1 The world economy is globalizing at an accelerating pace. Discuss thisstatement and list the benefits of globalization.Answer- Globalisation is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalisation is defined as the worldwide trend of businesses expanding beyond their domestic boundaries. It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalisation. In this section, we will understand globalisation, its benefits and challenges.

Global companies Companies, which invest in other countries for business and also operate from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets. The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in few selected foreign countries and a company that operates and markets its products across several countries and continents with manufacturing capabilities in several of these countries.Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy.

Global competitive strategy Companies adopt this strategy when prices and competitive conditions across the different country markets are strongly linked and have common synergies. In a globally competitive industry, a companys business gets affected by the changing environments in different countries. The same set of competitors may compete against each other in several countries. In a global scenario, a companys overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide. A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research and Development setup in USA and India, manufacturing and assembly plants in low-wage countries like China, and sales and marketing worldwide. This is made possible because of the ease in transferring technology and expertise from country to country. Industries that have a global competition are automobiles, consumer electronics (like televisions, mobile phone), watches, and commercial aircraft and so on.

Benefits of globalisationThe merits and demerits of globalisation are highly debatable. While globalisation creates employment opportunities in the host countries, it also exploits labour at a very low cost compared to the home country. Let us consider the benefits and ill-effects of globalisation. Some of the benefits of globalisation are as follows:

Promotes foreign trade and liberalisation of economies.

Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity.

Promotes better education and jobs.

Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture.

Provides better quality of products, customer services, and standardised delivery models across countries.

Gives better access to finance for corporate and sovereign borrowers.

Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world.

Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production.

Provides several platforms for international dispute resolutions in business, which facilitates international trade.

Some of the ill-effects of globalisation are as follows:

Leads to exploitation of labour in several cases.

Causes unemployment in the developed countries due to outsourcing.

Leads to the misuse of Intellectual Property Rights (IPR), copyrights and so on due to the easy availability of technology, digital communication, travel and so on.

Influences political decisions in foreign countries. The MNCs increasingly use their economical powers to influence political decisions.

Causes ecological damage as the companies set up polluting production plants in countries with limited or no regulations on pollution.

Harms the local businesses of a country due to dumping of cheaper foreign goods.

Leads to adverse health issues due to rapid expansion of fast food chains and increased consumption of junk food.

Causes destruction of ethnicity and culture of several regions worldwide in favour of more accepted western culture.

2 Compare the Adam Smith and David Ricardos theories of international trade withexamples.

Answer-

Adam Smiths theory

In one of the most notable book Wealth of Nations in 1776, Adam Smith attacked the mercantilism and argued that countries differ in their ability to produce goods and services efficiently due to variety of reasons. At that time, England, by virtue of their superior manufacturing processes, were the worlds most efficient textile manufacturers of the world. This was due to combination of several factors such as favourable climate, good soils, skilled manpower and accumulated experience and expertise in textile production. On the other hand, the French had one of the most efficient wine industries of the world. Thus, England had an absolute advantage in the manufacturing of textiles and France had an absolute advantage in the production of wine. Adam Smith argued that a country has an absolute advantage if it has one of the most efficient and cost effective product in comparison to any other country producing it.

Smith argued that countries should specialise in production and manufacturing of goods and services in which they have an absolute advantage. Such cost effective and efficient products can be traded with goods from other countries in which that country has an absolute advantage. According to Smith, England should specialise in the production of textiles and France should specialise in the production of wine. Both countries should exchange such products of absolute advantage with each other, i.e. England should sell textiles to France and France should sell wine to England. The crux of Smiths absolute advantage theory is that a country should not produce goods at home in which it does not have cost advantage; instead it should import from other countries. Absolute advantage theory was based on positive sum game where countries benefit from trade unlike mercantilism theory which was based on zero game. Caselet tabled as under illustrates the benefits of absolute advantage theory.

