International Business-Chapter 16-Class Lecture Notes-Summary sheets PDF

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Chapter 16 – Exporting, Importing and Countertrade Letter of Credit - issued by bank at importer’s request o bank agrees to pay specified sum of money to beneficiary, normally the exporter, on presentation of specified documents o main advantage is that both parties are likely to trust reputable bank even if they don’t trust each other - the letter of credit is issued by a bank at the request of the importer after the exporters asks the importer to post a letter of credit - the bank pays a specified sum to a beneficiary, normally the exporter, on presentation of particular, specified documents - the fee for letter of credit is paid by the party’s whose bank is issuing the letter of credit (most likely the importer), however the exporter and importer can agree on splitting the cost - may reduce borrowing ability of importer since the letter is financial liability of the importer Bill of Lading - issued to exporter by common carrier transporting the merchandise, it serves three purposes: o receipt- merchandise described on document has been received by carrier o contract – carrier is obliged to provide transportation service in return for specified charge o document of title – can be used to obtain payment or written promise of payment before merchandise is released to importer Draft (Bill of Exchange): order written by exporter instructing third party (e.g. bank) to pay specified amount of money at specified time or on demand (presentation) - used in international commerce for payment - Sight Draft: payable on presentation to the drawee (3rd party upon whom draft is drawn, e.g., bank) - Time Draft: allows for delay in payment o normally 30, 60, 90, or 120 days o once a time draft has been “accepted” it becomes a negotiable instrument and can be negotiated (sold) for value generally at discount from face amount Maker – person initiating a draft Drawee – the party to whom the draft is presented (i.e., the foreign bank) Letter of Credit – pays on documents – can require an inspector’s certificate from an inspector named in the Letter of Credit. Countertrade: agreements that facilitate trade of goods and services for other goods and services when they cannot be traded for money - it is estimated that about 8-10 percent of world trade is covered by some sort of countertrade arrangement

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5 types of countertrade agreement o barter – direct exchange of goods and/or services between 2 parties without cash transaction; most simple, but not common  most restrictive countertrade arrangement  used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy o counter purchase – reciprocal buying agreement  exporting firm agrees to purchase a certain amount of materials (often at a different time) back from the foreign firm to which a sale is made o offset – similar to counter purchase  exporting firm agrees to purchase goods and services with specified percentage of proceeds from original sale  difference is that firm can fulfill obligation with any firm in the country to which the sale is being made o Buyback – exporting firm builds plant in importing country or supplies technology, equipment, training, or other services to country  agrees to take a certain percentage of plant’s output as a partial payment for contract o Switch trading – use of specialized third party trading house in a countertrade arrangement  when exporting firm enters a counter purchase or offset agreement with a country, it ends up with counter purchase credits which can be used to purchase goods from that country  switching trading occurs when a third-part trading house buys the firm’s counter purchase credits and sells them to another firm that can better use them Advantages: o provides firm way to finance export deal when other means are not available o provides firm competitive edge over other firms unwilling to enter a countertrade agreement o countertrade arrangement may be required by government of country to which firm is exporting goods or services Disadvantages: o might involve exchange of unusable or port-quality goods that firm cannot dispose of profitably  most attractive to large, diverse multinational enterprises that can use their worldwide network of contracts to dispose of goods acquired in countertrade deals o could require firm to establish in-house trading department to handle countertrade deals

United Nations Convention on Contracts for the International Sale of Goods (CISG) : applies to contracts for the sale of goods, including aircraft, between parties whose places of business are in different countries where both countries are contracting state under the CISG (e.g. have agreed to be bound by the CISG)

When does title pass on the international sale of goods – i.e., ownership transfers and risk of loss thus transfers Shipment Contracts: the seller’s obligation is complete when he passes the goods to the common carrier for delivery Destination Contracts (FOB): the buyer’s destination as the point where the seller’s obligation to deliver is complete. At that point, all risk of loss passes to the buyer - seller pays for transportation and insurance of the goods F.O.B. (Free On Board): with an FOB shipment, responsibility and liability transfer from seller to buyer when the shipment reaches the port or other facility designated as the point of origin C.I.F. (Cost, Insurance, and Freight) : with a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination chosen by the buyer - expense paid by a seller to cover the costs, insurance, and freight of a buyer’s order while it is in transit F.O.B. – Seller’s city – Shipment Contract F.O.B. – Buyers warehouse – Destination Contract C.I.F. – are pricing terms (a shipment contract but has the economic effect of a destination contract) EXW: international trade term that describes when a seller makes a product available at a designated location, and the buyer of the product must cover the transport cost FCE ( functional capacity evaluation): a comprehensive medical assessment of an individual’s safe functional tolerances and physical limitations relative to work activies INCOTERMS – Published by the International Chamber of Commerce in Paris - a set of 11 internationally recognized rules which define the responsibilities of sellers and buyers. - Incoterms specifies who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities....