI6 ,ank.

T$e Export credit 8%arantee Corporationof India 9td 3 is an Indian o(ernmento-ned compan* t$at pro(ides exportcredits ins%rance s%pports to Indian

exporter.• It -orks %nder 6inistr* of commerce #

ind%str*3 department of commerce3 8!I


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Credit Risk 'eterminantThere are !arious credit risk management policy for an establishment,

which are as follows

• Prospecting The cases in which a company sells on a market

without ha!ing pre!iously prospected are rare. This prospecting

reuires financial & human resources. The result of this in!estment

cannot be guaranteed before.• Thrusting abroad *rospecting can be followed by thrusting

abroad, cost that will ha!e to be written off. 2ome insurance

companies conclude policies in order to co!er the risk of thrusting.

•

Offer presentation before being appointed as wining company ofan auction, it has to submit its offer. In international ad'udication,

the company has to pro!ide a good execution guarantee along with

offer guaranteeing the buyer that the wining company will comply

with the contract exactly according to conditions of the offer.


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• Order "et-een t$e order # t$e deli(er* 3 t$eexportin compan* ma* faces se(eral risk

/. Eit$er t$e ro-t$ of reco(er* cost: d%e to

ro-t$ of ra- material cost or prod%ctioncost) ,ein an economic risk.

2. Eit$er market loss

•.

Packing shipment Commodities -$ic$ aret$e s%,;ect of international trades o t$ro%$international transport3 -$ic$ s%pposes t$eexistence of t$e risk for t$em to depreciate3 to1%antitati(el* # 1%alitati(el* s%0er d%e totransport conditions.

•. Payment pa*ment is t$e last stae of t$ecommercial c$ain.


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Transit Risk 6anaement

• It is t$e risk of oods ,ein damaedd%rin s$ipment from t$e place oforiin to t$e place of destination.

• Fail%re in addressin transit risk ma*res%lt in $ea(* replacement cost orperformance risk.

• Transit risk is co(ered ,* marineins%rance companies reistered%nder 8eneral Act /


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• The transit risk is uit different from other risk as it

includes a bundle of e!ents & circumstances. That is

why premium is also !ery rates are also !ery higher &there are !ery few prominent players in the Indian

market

• Transit risk describe the possibility of the

merchandised being lost or damaged while beingtransported from international marketer to the buyer.

• Transit insurance co!ers all physical damage to or loss

of the goods in transit by land, sea & air, because of the

many dangers inherent in shipping most indi!iduals &

business choose to insure their goods while they are in

transit.


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T*pes of Transit Ins%rance

$asically there are 3 types of transit Insurancewhich are as follows

0. %pen co!er

1. 2pecific policy3. Contingency insurance

0. Open cover This is the most usual type of cargo

insurance, where a policy is drawn up to co!er a number ofconsignments. The policy can be either for a specific !alue

that reuire renewal once the insured amounts is exhausted

or an permanently open policy that will be drawn up for an

agreed period


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2. Specic policy Alt$o%$ not t$e

norm for caro ins%rance3 one ma*form time to time need to approac$ anins%rance compan* to re1%est anins%rance polic* for a partic%larconsinment.

5. Contingency Insurance or sellerinterest.


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T*pes of Transit Risk

• According to the -arine Insurance Act, unlessthe policy otherwise pro!ides, the insurer is

liable for any loss proximately caused by a peril

insured against.

• The insurer is not liable for any loss attributable

to the willful misconduct of the assured but,

unless the policy otherwise pro!ides, he is liable

for any loss caused by the insured e!en though

the loss would not ha!e happened but for

misconduct or negligence of the master.


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• Thus losses of insurance may be classified into two

pats

0. Total loss

1. *artial loss

Total loss when the sub'ect matter of insurance is being

lost totally, it is called as total loss.it is further di!ided

into two partsa. Actual total loss

b. Constructi!e total loss

Actual total loss when the sub'ect matter insured is

destroyed or is damaged such that it ceases to be a thing

or a kind insured.

In case of an actual total loss, the insurer has to pay either

the insured amount or the actual loss whiche!er is less.


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• Constructi!e total loss There is a constructi!e total loss

where the sub'ect matter insured is reasonably

abandoned on account of its actual loss appearing to be

una!oidable, or because it could not be preser!ed from

actual total loss without an expenditure which would

e!en exceed its !alue

1. Partial loss: In -arine insurance, the term partial lossother than total loss. It may be di!ided into two parts

a. *articular a!erage loss

b. ;eneral a!erage loss

*articular a!erage loss


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• 8eneral a(erae loss T$is occ%rs-$ere an* extraordinar* sacri7ce or

expendit%re is (ol%ntaril* #reasona,le made or occ%rred at t$etime of perils3 for t$e p%rpose of

preser(in t$e propert* in(ol(ed in acommon ad(ent%re.

For example caro s$ip ca%$t 7re3

-ater is %sed to extin%is$ 7re d%e to-$ic$ caro is damaed. T$e lossca%sed ,* caro is a eneral a(eraeloss.


