1. Features of the foreign trade contracts

2. The Trade Relationship
Trade financing shares a number of common characteristics with the traditional value chain activities conducted by all firms.
All companies must search out suppliers for the many goods and services required as inputs to their own goods production or service provision processes.
Issues to consider in this process include the capability of suppliers to produce the product to adequate specifications, deliver said products in a timely fashion, and to work in conjunction on product enhancements and continuous process improvement.
All of the above must also be at an acceptable price and payment terms.

3. The Trade Relationship
The nature of the relationship between the exporter and the importer is critical to understanding the methods for import-export financing utilized in industry.
There are three categories of relationships (see next exhibit):
Unaffiliated unknown
Unaffiliated known
Affiliated (sometimes referred to as intra-firm trade)
The composition of global trade has changed dramatically over the past few decades, moving from transactions between unaffiliated parties to affiliated transactions.

4. Exhibit 23.1 Alternative International Trade Relationships
Exporter
Unaffiliated
Unknown Party
A new customer
which with exporter has
no historical business
relationship
Unaffiliated
Known Party
A long-term customer
with which there is an
established relationship of
trust and performance
Affiliated
Party
A foreign subsidiary
or affiliate
of exporter
Importer is ….
Requires:
1. A contract
2. Protection against
non-payment
Requires:
1. A contract
2. Possibly some protection
against non-payment
Requires:
1. No contract
2. No protection against
non-payment

5. The Trade Dilemma
International trade (i.e. between and importer and exporter) must work around a fundamental dilemma:
They live far apart
They speak different languages
They operate in different political environments
They have different religions
They have different standards for honoring obligations
In essence, there could be distrust, and clearly the importer and exporter would prefer two different arrangements for payment/goods transfer (next exhibit)

6. Importer Exporter Importer Exporter
Exhibit The Mechanics of Import and Export
1st: Exporter ships the goods
Importer
Importer Preference
Exporter
2nd: Importer pays after goods received
1st: Importer pays for goods
Importer
Exporter
Exporter Preference
2nd: Exporter ships the goods after being paid

7. Importer Bank Exporter
Exhibit The Bank as the Import/Export Intermediary
1st: Importer obtains bank’s promise
to pay on importer’s behalf.
Importer
6th: Importer pays
the bank.
2nd: Bank promises exporter
to pay on behalf of importer.
Bank
5th: Bank ‘gives’ merchandise
to the importer.
4th: Bank pays the
exporter.
Exporter
3rd: Exporter ships ‘to the bank’
trusting bank’s promise.

8. Elements of an Import/Export Transaction
Each individual trade transaction must cover three basic elements: description of goods, prices, and documents regarding shipping and delivery instructions.
Contracts:
An import or export transaction is by definition a contractual exchange between parties in two countries that may have different legal systems, currencies, languages, religions or units of measure
All contracts should include definitions and specifications for the quality, grade, quantity, and price of the goods in question

9. Elements of an Import/Export Transaction
Prices:
Price quotations can be a major source of confusion
Price terms in the contract should conform to published catalogs, specify whether quantity discounts or early payment discounts are in effect, and state whether finance charges are relevant in the case of deferred payment, and should address other relevant fees or charges

10. Elements of an Import/Export Transaction
Documents:
Bill of lading – issued to the exporter by a common carrier transporting the merchandise
Commercial invoice – issued by the exporter and contains a precise description of the merchandise (also indicates unit prices, financial terms of the sale etc.)
Insurance documents – specified in the contract of sale and issued by insurance companies (or their agents)
Consular invoices – issued in the exporting country by the consulate of the importing country
Packing lists

11. International Trade Risks
The following exhibit illustrates the sequence of events in a single export transaction.
From a financial management perspective, the two primary risks associated with an international trade transaction are currency risk (currency denomination of payment) and risk of non-completion (timely and complete payment).
The risk of default on the part of the importer is present as soon as the financing period begins.

12. Exhibit 23.4 The Trade Transaction Time-Line and Structure
Time and Events
Price
quote
request
Export
contract
signed
Goods
are
shipped
Documents
are
accepted
Goods
are
received
Cash
settlement
of the
transaction
Negotiations
Backlog
Documents Are
Presented
Financing Period

13. Draft
A draft, sometimes called a bill of exchange (B/E), is the instrument normally used in international commerce to effect payment.
A draft is simply an order written by an exporter (seller) instructing and importer (buyer) or its agent to pay a specified amount of money at a specified time.
The person or business initiating the draft is known as the maker, drawer, or originator.
Normally this is the exporter who sells and ships the merchandise.
The party to whom the draft is addressed is the drawee.

14. Draft If properly drawn, drafts can become negotiable instruments.
As such, they provide a convenient instrument for financing the international movement of merchandise (freely bought and sold).
To become a negotiable instrument, a draft must conform to the following four requirements:
It must be in writing and signed by the maker or drawer
It must contain an unconditional promise or order to pay a definite sum of money
It must be payable on demand or at a fixed or determinable future date
It must be payable to order or to bearer
There are time drafts and sight drafts.

15. Name of Exporter Signature of Exporter
Exhibit Essence of a Time Draft
Name of Exporter
Date: October 10, 2003
Draft number 7890
Ninety (90) days after sight of this First of Exchange, pay to the order of Bank
of the West [name of exporter’s bank] the sum of Five-hundred thousand U.S.
dollars for value received under Bank of the East, Ltd. letter of credit
number
Signature of Exporter

16. Bill of Lading (B/L)
The third key document for financing international trade is the bill of lading or B/L.
The bill of lading is issued to the exporter by a common carrier transporting the merchandise.
It serves three purposes: a receipt, a contract, and a document of title.
Bills of lading are either straight or to order.

17. Countertrade
The word countertrade refers to a variety of international trade arrangements in which goods and services are exported by a manufacturer with compensation linked to that manufacturer accepting imports of other goods and services.
In other words, an export sale is tied by contract to an import.
The countertrade may take place at the same time as the original export, in which case credit is not an issue; or the countertrade may take place later, in which case financing becomes important.