Key documents used in international trade financing options
International Letter of Credit. At a minimum, there will be two documents: The buyer will usually provide the seller with a list of documents needed to get the goods into his country as expeditiously and inexpensively as possible. Some documentary requirements are not open to negotiation, as they are needed by the importer to clear customs at the port of destination. This presentation discusses documentation in relation to export letters of credit.
When the letter of credit payment method is used for an export sale, each document presented under the terms and conditions of the letter of credit must: For the following documents listed, the number in parenthesis refers to the relevant UCP article. This demand for payment is drawn by the seller on the payee. The payee on a letter of credit draft is almost always a bank.
For a documentary collection it would be the buyer. Normally an export invoice would include: These certificates evidence that the shipment meets certain statutory or other regulations of the importing country. Insurance coverage on exports is a complicated issue that we can not fully cover on this site. Certificates come in a many different forms depending on the product and the country of destination. Some of the most common certificates are discussed below.
Certificates should always be issued before the goods are shipped. Certificates issued after the goods arrived in the country of import defeat the purpose of the letter of credit. This document may be as simple as a certificate signed by the seller. Certain countries may require it to be issued by a third party such a Chamber of Commerce, or be notarized, legalized, or visaed by their Embassy or Consulate.
Inspection certificates should be based on quantifiable criteria. This document breaks down the shipment by weight. It provides evidence that the produce was in good condition at the date and time of inspection and can be useful in the event of a damage claim.
This certificate states that the product has been inspected and is free of harmful pests and plant diseases.
Export marketing requires a knowledge of the target market, a marketing mix decision, planning, organisation and control and information systems. Exporting is often an key documents used in international trade financing options process, from unsolicited order filling to deliberate export planning. No doubt few firms will export unless profit and growth opportunities are expected.
Theories of trade stress the basis as "comparative advantage", but in practice this is of little use. The most significant factors affecting trade are "firm" not "product" characteristics. McGuiness and Little 1 found two firm characteristics "restrained from exporting" and "high technology" as opposed to product characteristics had an overwhelming influence on the decision.
Whilst exporting and importing are, this is not the way governments look at it when making policy. Simply, policy can be construed as two-faced. Often, every effort is key documents used in international trade financing options to improve and encourage exports whilst every effort is made to curb imports.
The combination of policy measures can have an offsetting effect. Government, however, seeks to support export activities in three ways: Many African countries have incentives like export retention schemes and revolving schemes to aid potential exporters. Chapter Objectives The objectives of this chapter are: Structure Of The Chapter This chapter is very detailed, necessarily so, given the nature of the subject matter covered.
The various terms of access are described, including tariffs and duties, and the non-tariff barriers which can be quite effective in reducing the key documents used in international trade financing options terms of trade.
These include commercial documents like invoices, certificates of origin, and transport documents. The chapter concludes by looking at financial, insurance and transport documentation and the legal ramifications of any defaulting in international transactions. Note that all cases quoted in this chapter were sourced from Kwelepeta 2.
Complexity Exporting and importing requires an enormous amount of thought and attention to detail, especially documentation. If documents are missing or wrongly filled out then the transaction will be void. Consider the following example of key documents used in international trade financing options exportation of horticultural produce from Kenya. The documentation required is as follows: Flow of documents in export of horticultural Produce by Air A shipper is required to submit the following documents to facilitate the processing of exports: STEP 2 HCDA officer to vet prices, weights declared by the shipper and issue export certificate which is endorsed by produce inspectors.
Airway Bill and Customs entry C. Terms of access Terms of access refer to the conditions that apply to the importation of goods manufactured in a foreign country. The major instruments covered by this include import duties, import restrictions or quotas, foreign exchange regulations and preference arrangements.
Tariff systems Tariff systems provide either a single rate of duty for each item applicable to all countries, or two or more rates, applicable to different countries key documents used in international trade financing options groups of countries.
Tariffs are usually grouped into two classifications: A simple schedule of duties in which the rate applies to imports from all countries on the same basis. The initial single column of duties is supplemented by a second column of "conventional" duties, which shows reduced rates agreed through tariff negotiations with other countries.
The second column is supplied to all countries enjoying "most favoured nation" status within the framework of GATT. Signatories to GATT, with some exceptions, apply the most favourable tariff to products. A reduced tariff rate applied to imports from certain countries. GATT prohibits preferential tariffs except historical preference schemes like the Commonwealth, those part of a formal economic integration treaty like a free trade area and preference to companies of a developing country importing into a developed country.
Customs duties are of two different types - ad valorem or specific amounts per unit, or a combination of these.
As definitions of customs value vary from country to country it is best to secure valuation policy information first. A uniform basis for the valuation of goods for customs purposes was elaborated by the Customs Cooperation Council in Brussels and was adopted in the Brussels Nomenclature came out of this.
In this case the customs value is landed GIF cost at the port of entry. This cost should reflect the arm's length price of the goods at the time the duty becomes payable. Usually specific duties are expressed in the currency of the importing country. Normally, the applicable rate is the one that yields the higher amount of duty, although there are cases where the lower is specified.
These are special additional import charges designed to cover the difference between the export price and the "normal" price, which usually refers to the price paid by customers in the exporting countries. These include variable import charges, temporary import surcharges and compensatory import taxes i Variable import charges - Can be used to raise imported product prices to the domestic price level.