David Ricardos theory

David Ricardo, in his notable book Principles of Political Economy published in 1817 came up with an improvement on Adam Smiths absolute advantage theory. Ricardo argued what might happen if one country has an absolute advantage in the production of all goods. Adam Smiths theory suggests that such a country might not have benefitted from international trade as trade is positive sum game and countries prosper only if they exchange the goods in which they have absolute advantage. Ricardo argued that it was not the case and showed that countries should trade goods with each other where they have comparative cost advantage. For a sustainable economic system, Ricardo argued that a country should specialise in the production of those goods that it can produce most efficiently and import the goods which it produces less efficiently even if it has absolute cost advantage in the production of those goods. Practical case on comparative cost advantage is tabled as under:

3 Regional integration is helping the countries in growing their trade. Discuss thisstatement. Describe in brief the various types of regional integrations.

Answer: Regional integration can be defined as the unification of countries into a larger whole. It also reflects a countrys willingness to share or unify into a larger whole. The level of integration of a country with other countries is determined by what it shares and how it shares. Regional integration requires some compromise on the part of participating countries. It should aim to improve the general quality of life for the citizens of those countries. In recent years, we have seen more and more countries moving towards regional integration to strengthen their ties and relationship with other countries. This tendency towards integration was activated by the European Union (EU) market integration. This trend has influenced both developed and developing countries to form customs unions and Free Trade Areas (FTA). The World Trade Organisation (WTO) terms these agreements of integration as Regional Trade Agreements (RTA).

Types of Integration

Preferential trading agreement:- Preferential trading agreement is a trade pact between countries. It is the weakest type of economic integration and aims to reduce taxes on few products to the countries who sign the pact. The tariffs are not abolished completely but are lower than the tariffs charged to countries not party to the agreement. India is in PTA with countries like Afghanistan, Chile and South Common Market (MERCOSUR). The introduction of PTA has generated an increase in the market size and resulted in the availability and variety of new products.

Free trade areaFree Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of economic integration. It comprises of all countries that are willing to or agree to reduce preferences, tariffs and quotas on services and goods traded between them. Countries choose this kind of economic integration if their economical structures are similar. If countries compete among themselves, they are likely to choose customs union. The importers must obtain product information from all suppliers within the supply chain in order to determine the eligibility for a Free Trade Agreement (FTA). After receiving the supplier documentation, the importer must evaluate the eligibility of the product depending on the rules pertaining the products. The importers product is qualified individually by the FTA. The product should have a minimum percentage of local content for it to be qualified.

Custom unionCustom Union is an agreement among two or more countries having already entered into a free trade agreement to further align their external tariff to help remove trade barriers. Custom union agreement among negotiating countries may encompass to reduce or eliminate customs duty on mutual trade. Under customs union agreement, countries generally impose a common external -tariff (CTF) on imports from non-member countries. Such common external tariff helps the member countries to reap the benefits of trade expansion, trade creation and trade diversification. In the absence of common external tariff, there is a possibility that countries with lower custom duties may become conduits for members which has higher custom duty. Custom union is third stage in level of economic integration and is followed only after free trade agreement among participating countries.

Common market

Common market is a group formed by countries within a geographical area to promote duty free trade and free movement of labour and capital among its members. European community is an example of common market. Common markets levy common external tariff on imports from non-member countries. A single market is a type of trade bloc, comprising a free trade area with common policies on product regulation, and freedom of movement of goods, capital, labour and services, which are known as the four factors of production. This agreement aims at making the movement of four factors of production between the member countries easier. The technical, fiscal and physical barriers among the member countries are eliminated considerably as these barriers hinder the freedom of movement of the four factors of production. The member countries must come forward to eliminate these barriers, have a political will and formulate common economic policies. A common market is the first step towards a single market. It may be initially limited to a FTA with moderate free movement of capital and services, but it is not capable of removing the other trade barriers.

Benefits and costs A single market has many advantages. The freedom of movement of goods, capital, labour and services between the member countries results in the efficient allocation of these production factors and increases productivity. A single market presents a challenging environment for businesses as well as for customers making the existence of monopolies difficult. This affects inefficient companies and hence, results in a loss of market share and the companies may have to close down. However, efficient companies can gain from the increased competitiveness, economies of scale and lower costs. Single market also benefits the consumers in a way that the competitive environment provides them with inexpensive products, more efficient providers of products and increased variety of products. A country changing over to a single market may experience some short term negative effects on the national economy due to increased international competition. National companies that earlier benefited from market protection and subsidies may find it difficult to cope with their efficient peers. If these companies fail to improve their methods, they may have to close down leading to migration and unemployment.

