Documentary Letter of Credit

A letter of credit (L/C) is a document in which a bank or other financial institution assumes liability for payment of the purchase price to the seller on behalf of the buyer. The bank could deal directly or through the intervention of a bank in the seller’s country. In all types of letters of

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Cash in Advance

This method of payment requires the buyer to pay before shipment is effected. The seller assumes no risk of bad debt and/or delays in payment because advance payment is a precon¬dition of shipment. Sellers often require advance payment in cases in which the creditworthiness of the over¬seas customer is poor or unknown and/or the

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New Payment and Financing Alternatives

Since the 1990s, there has been a rapid expansion of online business-to-business transac­tions. One of the most significant challenges to this continued growth has been the lack of a payment mechanism for large cross-border transactions. Existing trade payment processes have not evolved and continue to be labor and document intensive. Any discrepancy in letter-

Fraud in Documentary Credits

International trade fraud is not a new phenomenon. Ever since trade began, merchants have been victims of fraud and other criminal activity. As early as the 1st century BC, there were pirate states along the Anatolian coast, threatening the commerce of the Roman Empire in the eastern Mediterranean. Roman ships were attacked by pirates

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Other Letters of Credit

1. Transferable Letter of Credit Exporters often use transferable L/C to pay a supplier, while keeping the identity of the supplier and the foreign customer from each other, lest they conduct the next transaction without the exporter. This method is often used when the exporter acts as an agent or intermediary. Under a transferable

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Dishonoring Letters of Credit

In June 2005, JFTC, a Chinese company, agreed to purchase 1,000 metric tons of fertilizers from VA Trading Corporation (VATC), located in Houston, Texas. JFTC obtained a letter of credit from the Bank of China (BC) for the purchase price of $1.2 million. Payment was to be made to VATC after delivery of the

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The Independent Principle in Letters of Credit

A bank in New York issued a letter of credit to a beneficiary (seller) in Spain at the request of the buyer to cover the shipment of building products. When seller presented the documents to the bank for payment, the bank declined to pay on the ground that it had no opportunity to test

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Deferred Payment in Letters of Credit (L/C)

Bank A issued a deferred payment L/C in favor of Martin Co. with a promise to pay sixty days from the bill of lading (BL). It also undertook to cover the confirming bank at maturity. Martin Co. presented complying documents to the confirming bank, after which the latter made a discounted payment. The beneficiary

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Origins of Countertrade

Countertrade is any commercial arrangement in which sellers or exporters are required to accept in partial or total settlement of their deliveries a supply of products from the import­ing country. In essence, it is a nation’s (or firm’s) use of its purchasing power as leverage to force a private firm to purchase or market

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Benefits of Countertrade

1. Benefits for Buyers 1.1. Transfer of Technology In exchange for a guaranteed supply of raw materials or other scarce resources, a developed nation will provide the capital, equipment, and technology that are needed to develop such resources. Western firms, for example, assisted Saudi Arabia in the development of its refin­ery and petrochemical industry

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Theories on Countertrade

A limited number of empirical studies on countertrade have been conducted. The following findings characterize some of the theoretical studies on countertrade practices: Countertrade is positively correlated with a country’s level of exports. This means that a higher level of international commercial activity is associated with a high level of countertrade (Caves and Marin,

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Forms of Countertrade

Countertrade takes a variety of forms (see Figure 12.1). Such transactions can be divided into two broad categories: Transactions in which products and/or services are traded in exchange for other prod­ucts and /or services. These include barter, switch trading, and clearing arrangements. Transactions that feature two parallel money-for-goods transactions. These include buy-back, counterpurchase, and

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Countertrade and the WTO

The prevalence of countertrade practices has directed the attention of policymakers to its po­tentially disruptive effects on international trade. Trade experts claim that countertrade repre­sents a significant departure from the principles of free trade and could possibly undermine the delicate multilateral trading system that was carefully crafted after World War II. This move­ment toward

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Countertrade and the International Monetary Fund

The International Monetary Fund (IMF) imposes a dual regime: on the one hand it attempts to deter members from restricting international payments and transfers for current international transactions, while on the other hand it permits its members to regulate international capital movements as they see fit. Payments for current transactions involve an immediate quid

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Governments’ Attitudes Toward Countertrade

Consistent with their commitment to a nondiscriminatory trading system, many countries are opposed to government-mandated countertrade because it distorts the free flow of trade and investment. Yet, they do not publicly discourage firms from engaging in countertrade (U.S. ITC, 1985; U.S. Office of Management and Budget, 1986). The U.S. policy on countertrade was developed

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The Bofors-India Countertrade Deal

Bofors AB is a Swedish company that specializes in the manufacturing and sales of weapon systems such as antiaircraft/antitank guns, artillery, and ammunition. The Indian government concluded an agreement with Bofors AB for the purchase of 410 FH77B howitzers ($1.3 billion) in 1986. The FH77B howitzer is a powerful, highly mobile artillery system. It

Offsets in U.S. Defense Trade

Offsets in defense trade encompass a range of industrial compensation arrange­ments required by foreign governments as a condition of the purchase of defense articles and services from a nondomestic source. This mandatory compensa­tion can be directly related to the purchased defense article or service, or it can involve activities or goods unrelated to the

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Capital Sources for Export-Import Businesses

Capital needs to start the business or to finance current operations or expansion can be obtained from different sources. Internal financing should be explored before resorting to external funding sources. This includes using one’s own resources for initial capital needs and then retaining more profits in the business or reducing accounts receivables and inven­tories

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Private Sources of Export Financing

In many export transactions, the buyer is unable or unwilling to pay for the goods at the time of delivery. This means that the seller has to agree to payment at some future date or that the buyer should seek financing from third parties. The seller may seek financing from the buyer or third

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Tadoo’s Sales to Belgium

Tadoo Inc. is a chemical company incorporated in the state of Tennessee and engaged in the production and sale of various chemical products used to kill harmful insects or strip leaves from trees. Since the company was established, in 1980, it has generated gross sales of more than $60 million, largely from sales in