According to GATT such "border tax adjustments must not amount to additional protection for domestic producers or to a subsidy for exports". This can lead to great inequities. Non tariff barriers Non tariff barriers are measures, public or private, that cause internationally traded goods and services to be allocated in such a way as to reduce potential real world income the attainable level when resources are allocated in the most economically efficient manner. They virtually prevent sales in a foreign market.
Some countries, for example Zimbabwe, operate state trading. Some countries require an import deposit, thus in effect raising the price of foreign goods. The EU, for example has very strict hygiene measures for imports of horticultural products. Tariff classification Before World War II specific duties were widely used and the tariffs of many countries were very complex. Tariff administration has been made more simple by the Brussels Nomenclature BTNworked out by an international committee of experts under the sponsorship of the Customs Cooperation Council, which in produced a convention that entered into force in These rules now apply to most GATT countries.
The BTN groups articles mainly according to the materials from which they are made. With many new products appearing the task of classifying becomes more difficult. Exporters should seek the most favourable classification for their products to minimise the duty levied. Sometimes products can be reclassified to get an advantageous rate.
Difficulties of classification raise serious questions about the accuracy of data in international trade patterns. In key documents used in international trade financing options data on trade, the numbers may often reflect hasty and arbitrary classification which distorts the true picture of the trade flows. This often explains the discrepancies in import and export figures of the same commodity between two countries. International trade The export transaction is founded on a contract of international sale of goods with the special characteristic that it is entwined with other contracts, a thing that differentiates the international sale from the key documents used in international trade financing options sale.
These connected contracts are the contract of carriage by sea or air under which goods are exported and the contract of insurance by which the goods are insured. In many export transactions, delivery of the shipping documents amounts to key documents used in international trade financing options of the contract of sale. These shipping documents consist normally of the bill of lading, the marine insurance policy and the invoice.
The position becomes more involved when payment is made under a banker's documentary credit because this common method of payment requires the addition of two other contracts to the export transaction viz: Export contracts A contract is a general agreement between a seller making an offer and a buyer making an acceptance.
The acceptance should be unqualified and any variation is regarded as a repudiation of the contract. The export contract should be very explicit regarding goods and specifications, price, mode of payment, storage, packing, delivery schedule and so on. Normally the contract is sent with a pro forma invoice by airmail. Although contracts may be oral or partly in writing and partly by word of mouth, it is always safer for the exporter to produce his terms of selling in writing and obtain the signatures of his buyer or authorised representative.
The essential elements of a contract of sale should include the following: If the buyer is satisfied with the terms set out in the contract and the pro forma, the exporter can then get an order with duplicate copy of the contract, detailing payment arrangement and other details and an indication that a letter of credit LC has been opened in favour of the exporter.
Details of documents required will also be indicated in the export order. The following must happen: All efforts should be made to ensure adherence to delivery schedule as this would affect the requirements of the LC. The export order should indicate whether part shipment is permissible or not. Terms of payment This is very important: If payment is to be by LC the following should be borne in mind when examining the LC: Documents Since the LC indicates the documents required along with the bill of exchange, the exporters should look for availability of the documents called for by the importer and particularly: The Buyer should endeavour to send a special form of invoice required by him.
The name of the company from which the insurance contract is to be obtained should also be mentioned. Pre-shipment inspection To be carried out by an appointed body or any other agency. Packing, labelling and marking requirements Special or usual activities for example, colour contents, language, packing etc. Confirmation If the exporter is satisfied with all of the above, then he must send his confirmation of the export order to the buyer.
No special form of confirmation is needed as any letter giving details of order and indicating clearly terms and conditions would be sufficient.
If dissatisfied, the exporter should write to the importer to seek for clarification and necessary corrections, If the export transaction presents itself to the businessman as a natural and indivisible whole and he is apt to pay little attention to its constituent parts, like the motorist who thinks of the components of his car only when he notices a fault in them.
Special trade terms in export sales Key documents used in international trade financing options transactions based on the contract of sale usually have terms which are not customary in the local trade. Ex-works or ex-warehouse or ex-store where the goods are situated This is an arrangement which is most favourable to the seller who desires to conduct export key documents used in international trade financing options as closely as possible on the lines of a home market sale.
The clause means that key documents used in international trade financing options overseas buyer or his agent must collect the goods at the place where the seller works or where his factory, warehouse or store is situated. The seller must provide goods of the contract description and place them at the agreed collection point.
Key documents used in international trade financing options should be given to the buyer that the goods are ready for collection. But unlike the above, the goods are not collected at the seller's doorstep but have to be delivered by him into the custody of the railway or transport authority at the agreed point.
The seller should give immediate notice to the buyer of the loading or delivery to enable him to make a claim on the carrier within the time prescribed, in the event of loss. Free alongside ship FAS This involves certain elements which are absent in a sale on the home market. The seller will have performed his obligations when the goods are carried alongside the ship so that they can be placed on board.
The actual loading of the goods is the responsibility of the buyer. Under the FAS contract, the duty to nominate an effective ship falls on the buyer. Once the seller has placed the goods alongside a ship in the customary way and at the agreed time, all subsequent expenses and costs are to be met by the buyer.