Economic union Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a common market with a customs union. The countries that are part of an economic union have common policies on the freedom of movement of four factors of production, common product regulations and a common external trade policy. The purpose of an economic union is to promote closer cultural and political ties while increasing the economic efficiency between the member countries.

Economic unions are established by means of a formal intergovernmental legal agreement among independent countries with the intention of fostering greater economic integration. The members of an economic union share some elements associated with their national economic jurisdictions. These include the free movements of: Goods and services within the union along with a common taxing method for imports from non-member countries. Capital within the economic union. Persons within the economic union. Some forms of cooperation usually exist while framing fiscal and monetary policies.

Political unionA political union is a type of country, which consists of smaller countries/nations. Here, the individual nations share a common government and the union is acknowledged internationally as a single political entity. A political union can also be termed as a legislative union or state union.

4 Write short note on:a) GATS (General Agreement on trade in services)b) ILO (International Labour organization)

Answer

GATS (General Agreement on trade in services)

General Agreement on Trade in Services (GATS) GATS is a framework agreement defining the rules under which trade in services must occur. GATS aims at extending the rules covering trade in goods to trade in services. A detailed rule has been included to take into account the differences between goods and services and the way in which trade in services is conducted. Trade in services cover a wide range of activities in the area of telecommunication, information, banking, insurance and education. WTO has recognised over 150 service sub-sectors.

The main objective of GATS is to establish a framework for liberalising trade in services. It encourages countries to modify their domestic regulations. This modification results in elimination of restrictions applied to service products entering the country and is applicable to international service suppliers who are carrying out business in various modes. According to the GATS, MFN status and transparency is applicable to all services. Other commitments such as national treatment and market access are only applicable to services that are opened according to the specified negotiated commitments. GATS covers services known as consumption abroad where services such as e-commerce are used by the consumers in a host country and citizens of a country travel overseas to consume products such as tourism or education.

Trade-Related Aspects of Intellectual Property Rights (TRIPS) The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is one of the WTO agreements that is compiled by all WTO members. According to TRIPS, developed and developing members of WTO must adopt the same minimum levels of intellectual property protection. The TRIPS Agreement includes rules on domestic enforcement procedures. TRIPS Agreement focuses on issues such as innovation and the dissemination of technology, development of biotechnology, health care and the operation of multilateral environment agreements. The TRIPS agreement states that members can take actions to protect the public health and nutrition. It encourages protection of new plant varieties. The members are encouraged to develop national systems that promote local breeding, rights of farmers and protect human fundamental human rights which include the right to food and health. It promotes the use and protection of knowledge that is relevant to the conservation and use of biological diversity. This includes knowledge in technology and genetic material. The 1995 WTO TRIPS Agreements covers copyright and related rights, geographic indications, trademarks, and patents of integrated circuits, protection of information and control of anticompetitive practices in contractual licenses.

General Agreement on Tariffs and Trade (GATT) GATT is a multilateral agreement among countries providing a framework for conducting international trade. GATT is regarded as an international institution governing international trade relations. It consists of disciplines on governments and matters related to import and export of goods. It was established to promote international trade by reducing tariff and non-tariff restrictions on imports imposed by member nations. Tariff barrier refers to imposing import duty and non-tariff barriers means restricting imports through import licensing and by banning the imports. GATT provides a framework for negotiations on the level of tariff. It promotes multilateral trade among member nations. It provides protection against unfair trade and obstructions to trade.

