Trade is a people business

The business of international trade and global commerce is very much a business of people and partnerships. Few are masters of every aspect of trade or global business, even among experts or experienced veterans of the international business scene.

If we consider an international trade deal by way of illustration, there are many variations of these transactions, and even in the most straightforward structure, several “cast members” are required to make the production a success.

The actors

Exporter

Is an exporter a driven and internationally oriented business person, with entrepreneurial qualities, the heart of a deal maker and the soul of an explorer? The exporter’s interest in international trade may be purely profit or opportunity driven, yet many have a certain attraction to extending business activities (increasingly at the start-up stage of business) into the global marketplace.

The exporter’s primary concern, with apologies to Jerry Maguire, may be summarized as “SHOW ME THE MONEY!”

Importer

The importer is very comfortable operating in the familiar domestic environment. They may identify an opportunity to bring an innovative new product to the home market and could imagine a contribution being made to raising the standard of living at home by importing the latest new technologies or luxury items.

The importer is an acquirer and is focused on successfully sourcing and safely receiving that shipment, to be turned around at a profit on the home market or perhaps as a re-export. Both characters may have a dual role, particularly under a screenplay influenced by integrative trade.

Financier

This character finances the trade transaction, through a range of product and service offerings. The financier may require the participation of other financiers—bankers, export credit agencies, non-bank providers of trade finance—to be able to support the transaction adequately.

This character will earn revenue by granting access to monies (generally on a short-term basis, but possibly well into the five-to-seven-year medium term) required by either or both the importer and exporter.

Transporter

This actor is an expert at moving goods across the globe: he knows the most secure and optimal routes and is fully versed in the various components of freight costing and the regulations related to transport. The transporter and the exporter work very closely together to produce documentation that correctly describes the goods, ensures that they meet the standards of the importing market and clearly identifies and allows transfer of ownership and risk. 

Broker

The customs broker is often the first point of contact for the goods on arrival at destination. The broker may provide temporary accommodations to store the goods pending customs clearance and is an expert on the requirements related to the final import of goods into the receiving country after the transporter has completed his task.

The broker may collect any taxes and duties due.

Agent

This actor is skilled in the mechanics of commerce, is well-connected in the home market and most commonly represents the exporter in the country of destination. The actor assists in the sales process and, depending on the script, remains active as the local representative of the exporter in the destination market.

Government

This actor is always on stage, collecting taxes, regulating the interaction of the rest of the cast, negotiating with other governments and the various actors’ guilds, and providing financing or guarantees in support of the financier’s transactions. This role is broad and varies on each stage and with every deal.

Supporting Cast

There is a group of additional actors, such as the inspector, who verifies shipments and issues certificates attesting to their nature and condition, and the lawyer, whose presence is generally under-emphasized, and numerous others, depending on the exact nature of the production.

A major supporting actor is technology: this member of the cast is reshaping nearly every aspect of international trade and global business in ways that revise practices that are hundreds of years old—shifting business processes, documentation and even trade transaction decisions from the “real world” to the virtual world.

The post Lights, Camera, Action: It takes a cast of characters to complete a trade transaction appeared first on Trade Ready.

These issues can have a dramatic impact on the costs of importing a product and can even make a supply deal unprofitable. If regulations are not adhered to, companies might find their goods seized by customs or be subject to fines.

Managing global export compliance regulations

Most countries have some form of export control. For example, about forty countries are signatory members of the Wassenaar Arrangement, which was established in 1996 to establish controls over sales of arms and dual-use products and technologies.

The control lists covered by the Wassenaar Arrangement cover a wide range of goods and technologies, including protective clothing, materials used in aircraft construction, metal alloys, many chemical compounds, submersible vehicles, robots designed for underwater use, telecommunications equipment, satellite components and many forms of software.

In order to export any of the controlled products or technologies, certain procedures must be followed.

The importing company will often have to assist the exporter to obtain an export license from its government, usually by providing an import certificate or other documentation.

Where an export license is required, both the importing and exporting companies should take the time that will be required to obtain it into consideration when planning delivery schedules. The importing company must also include clauses in its agreements to require the exporter to obtain all required licenses.

Want to learn more about how to keep your customers, clients and suppliers happy by transporting goods in a timely manner and in compliance with all regulatory requirements? Check out the FITTskills Global Value Chain online course.

Handling exchange control licenses

Most countries also have some form of foreign exchange control. This means that exporters must provide proof that they will be paid by the importer before they will be permitted to export valuable products.