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&roced%res of Ins%rin Aainst

Transit Risk

• Selecting the Insurance Company ;eneralInsurance business in India, the monopoly of ;eneral

Insurance Corporation of India & its four

subsidiaries. =owe!er , if an exporter intends to

insure with a foreign company it has to take prior

permission of the +$I

• Deciding the appropriate type of policy There are

!arious types of cargo insurance policies issued bythe ;IC to suit the reuirements of the exporter. They

ha!e to decide the appropriate type of policy tailing

into consideration his reuirement


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• pplication to the insurance company alue of packages

e. Transportation from warehouse to its finaldestination

f. +isk to be co!ered for insurance


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• *ayment of premium The insurance premium charges

may !ary from company to company & country to

country• Issue of the Insurance policy After the completion of

all the formalities the exporter has to produce the bill

of lading & the name of the ship? the insurance

company. The insurance company issues the certificatein 3 copies as per the declaration gi!en by the exporter

policy

• *rocessing of the policy The exporter will submit the

original copy to the bank with his other documents n

second copy will be sent to the importer n 3 rd copy will

be with him only


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Consinment Sale• Consignment sale is an arrangement in trade in which a

seller or the consignor sends goods to a buyer or consigneewithout getting payments for the goods then itself. The

consignee or the buyer pays the amount only when the

goods are sold. It is actually a deli!ery of goods not

amounting to sale .• The seller retains the ownerships of the goods until the

payments is made in full by the buyer.

•


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• T$e seller is %s%all* responsi,le for

loss3 s$rinkae3 or damae of itsmerc$andise -$ile in its control #c%stod* of t$e ,%*er.s


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Ins%rance polic*• This is a written contract between the insurer & the insured

containing all terms & conditions of the agreement.

• It shows the full details of the risk co!ered, & is also called

formal insurance documents.

•

Insurance policy certifies that the goods transported ha!e been insured under an open policy & is not actionable with

little details about the risk co!ered.

• It is important that the date on which the insurance

becomes effecti!e should be same or earlier then the dateof insurance transport document.

• A policy may refer to a single consignment & sent with the

other commercial documents.


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Re1%irements for completin of anins%rance polic*

0. The name of the party in the fa!or of which thedocuments ha!e been issued

1. The name of the !essel or the flight details

3. The place of origin & the place of destination5. Insurance !alue that specified in the credit

6. -arks & umbers to agree with those on other

documents

8. The description of the goods, which must be

consistent with date in the credit & on the in!oice

9. The name & address of the claims settling agent

together with the place where claims are payable


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>. Co%ntersined -$ere necessar*

Types of Insurance Policies:There are !arious types of Insurance *olicies which are

as follows

0. >oyage policy

1. Time policy

3. -ixed policy

5. >alued policy

6. %pen or un!alued policy8. #loating policy

9. *ort risk policy


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Ins%rance Certi7cate

•

#or each consignment an insurance certificate is issued,cross?referencing the policy. An insurance certificate is a

document issued to the insured certifying that the

insurance has been affected.

• It contains the same details as an insurance policy exceptthat !ersion of pro!ision is abbre!iated.

• It is a type of document indicating the type & amount of

insurance co!erage in force on a particular shipment.

• It is used to assure the consignee that insurance is pro!ided to co!er loss of or damage to cargo while

transit.

• This instrument is negotiable


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Caro 9oss Cla%ses

• T$ere are di0erent cla%ses co(erin t$e caro loss -$ic$ areas follo-s

/. Instit%te 6arine caro cla%se ? Co(erae A ? @all risk polic*

2. All risk co(erae

5. Instit%te 6arine caro cla%ses ? Co(erae " ? named perils

: -$et$er damae not co(ered)4. Instit%te 6arine caro cla%ses ? Co(erae C named perils

: -$et$er damae co(ered)

B. Wit$ a(erae co(erae in ,et-een all risk polic* # co(erae

". Free of partic%lar A(erae co(erae named perils 3 t$is -ill

co(er all loss ,%t -ill onl* co(er partial losses in some case.

=. Strikes co(erae.


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&roced%re # doc%mentation for

caro loss

!. Preliminary notice of claim The export @import

(insured must file a preliminary claim by notifying

the carrier of a potential claim as soon a the loss is

known or expected. A formal claim may follow whenthe name & !alue of the loss or damage is ascertained

". #ormat notice of claim The consignee must file a

formal claim with the carrier & the insurance

company once the damage or loss is ascertained. Theclaim should include cost such as the !alue of the

cargo, inland freight, documentation & other item.


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• Settlement notice of claim: If the claim is

co!ered by the policy & claims procedures are

appropriately followed, the insurance companywill pay the insured. If the insurance company

declines to appro!e payment, the insured could

pursue arbitration or other dispute settlement procedure as pro!ided in the insurance

contract.


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9etter of credit/etter of credit refers to a written undertaking gi!en by the

importers bank, at the reuest & instructions of the

importer(i.e the applicant, to the exporter that the payments

shall be made to him against stipulated documents pro!ided

that the same appear on their face to be in accordance with

the terms & conditions of the credit.