International Labour Organisation (ILO)

International Labour Organisation (ILO) is a specialised agency of the United Nations which deals with labour issues. The headquarters is situated in Geneva, Switzerland. The secretariat comprises of the people employed by the organisation throughout the world. The secretariat is known as the International Labour Office. The ILO manages work through three main bodies. They are: International Labour Conference The members of the ILO meet at the International Labour Conference every year in June, in Geneva. Two government delegates along with an employer delegate and a worker delegate represents their respective member state. The technical advisors also accompany the delegates. The Cabinet Ministers are usually responsible for labour affairs, head the delegations and present the viewpoint of their government. The Conference creates and implements standards for international labour. Social and labour issues are discussed in the Conference. It also assigns the budget of the organisation and elects the Governing Body. Governing Body The executive council of the ILO is known as the Governing Body. It meets thrice a year in Geneva and takes decisions on the ILO policies. It forms programmes and budgets which are submitted to the Conference for adoption. The Governing Body has 28 government members, 14 employer members and 14 worker members. Ten government seats are permanently held by states of chief industrial importance. Taking into consideration the geographical distribution, representatives of other member countries are elected at the Conference once in every three years. The representatives are elected by the employers and workers.

International Labour Office The permanent secretariat of the International Labour Organisation is the International Labour Office. It is the central point for all activities that are administered by the governing body. The Office is a center for administration, research and documentation. It employs more than 1,700 officials from 110 nationalities. The Office also organises certain programmes to extend technical help to all member nations. Under this programme of technical cooperation, around 600 experts undertake missions in all regions of the world.

International Labour Code The International Labour Code is composed of Conventions and Recommendations adopted by the International Labour Conference. In 1997, the Code contained 181 conventions and 188 recommendations that covered important subjects in labour and social fields. The main function of the ILO is to set international labour standards by adopting conventions and recommendations covering the major labour-related issues which are referred to as the International Labour Code. The Conference adopts conventions and recommendations which is prepared by the International Labour Office and the governing body. The representatives of the member nations bring the conventions and recommendations to the notice of the authorities.

Conventions These treaties are not bound to a country unless they are approved by that country. ILO conventions that have secured a two-third majority should be presented by the member country in the Conference. The ILO conventions are approved as written and without reservations. Flexibility clauses are included in the conventions to accommodate different climatic conditions or states of development of particular countries. Recommendations When state practices vary largely, non-binding guidelines known as recommendations are issued. Recommendations are issued when the subject is:

Very technical and cannot be handled by a convention. Already covered by a convention but needs to be addressed in more detail. Member states are required to bring recommendations to the attention of their governments.

5 What is the difference between domestic and international accounting and howwill you measure this difference?

Answer:

Domestic vs. international accounting

Different countries whether domestic or international, have different accounting standards. A common belief is that these differences reduce the quality and importance of accounting information. Accounting standards determine the financial reporting quality and provides separately verified information about an organisation's financial performance to investors creditors. Though there are differences in accounting methods, domestic businesses are not affected. The accounting system of a domestic organisation must meet the specialised and regulatory standards of its home country. But, an MNC and its subsidiaries must meet differing accounting and auditing standards of all the countries in which it operates. This leads to a need for comparability between businesses in the group. In order to successfully manage and organise their operations, local managers require accounting information, which should be prepared according to the local accounting concepts and denomination in the local currency. Yet, for financial controllers, to measure the foreign subsidiarys performance and worth, the subsidiarys accounts must be translated into the organisations home currency. This translation is done using accounting concepts and measures, which are detailed by the organisation. Investors worldwide look for the highest possible returns on their capital, in order to interpret the track record, though they use a currency and an accounting system of their own. The organisation also has to pay taxes to the countries where it does business, based on the accounting statements prepared in these countries. Besides this, when a parent corporation tries to combine the accounting records of its subsidiaries to produce consolidated financial statements, extra complexities occur because of the changes in the value of the host and home currencies.There are many differences between International Accounting Standards (IAS) and Domestic Accounting Standards (DAS). On the basis of difference between the two, two indices, namely 'divergence' and 'absence', are created. Absence is the difference between DAS and IAS; the rules on certain accounting issues are missed out in DAS and covered in IAS. Divergence represents the differences between DAS and IAS; the rules on the same accounting issue differ in DAS and IAS.