Conversion of received payment from importers into local currency will often require a license.

Importers should check whether this is necessary because otherwise, delays might result while the exporter waits for payment.

Some countries require payment to be made by specific means, such as a letter of credit. Some governments also impose strict payment regulations on all foreign trade contracts in order to ensure payment.

Export quotas

Export quotas are restrictions imposed by a government on the amount or number of goods or services that can be exported annually. The purpose is to ensure that domestic prices of this good or service do not increase because of exports. Importing companies must make sure there are no foreign government quotas that could make their purchase agreement unsustainable.

Export documentation

Standard export transactions require that the exporter provide standard documentation to accompany shipments of goods. They typically include:

• Commercial invoice
• Bill of Lading or transport document
• Export declaration
• Packing list
• Insurance documentation
• Certificate of origin

Documentary requirements can vary significantly, as a result of both the specifics of a transaction or shipment, and as a result of the arrangements related to payment and financing, which may be based on the tendering of documents by the exporter, depending on the agreed mechanism of settlement.

What are some other international export compliance measures you’ve encountered during your international business endeavors? Share your experience!

The post The importance of managing your international export compliance appeared first on Trade Ready.

The basic and most common forms of settlement of international trade transactions are open account (where payment on delivery is the most common), documentary collections, documentary letters of credit and payment in advance.

There are numerous features, variations and options related to these payment types which make them very flexible, adaptable and enduring as business solutions.

It should be noted explicitly that certain payment options or types of payment transactions have a variety of features or characteristics, which can be incorporated in a given transaction, or not. A documentary credit, may be payable at sight (immediately) or on a term basis (at maturity, at an agreed date in future).

The use of certain features changes the nature of the transaction. However, the payment is still effected through a documentary credit in the end.

The FITTskills International Trade Finance training course considers each instrument type/variation in turn, in the following order:

Open account and payment in advance

These are the two extreme options, providing maximum security to one party and exposing the other party to the greatest risk.

Payments on an open-account basis are basically transfers of funds to the account of the exporter. Historically, open-account payments have been used in trade between very stable and secure markets such as the United States and Canada, or in intra-EU trade, and in cases where the trading relationship is established and trusted.

At the opposite extreme, payment in advance presents the highest risk to the importer, given that the exporter could easily receive the funds and not carry through with the promised shipment.

Documentary collection

These are somewhat secure, but generally used in established trading relationships involving reasonably stable and secure markets.

Documentary collections are types of transactions where banks act as intermediaries between the importer (buyer) and exporter (seller), in effect, agreeing to facilitate payment to the exporter only once a set of shipping documents has been prepared and presented to an intermediary bank.

These documents typically include documents of title to the cargo, representing ownership of the goods as well as demonstrating that the goods have been shipped.

Documentary credits

These offer the most balanced security for both parties. Documentary letters of credit (abbreviated as DLC, D/C or L/C) are trade finance instruments issued by a bank on behalf of an importer, promising payment to an exporter, provided that all the terms and conditions specified in the letter of credit are fully complied with by the exporter.

CAUTION: 60-70% of documents presented by exporters under Documentary Credits are in some way non-compliant with the terms of the Letter of Credit (L/C).

In those instances, the protection to the exporter is minimal, as the importer can refuse the shipment, or take advantage of the discrepancies to demand a substantial discount on the shipment. Some banks exercise judgment and will not identify “trivial” discrepancies, while others take a very literal approach to the examination of documents.

Confirmed documentary credits

These provide additional security to the exporter, while preserving security for the importer. The basic documentary letter of credit is a straightforward instrument which represents a payment promise by the issuing bank in favour of the exporter or beneficiary against the presentation of fully compliant documents.

Documentary letters of credit offer numerous powerful and valuable features that address certain aspects of trade finance. A major one of these features is referred to as a confirmation of a documentary letter of credit. A confirmed documentary credit (contrast the basic, unconfirmed letter of credit described above), is one in which an additional, separate and independent payment undertaking is added to that of the issuing bank by another financial institution—the confirming bank—to provide further security to the exporter.

Confirmation is added at the request of the issuing bank, on behalf of the exporter.

If an exporter is considering exporting to a high-risk market, and is not reassured by a straightforward documentary credit, the option to confirm that letter of credit may provide the added comfort that will enable the exporter to proceed with the transaction.

Major features and characteristics of various payment options are discussed in greater detail throughout the FITTskills International Trade Finance course.

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