Lesson 3 International Trade: Theory & Practice
International Trade: Theory & Practice Issues: （ ）Rationale of International Trade （ ） International Trade Rules （ ）Commonly used trade terms （ ）Remittance & Collection （ ）Letters of credit Methods of Using L/Cs Antedating & DP TR Export & import contracts Cases: An Exchange between Tom & Huck Can Lee & Wang Help Each Other? What type of L/C is it? Dilemmas for Kai Company Which Bank Should the Documents…
Real Case: Middleman’s Difficulty Kay, an MBA holder in GZ, is starting her own business in foreign trade. She contacts a copper dealer in Canada, and receives a good offer to sell copper. In the meantime a domestic producer is willing to import copper by using an L/C. Given the higher domestic copper price at the time, it would be profitable for Kay to be a middleman. However, what she wants is not just a one-time deal. To do repeated business, she doesn’t want to disclose the information about the importer in the L/C to the exporter. The problem is that the transaction requires huge funds, she does not have enough capital to open her own L/C. What advice would you give her regarding how to solve the problem?
Solution: Use Back-to-back Credit (背对背信用证). How does it work? To illustrate, G.Z. Importer G.Z. Trading Co. Canadian supplier Bank A issues 1st L/C Use 1st L/C as security (non-transferable) for Bank B to issue 2nd L/C
Reading Comprehension: “Amount of credit USD30,000, revolving 5 times to maximum USD_______.” “Amount of credit USD10,000, revolving monthly non-cumulative commencing Nov. 1, 2003” Q1. What does “negotiation” mean? p203 “the giving of value for Draft(s) or document(s)” Q2. What’s the difference between terms vs. conditions? (1)“The seller must use the less than 10 years of age of the ship for the cargo.” (2)“The seller must present documents evidencing the less than 10 years of age of ship for the cargo.” Note: Banks must comply with terms of L/C (2), but not conditions of L/C(1).
Exercise (p81): Negotiable Credit To: The Beneficiary Place & Date of Issue: _____ We hereby issue an Irrevocable Documentary Credit No. 54620 for USD45,000 to expire on July 30,2005. Available with any bank (freely negotiable credit) by negotiating against Beneficiary’s draft at sight drawn on a bank other than negotiating bank which may be Issuing Bank or Advising Bank and the documents detailed herein,…… … We hereby engage with drawers and/or bona fide holders that drafts drawn and negotiated in conformity with the terms will be duly honored on presentation and that drafts accepted within the terms of this credit will be duly honored on maturity.
Q. What type of credit is it? (Refer to p76-78) (1) Is it a Clean Credit or Documentary Credit? (光票信用证) (跟单信用证)? (2) Is it Revocable Credit or Irrevocable Credits? (3) Is it a Confirmed Credit or Unconfirmed Credits? 保兑信用证 非保兑信用证 (4) Is it Sight Credit or Time Credit?即期 远期 (5) Is it a Payment Credit or Acceptance credits? 付款信用证 承兑信用证 (6) Is it a Straight Credit or Open Credit? 指定议付行信用证 非指定议付行信用证
(7) Is it a Transferable Credit or Nontransferable Credit? (8) Is it a Revolving Credit or Non-revolving Credit? 循环 (9) Is it a Back-to-back Credit (背对背信用证)? or a Reciprocal Credit (对开信用证)? The latter is often used in the trade of processing incoming materials. Each of the two parties in the trade opens an L/C to pay the other. e.g. G.Z. Co. is an importer of raw materials & an exporter of the product; H.K. Co. is an exporter of raw materials & an importer of the product. (10) Is it an Anticipatory Credit or Standby Credit? 预支信用证， 备用信用证
Q. What type of credit is it? （1）Documentary （2）Irrevocable （3）Non-confirmed （4）Sight （5）Payment （6） Open （7）Non-transferable （8）Non-revolving (9) Not reciprocal, nor back-to-back (10) Not anticipatory, nor standby
Case: Which Bank Should the Documents Be Presented To? 5 minutes for reading the case (p62, Book 1) The bonus point for introducing the case. Discussion Questions: (1) Why couldn’t Yufo present the document to a bank at its choice? (2) Yufo had presented the documents three days before the expiry date of presentation in China, why did the issuing bank say that the documents were presented after the expiry date? (3) Why did the issuing bank say that even if the L/C opener agreed to pay, it would pay after the L/C expired?
(1) Why couldn’t Yufo present the document to another bank? According to Article 7, UCP600, “Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank.” Since the L/C was “negotiable at Bank of China”, it was a straight credit, and the documents should be presented to the nominated bank.
(2) Why did the issuing bank say thatthe documents were presented after the expiry date? If the documents had been presented to Bank of China, it would be before the expiry date because the expiry place would be the counter of the nominated bank in China. Since the documents had been presented to CBOC, not the nominated bank, the expiry place had been changed to the counter of the Issuing Bank. When the documents arrived at the Issuing Bank in the foreign country, it was after the expiry date.
(3) Why would Issuing Bank pay after the L/C expired? By delaying the payment, the Issuing Bank adopted a cautious approach of avoiding double claims. Since the documents came from CBOC instead of Bank of China, the nominated bank, there was the risk that another L/C holder could negotiate with Bank of China, or directly send the document to the Issuing Bank for payment.