These terms & condition are indicated by the importer to

the bank issuing the letter of credit. The bank do not deal in

goods, they deal in documents, as such the importer theimporter has to specify to the bank the documents which it

should examine to conclude that the exporter has sent the

shipment in strict compliance with the terms & conditions

of the credit.

& i i l d i l f


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&arties in(ol(ed in letter ofcredit

/. Accepting bank The bank named in a letterof credit on whom terms draft are drawn & whoindicates acceptance of the draft dating &

signing across its face, thereby incurring a legal

obligation to pay the amount of the draft at

maturity.

1. Ad!ising bank A bank or correspondent bank

at or near the domicile of the beneficiary, to

which the issuing bank either sends the letter of

credit


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• Applicant

• "ene7ciar*

• 'isco%ntin ,ank

• 'ra-ee ,ank

• 'ra-er

Types of /etter of Credit

!. Sight letter of credit A letter of credit is known as sight /C if it in!ol!es

payment to the exporter against sight draft.

". Confirmed letter of credit An irre!ocable /C is confirmed when another

bank add its confirmation to the /C upon the reuest or authori"ation of the

issuing bank. Confirmation means definite undertaking of the confirming bank

to honour or negotiate a complying presentation.

$. %egotiable LC An /C is known as negotiable if it states that the credit shall

be a!ailable by negotiation. 4egotiation means the purchase by the nominated bank of drafts or the documents under a complying presentation, by ad!ancing

or agreeing to ad!ance funds to the beneficiary on or before banking day on

which reimbursement is due to the nominated banks


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!. &evolving LC: It is one which pro!ides for the renewal of the

amount of the credit without any amendments to the letter ofcredit in relation to a gi!en time period or a gi!en amount. It may

be re!ocable or irre!ocable

'. &ed clause ( green clause: A red clause /C is a kind which

enables the confirming bank or the nominated bank o ad!ance tothe beneficiary e!en before the presentation of the documents.

;reen clause /C it pro!ides for the credit gi!en to the exporter to

co!er the period of storage of goods T the seaport.

8. Transferable LC: This means that /C is specifically

transferable.


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UC&'C Dorms• The uniform Customs & *ractice for )ocumentary

credits (:*C is a set of rules on the issuances & the

use of letter of credit. The :*C is utili"ed by banker

& commercial parties in more than 096 countries in

trade finance. 2ome 00?06 of international tradeutili"es letter of credit, totaling o!er a trillion dollars

each year.

• The commercial parties, particularly banks, ha!e

de!eloped the techniues & methods for handlingletters of credit in international trade finance. This

practice has been standardi"ed by ICC by publishing

:C* in 0B33 & updating throughout the year.

$ l i $ f l


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• T$e res%lt is t$e most s%ccessf%linternational attempt at %nif*in

r%les e(er3 as t$e UC& $ass%,stantiall* %ni(ersal e0ect.

• T$e 5< articles of UC& are acompre$ensi(e # practical -orkinaid to ,ankers3 la-*ers3 importers #exporter

6a;or cla%ses of UC&'C


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6a;or cla%ses of UC&'C

6a;or cla%ses %nder UC&'C are as follo-s• pplication of )CPDC *article !+:

0. If the documentary credit is to be sub'ect to the :C*, this

fact must now be explicitly stated in the text of the

documentary credit

1. If a specific articles is to be excluded, it must be so noted

in the text of the documentary credit.

• )efinition & Interpretation (article 1,3

0. A summary of definitions of key terms ( e.g negotiations,interpretations & clauses is contained in article 1,3.

1. +e!ocable letters of credit are no longer listed. Therefore

a documentary credit should be considered irre!ocable

unless otherwise noted

il bilit * ti l ,+ d di


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• vailability *article ,+: !ery documentary credit must state

the bank with which it is a!ailable or whether it is a!ailable

with at any bank.

• %ominations * article !"+: $y nominating a bank to accept adraft or incur a deffered payment undertaking, the issuing bank

expressly authori"es the nominated bank to prepay the draft

accepted or deffered payment undertaking to discount it to the

beneficiary.• Standard for e-amination of documentation

* article !+:

0.The amount of time banks ha!e to examine documents

has been reduced to fi!e banks working days followingthe day of receipt of the documents.

1. If the document contain a shipperconsignorD field, a

party other than the beneficiary may be listed

/ l i d l T d * i l


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• /ultimodal or sea Transport documents * article

!01"21"!1""+ If the transport documents is signed by an

agent for or on behalf of the master , the name of the

master does not need to be listed. The term multimodaltransport documentD & marine bill of ladingD ha!e

been replaced by the terms transport documents

co!ering at least two different modes of transportD &

bill of ladingD.• ir transport documents* article "$+: If the air waybill

has a specific notation indicating the actual date of

shipment, this date is considered the date of shipment,

e!en if such a notation was not reuired in the

documentary credit.in all other cases, the date of

insurance will be considered to be date of shipment.

International Trade Terms

Documents

Transcript of International Trade Terms