Measurement of differences between IAS and DAS You can measure the differences between IAS and DAS in the following way:

Literature on international accounting differences Referring to earlier reports on international accounting could give more information about the subject. Most of the earlier reports understand international accounting differences as various options adopted by nations for the similar accounting problems, which correspond to divergence concept.

Framework of analysis Links between variations in accounting standards and financial reporting quality of various countries could be clearly seen from the reports published earlier. We should consider the institutional determinants of accounting differences such as legal origin, governance structure, economic development, and equity market.

National differences in accounting One of the major problems encountered by an international business is lack of consistency in accounting standards in various countries. Organisations show opposite financial results because of the differences in accounting standards. Differences in accounting standards exist because of diverse political, legal, economic, and cultural systems of the countries. Accounting standards and practices are also prejudiced by the sources of capital used to fund business. Figure 9.1 shows the influencing factors on a countrys accounting practices.

You might think that accounting systems in the world were uniformly influenced by a few historical developments. There could be some similarities but no two countries and their systems are alike. Accounting systems are developed suiting the countrys specific needs. It is a fact that different countries evolved in different ways. Accounting systems were influenced by private ownership, industrialisation, inflation, and so on. When there are differences in economic conditions, it is not surprising to find differences in accounting practices. However, there are other influencing elements apart from economic factors. These are legal systems, educational systems, socio cultural features, and political systems. These also influence the need for accounting, speed and direction of its development. Due to the increasing trend in globalisation of business, understanding various accounting systems is important.

Legal systems Law system is divided into civil law and common law in countries worldwide. In countries like US, Australia, UK and New Zealand accounting procedures originate from decisions of independent standards setting boards, such as US Financial Accounting Standards Board (FASB). Each board works with professional accounting groups. In countries, which follow common law, accountants follow Generally Accepted Accounting Principles (GAAP), which provides a 'true and fair view' of the organisation's performance, based on the standards approved by these professional boards. Many civil law countries also have a similar approach as that of GAAP. Functioning within the limitations of these standards, accountants have freedom to implement their professional judgment in reporting a 'true and fair' representation of the organisation's performance.

Countries following civil law are likely to codify their national accounting measures and standards. In these countries, accounting practices are determined by the law. To assist the legal role, all business accounting records must be officially registered with the government. The way in which the accounting practices are imposed depends on the legal system. Most of the developed countries depend on both private and public enforcement of business performance, though the public or private combination varies from country to country. The difference of legal system is a major restriction in the growth of accounting standards. In some countries, the accounting policies are restricted to detailed legislation, which is passed by governments. This restriction forms a major problem to international accounting bodies that are created to increase harmonisation of national accounting frameworks. This is because, such government-controlled regimes are inclined to be less flexible, and perceive private sector influences as less acceptable.

6 Discuss the various payment terms in international trade. Which is the safestmethod and why?

Answer:- Understanding Payment Mechanism in Foreign Trade-For successfully conducting international trade in todays competitive international environment, it is essential for the exporters to offer attractive sales terms and payments to importers so as to woo them for business. One of the major concerns for en exporter is to choose the appropriate payment method in order to minimise risks related to payments of trade transaction. Payment should be done after understanding the economic scenario of importers country, importer credit worthiness and to certain extent accommodating the needs of the importer. Exporter can choose any mode of payment depending on risk perception, size of deal, importer credit worthiness and economic situation in importers country.

In case of domestic business, main factor driving salesmans decision criteria for realisation of payments is based on the buyer's ability, willingness and honesty to make payment coupled with exporter trust on buyer. Usually sale in domestic market are on open account and in certain cases it can be on cash in advance. Such methods also depend on buyers and sellers power to negotiate and nature of competition such as: Monopoly condition will favour to the seller. Perfect competition will favour to the buyers.

However, in case of international trade, exporter has to take more precautions as some methods of payment are unique and usually used in case of international trade only. Key consideration while deciding upon a payment term in foreign trade is elaborated as under.