Scenario Analysis: Dilemmas for Kai Company p82, Book 1 Kai, an exporting company, ran into troubles in early 1990s. … … The goods were stored in the warehouse at the port of destination. Kai had to pay much rent and insurance. At this time, Aken requested DPTR. Discussion Questions : (1) Regarding commodity A421, did Kai give a justifiable reason for revoking the offer? (2) Since Aken Company requested DP TR, should Kai accept it? Why or why not? What can be learnt from this case?
What’s DPTR? 付款交单凭信托收据借单 (p 73, Book 1) DP: documents against payment TR : trust receipt which is a written guarantee by the importer when he borrows the shipping documents from the bank to take the delivery. After the goods are sold, the importer must make the payment to the bank. If the exporter authorizes the collecting bank to lend the shipping documents, then the importer can borrow the documents by promising to pay. In the case of default by the importer, the bank is not liable, but the exporter must take the risks.
(1) Did Kai give a justifiable reason for revoking the offer? No. Kai’s excuse does not hold. It’s not acceptable to say “sold” while its offer has not expired. First, Kai made a valid offer. According to Article 14, CISG80, “…A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.” Second,Kai’s cable seemed to suggest the validity of Dee’s acceptance.
According to Article 19 (2), CISG80, “A reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance”. Given the validity of both the offer and the acceptance, Kai cannot use “goods sold” as an excuse to revoke the offer.
Could Kai reject Dee’s acceptance with a good reason? Yes. According to Article 19(1) , CISG80, “A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer”. The valid reason could be: Dee’s acceptance is conditional because it “requires certificates of origin…” Since there is discrepancy between Kai’s offer and Dee’s acceptance. Dee’s counter offer constituted a rejection which terminated Kai’s initial offer.
(2) Since Aken Company requested DP TR, Should Kai accept it? Why or why not? Answer: No. Aken is very suspicious: Money of account not correct？ Amended L/C not received？ Timing of Aken’s request for DPTR？ Outcome: Kai accepted it & incurred a huge loss. Lesson： （a）Request L/C amendment timely； （b）Don’t ship goods without correct L/C； （c）Look before you leap!
P82, Book 1 Q2 Antedating De Co. signed a large export contract stipulating, …… Upon De’s request, the carrier antedated the B/L to August 31. (1) What could be the consequence of antedating? (2) How could “antedating” be uncovered? (3) What would be the right thing to do in case of a possible shipment delay? Note: Antedate To assign to a date earlier than the actual one.
Answer: (1) Changing the date of shipment on B/L is a forgery. Both the seller & carrier are liable. In the worst case, the vessel & goods could be impounded (2) The buyer could hire lawyers to investigate. The shipping logbook could be checked. (3) Honesty is the best policy. The seller should contact the buyer immediately about remedy measures. Even if the buyer does not cooperate, the penalty for the shipment delay is not likely to be large.
Q3 Suitcase Dispute (p82) In 1930, Wilson, a British merchant, signed a contract to buy 3,000 leather suitcases from Mou-Lomg (茂隆) Suitcase Co. The transaction amounted to HK200,000. The contract stipulated, “The seller must deliver the goods which are of the quantity and quality required by the contract. In the event that the goods do not conform with the contract, the seller must compensate the buyer for an amount equal to 50% of the goods’s value.” When the suitcases were delivered, Wilson complained, …Wilson filed a lawsuit against Mou-Long, and claimed for compensation. In court, Wilson was arrogant & aggressive because he was confident of winning the case. Suppose you were the lawyer for the seller, how would you defend Mou-long?
Recapitulation: Incoterms2000, UCP600, & CISG1980 are widely accepted international trade rules; There are 4 types commonly used trade terms: E, F, C, and D terms; E, F and C-terms are shipment contracts, D-terms are arrival contracts; L/C is a bank credit, not a commercial credit; Different types of L/Cs serve different purposes; Terms of L/C are biding, but not conditions of L/C; Be cautious of using loose payment terms such as DPTR; An counter offer renders the initial offer invalid.
Next Class Global Strategic Management (Chap. 6, Book 1) Cases : Larry Bossidy at AlliedSignal Wal-Mart (Both are available in our class e-mail box) Note: The case write-up about Wal-Mart will be due next class.
Next class: Wal-Mart Stores Inc Questions: I.What’s its success? II. What are the main reasons for its success? III. Regarding the sustainability of its competitive advantage in the discount retailing industry, what problems do you foresee for Wal-Mart as it continues to expand its business? Individual Homework (If you have not done the case analysis on Aflac, you must do the case write-up about Wal-Mart): A hard copy is due next class. Bonus points will be awarded if an electronic copy of the Powerpoint and the case write-up is sent to the TA via e-mail one day before the class. Some Powerpoints will be selected for class presentation.
Group Presentation Contest (The week after the next class) 1.Each group, consisting of 5 to 6 students, will make a presentation in class; 2. The presentation will be focused on a concept, a case, or a model related to our course; 3. Each presentation will last 5 to 6 minutes; 4. The presentation may take any form such as role-play, story-telling or multimedia performance. 5. The presentation will be evaluated based on content, style, team work and originality. Note: Now please form the groups, and submit your group names with a group leader. Next week every group must submit an outline of your presentation. Try to show your creativity & team-work spirit!