A. Some of the major risks involved in realisation of payments in international trade can be either at importer, importer bank and importers country such as insolvency and default by importer, insolvency of importer bank and exchange control restrictions, inconvertibility issues with importers country. B. Some of the risks involved in international trade in Liberalisation, Privatisation and Globalisation era can be under control of exporter but some cannot be. For example, credit risk which arises from a change in the credit worthiness of importer can be covered by ECGC. Exchange Rate Fluctuation risk can be covered by hedging the currency invoiced in forward contract market but risk such as Force Majeure which arises from change in policy of a country, which in turn affects the trade capability, and by a natural disaster cannot be anticipated in complex international environments1. Other risks mainly arises due to a difference in culture, law, or language are also beyond exporter control.

C. International Trade Operations offers different types, quantum and location of risks, thereby confusing the exporter with uncertainty over realisation of payments and timing of payments between the exporter and importer2. D. For exporters, any international sale will be equivalent to gift until he has not realised the payment from the importer. For importer any payment is donation until he has received the cargo as sent by exporter. E. Exporter will always be interested to receive the payments as soon as he/she sends the goods to importer through shipment. Importer will be willing to delay the payments as he/she will be interested to sell these goods in markets and then make the payments to exporter.

F. However, the selection criteria for mode of payment is based on mutual negotiation of exporter and importer and in LPG&M era there are other parties such as bank, credit insurer involved which helps in exporter in financing and assuring about the payment. G. Though safe mode of payment such as L/C is getting popular, this is not usually used by small exporters and importers due to heavy transaction costs. For example, L/C is used as mode of payment only in 14% trade transactions due to heavy transactions costs3. H. Exporter can alternatively divide the payment category into secure mode and unsecure mode. The secure mode of payment for exporter is cash in advance and letter of credit. Unsecure mode of payment are Open Account, Documents against Acceptance and Documents against Payments.

Payment terms in foreign trade Since international trade deals with exchange of goods, there are various ways in which the payment terms (finance) will be handled. Bothe seller and trader should be careful about the method of payment as they are at different locations and transactions happen without face-to-face interaction. There are four methods of payment for the international transactions. This includes the Cash-in-advance method, Letter of Credit, Documentary collections and the Open Account. These are shown in figure 14.1.

As shown in figure 14.1, there is uncertainty during the time when payment transactions happen between importer and exporter. The figure compares and contrasts the most suitable methodology from the perspective of importer and exporter. Apparently the most secure methodologies that work for the exporter is not safe for the importer. For exporters, documentary collection and open account are less secure and letter of credit and cash in advance are more secure methods. In the same way, with respect to the importer, the letter of credit and cash in advance are less secure and the documentary collection and open account are more secure. These terms are explained as follows.

Cash-in-advance Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter receives the payment before the transfer of goods. The options that are available with the cash-in-advance method include wire transfers and credit cards. This is the least attractive method for many of the buyers as it creates cash flow problems. The buyers are concerned about the quality/quantity and delivery of the goods that are not sent if the payment is made in advance. Letters of credit The letter of credit is the most secure instrument available for international traders. This is the commitment made by the bank that the payment will be made to the exporter if the terms and conditions are met. The terms and conditions of the payment are explained in the required documents.

Documentary collections Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the documents to the importer's bank (collecting bank). The document contains information about the payment. The funds are collected from the importer and paid to the exporter through the banks involved in the collection, in exchange for the documents. Open account The open account transaction involves the shipping and delivery of goods in advance. The payment is due usually from 30 to 90 days. This is advantageous for the importer in cash flow and cost terms, but at the same time it is very risky for the exporters. Buyers from abroad stress on open accounts since the extension of credit from the seller to the buyer are more common in many countries. Exporters who avoid extending credit may face loss in the sale because of competitors in the market.

Letter of credit International Trade is affected by distance, laws, political instability and lack of familiarity by the transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It is a document that is issued by the bank that guarantees payment to a beneficiary. It is written by the financial institution in favour of the importer of goods to the seller. In the letter, the bank promises that it will honour the drafts drawn on it if the seller confirms to the specific conditions that are set forth in the letter of credit. The process of letter of credit works as shown under: