Unit 6
International Trade
 Basic concepts of international trade
 Basic practices of international trade
 Language associated with trade
Part I Basic Concepts
 1. Definition
 international trade: the exchange of goods
and services across national
boundaries/borders.
 2. Major participants in international trade
— the buyer that purchases the products (importer)
— the seller that provides the products (exporter)
— banks that facilitate the payment of the
transaction
Part I Basic Concepts
 3. Classification
– import vs. export (directions of the
movement of commodity traded)
– tangible trade vs. intangible trade
1) tangible trade: the exchange of tangible
goods (to carry out importing/exporting
customs formalities)
2) intangible trade: the exchange of
intangible goods, such as services and
intellectual property rights
– direct trade vs. indirect trade
1) direct trade: the producing country sells
the goods directly to the consuming
country. (transit country, transit trade,
transit duty)
2) indirect trade: the producing country sells
the goods to a third country first and then
the third country resells the goods to the
consuming country. (middleman, entrepot
trade)
4. Policies
 Manchesterism (free trade policy)
It is aimed to assure that the market is
free to function in an unconstrained
manner by eliminating the restrictions or
removing the barriers to effective
operation of “invisible hand” of the market
and the goods is traded freely between
nations to increase the wealth of both the
buying and the selling nations.
4. Policies
 Protectionism (protective trade policy)
It means a trade policy by which a
government sets up controls over its
import trade for the purpose of protecting
its economy (esp. agriculture and infant
industries) from foreign competition and
provides preferential treatment and
subsidies to its exporters or exporting
firms.
Important terms
 absolute advantage
 comparative advantage
 natural advantage
climate conditions, access to certain natural
resources, or availability of an abundant labour
force
 acquired advantage
advantage in product or process technology
 factors of production/productive factors
 international division of labour
Important terms
 labour-intensive
 capital-intensive
 land-intensive
 technology-intensive
 economies of scale (ES)
 specialization
 specialize in
5. Trade barriers
 Tariff barriers
 A tariff is a tax (duty) levied on a product when it
crosses national boundaries. It is the most
common type of trade control.
 Purposes:
– revenue tariff: to generate fiscal revenue
– protective tariff: to weaken the competitive power
of the imported goods
 Types:
import duty; export duty; transit duty
Tariff barriers
 Methods of assessment:
– specific tariff or duty 从量税: a fixed amount of
duty per physical unit of the imported product,
say $100 per imported auto
– ad valorem tariff or duty 从价税: a fixed
percentage of the total value of the imported
goods, e.g. 10%, 30%
– compound tariff or duty 混合税: a combination
of the above two types of duties
– alternative tariff or duty 选择税: Both a specific
duty and an ad valorem duty are prescribed for a
product, with the requirement that the more
onerous one shall apply.
Tariff barriers
 Special duties:
– countervailing duties (CVD): taxes assessed to
counter the effects of subsidies provided by
foreign governments to goods exported to the
importing country. Subsidies cause the price of
such merchandise to become artificially low,
which may cause economic “injury” to
manufacturers in the importing country.
Tariff barriers
 Special duties:
– anti-dumping duties (ADD): taxes assessed on
imported goods that are sold in the importing
country at a price less than normal value. Normal
value is determined as the price the product is
normally sold at in the domestic market of the
exporting country or in a third country, or the
constructed value (推定价值)which is based on
the cost of production, selling, general and
administrative expense, and the normal profits.
Words
 duty
put/slap ~ on (a product or goods)
increase/raise/put up ~
lower/cut/reduce ~
pay/avoid/evade ~
 tax
impose/introduce/levy/put ~ on (a product)
pay/avoid/escape/evade ~
collect ~
deduct ~
5. Trade barriers
 Non-tariff barriers (NTBs)
– NTBs are restrictions to imports but not in the
usual form of a tariff.
– Their use has risen sharply after the WTO rules
led to a very significant reduction in tariff use.
– NTBs usually refer to government requirements
for licenses, permits, or significant amounts of
paperwork in order to allow imports into its
country.
– “gray area” in international trade
Non-tariff barriers (NTBs)
 Major forms:
– import quota: a limit to the quantities or money
values of a particular product that can be
exported to the quota-enacting country.
– subsidy: a government payment to a domestic
product or industry or a domestic exporting firm.
(helping to compete against low-cost foreign
imports and to gain export markets)
– import license: a document required and issued
by some governments authorizing the
importation of specified goods into their
countries.
Non-tariff barriers (NTBs)
– “voluntary” export restriction (VER): a quota
imposed by the exporting country on its domestic
firms’ exports to the importing country, typically at the
request of the importing country. (the limitation on
auto exports to USA enforced by Japan in 1981)
– customs valuation: import duties and other charges
can be levied on the basis of a decreed value of
goods that is valued by the customs. This practice is
a means to avoid fraud in the declared import price.
The customs of the importing country may raise the
dutiable price of the imports arbitrarily in order to
restrict the import.
Non-tariff barriers (NTBs)
– technical barriers to trade (TBT): strict regulations
of products and various measures referring to
product characteristics such as quality, safety or
dimensions, packaging, marking and labeling
requirements as they apply to a product. All these
can bring rising cost or excessive trouble to the
exporter/importer and thereby lead to the reduction
of the import. (green barrier)
 technical regulations (to protect health, life,
environment…)
 product characteristics requirements
6. Basic principles of WTO system
 Non-discrimination: the MFN treatment and the
national treatment principle
 Free trade: lowering trade barriers
 Fair competition
 Special and differential treatment to developing
countries: to provide developing countries special
rights and exemptions from certain obligations
 Transparency
Important terms
 balance of trade: the total of a country’s exports minus







its imports 贸易差额,贸易平衡
favourable balance of trade (trade surplus)
unfavourable balance of trade (trade deficit)
barter trade: the direct exchange of goods for goods
embargo: a prohibition upon exports or imports, either
with respect to specific products or countries
export processing zone
bonded warehouse/area
p.47 Vocabulary
Part II Practices of
international trade
1.
2.
3.
4.
Trade terms – the language of foreign trade
International transportation & insurance
International payments & settlements
International trade contracts
1. Trade terms
price terms/delivery terms
Standardized terms used in international trade contracts
which define the trade contract responsibilities and
liabilities between the buyer and the seller.
 Key elements of international trade contracts, since they tell
the parties what to do with respect to:
– delivery terms (carriages of the goods from the seller to the
buyer and division of costs and risks between the parties)
– price terms (stipulating what are included in the price the
buyer paid to the seller, e.g. cost, freight, insurance, export
and import clearance fees, etc.)
– delivery obligation (what documents should the seller
provide, e.g. B/L, insurance policy, etc.)

Role of trade terms



To simplify the process of negotiation
To simplify the paper-work of preparation for
the contract
To save time and cost of the transaction
Incoterms


Incoterms (International Commercial Terms) is
a set of uniform rules published by ICC for
the interpretation of trade terms most
commonly used in international trade.
Incoterms was published in 1936 (Incoterms
1936). Amendments and additions were later
made in 1953, 1967, 1976, 1980, 1990 and
presently 2000 in order to bring the rules in
line with current international trade practices.
Incoterms 2000
Group E
Departure
Group F
Main carriage
unpaid
Group C
Main carriage
paid
EXW
Ex Works
FCA
FAS
Free Carrier
Free Alongside Ship
FOB
CFR
CIF
CPT
Free on Board
Cost and Freight
Cost, Insurance and Freight
Carriage Paid to
CIP
Carriage and Insurance Paid to
Incoterms 2000
Group D
Arrival
DAF
Delivered at Frontier
DES
Delivered EX Ship
DEQ
Delivered EX Quay
DDU
Delivered Duty Unpaid
DDP
Delivered Duty Paid
Incoterms 2000

Group E — EXW
– The seller fulfills his obligation to deliver when he has
made the goods available to the buyer at his premises
or another named place (i.e., works, factory,
warehouse, etc.) not cleared for export and not
loaded on any collecting vehicle.
– The buyer bears all costs and risks involved in taking
the goods from the seller’s premises to the desired
destination.
– It represents the minimum obligation for the seller.
– It can be used for any mode of transportation.
Case: USD10 per set EX Works Dongguan
Incoterms 2000
Group F — FCA, FAS, FOB
– The seller has the duty to deliver the
goods to the carrier’s place and the freight
from the place of delivering goods to the
port or place of destination is paid by the
buyer.
– Critical points coincide: the point for
division of costs is the same as the point
for division of risk.

Incoterms 2000
Group F — FCA, FAS, FOB
FCA
– The seller delivers the goods cleared for export
to the carrier (or the person) nominated by the
buyer at the named place.
– If delivery occurs at the seller’s premises, the
seller is responsible for loading; if delivery
occurs at any other place, the seller is not
responsible for unloading.
– It can be used for any mode of transportation
including multimodal transport.

Incoterms 2000
FOB
– The seller has the duty to deliver the goods
across the ship’s rail at the named port of
shipment.
– The seller clears the goods for export.
– The buyer has to bear all costs and risks of loss
of or damage to the goods from the point when
the goods have passed the rail of the ship.
– It can be used only for sea or inland waterway
transport.
Case: US$18 per piece FOB Guangzhou
Incoterms 2000
FOB: practices
– When the ship’s rail serves no practical purpose,
such as in the case of roll-on/roll-off or container
transport, the FCA term is more appropriate.
– The buyer arranges the ship for the shipment of
the goods. The seller sometimes also make the
contract with the carrier at the buyer’s risk and
expense on the buyer’s behalf.
– loading charges (trimming, stowing): liner
(including); charter party (excluding, clarifying in
the contract)
Incoterms 2000
Group C — CFR, CIF, CPT, CIP
– The seller has the duty not only to deliver the
goods to a place or point in his country but also
to be responsible for arranging the carriage of
the goods from the place of delivery to the place
or point of destination at his own expense.
– Critical points: the point for division of costs (i.e.
place of destination) is different from the point
for division of risk (i.e. place of shipment).

CFR
– The seller delivers when the goods pass the ship’s rail in the
port of shipment.
– The seller pays the costs and freight necessary to bring the
goods to the named port of destination, but the risk of loss
of or damage to the goods, as well as any additional costs
due to events occurring after the time of delivery, are
transferred from the seller to the buyer.
– The seller clears the goods for export.
– The seller arranges the charter party or rent the shipping
space.
– It can be used only for sea or inland waterway transport.
– discharge/unloading charges: liner (including); charter party
(excluding, negotiating)
– The buyer effects the insurance (the seller gives timely
notice)
Case: US$12.5 per carton CFR New York
CIF
– The seller delivers when the goods pass the ship’s rail in the
port of shipment.
– The seller pays the costs and freight necessary to bring the
goods to the named port of destination, but the risk of loss
of or damage to the goods, as well as any additional costs
due to events occurring after the time of delivery, are
transferred from the seller to the buyer.
– The seller clears the goods for export.
– The seller has to procure marine insurance against the
buyer’s risk of loss of or damage to the goods during the
carriage. (The seller contracts for insurance on minimum
cover and pays the insurance premium.)
– It can be used only for sea or inland waterway transport.
CPT & CIP
– CFR: When the ship’s rail serves no practical
purpose, such as in the case of roll-on/roll-off or
container transport, the CPT term is more
appropriate.
– CIF: When the ship’s rail serves no practical
purpose, such as in the case of roll-on/roll-off or
container transport, the CIP term is more
appropriate.
– The risks transfer to the buyer from the seller
when the goods are delivered to the international
carrier.
– Used for many mode of transportation.
Incoterms 2000
Group D — DAF, DES, DEQ, DDU, DDP
– The seller has the responsibility for the arrival of
the goods at the agreed place or point of
destination at the border or within the importer’s
country.
– The seller bears all risks and costs in
transporting the goods.
– Contracts under D terms mean arrival contracts.
(Contracts under F & C terms are shipment
contracts.)

How to select a trade term



the mode of transportation:
sea and inland waterway transport only: FAS,
FOB, CFR, CIF, DES, DEQ
the mode of payment
other factors: the time of delivery, the
customs formalities, the possible risks of loss
of or damage to the goods during the
transportation
Variations of Incoterms


In practice, the parties often add words to an
Incoterm to seek further precision than the
term could offer, e.g. FOB Liner terms, FOB
Under Tackle, FOB Stowed, FOB Trimmed…
Since Incoterms 2000 gives no guidance
whatsoever of such additions, the parties are
strongly advised to clarify the exact meanings
of those added terms otherwise serious
problems might arise.
2. International transportation
& Insurance
Major modes of international transportation
 Ocean transportation: convenient; low freight charges
1. Liner transport (suitable for general cargo of small
quantity)
 “the four fixed”: fixed sailing date, fixed route, fixed ports to
call at, and fixed freight rates
 different standards for calculating freight:
W: calculated per metric ton on weight (weight ton)
M: calculated per cubic meter on measurement of the cargo
(measurement ton 尺码吨)
W/M: weight or measurement ton, subject to the higher one
Ad Val.: based on the price or value of the cargo
Major modes of international
transportation
Ocean transportation
2. Charter transport
 charter party between the charterer and the
ship owner
 suitable for bulk cargo 散装货 of large
quantity, such as grain, coals, crude oil and
raw timber
 time charter 定期租船
 voyage charter 定程租船

Major modes of international
transportation
Rail transport
 Air transport
 Road transport
 Inland waterway transport
 Pipeline transport

Major modes of international
transportation

Container transport & International multimodal
transport

carrying goods in containers suitable for ocean, rail, air
and multimodal transport
FCL: Full Container Load 整箱货 The goods carried in a
container is owned by the same consignor.
Container yard (CY) 堆场
LCL: Less than Container Load 拼箱货
CFS: Container Freight Station 集装箱货运站
door to door service





Major transport documents

Bill of Lading (B/L)
receipt for the goods
 evidence of the contract for carriage (between the shipper
and the carrier)
 document of title to the goods
Types:
 on board (shipped) B/L & received for shipment B/L
– The first is issued after the goods have been loaded on board
the designated vessel.
– The second is issued before the goods are loaded on board
and does not indicate the name of vessel and “On Board”.

Bill of Lading (B/L)
clean B/L & unclean B/L
– The first is issued for goods which appear to be
in good condition, carrying no unfavorable
remarks by the carrier.
– When the goods are received in apparent
damaged condition by the carrier for shipment,
he will note the damage on the B/L, such as
“…packages in damaged condition”, “iron strap
loose or missing”, etc.

Bill of Lading (B/L)
straight B/L & order B/L & blank B/L
– In a straight B/L, the consignee is named
specially, thus only the named consignee is
entitled to take delivery of the cargo. (nonnegotiable/non-transferable)
– In an order B/L, “To order” or “To the order of…”
is filled in the column of “Consignee”. It means
the goods are consigned to the order of
consignor or a named person.
(negotiable/transferable with endorsement)
– In a blank B/L, there is blank or the words “To
bearer” filled in the column of “Consignee”. It
could be transferable without endorsement.

Bill of Lading (B/L)
direct B/L & transshipment B/L & through B/L
– The first means the goods are shipped from the
shipment port directly to the destination port.
– The second means the goods have to be
transshipped at an international port as there is
no direct service between the port of shipment
and the port of destination.
– The third is issued by the first carrier covering
the whole carriage of the goods from the port of
shipment to the final destination when two or
more modes of transportation are involved.

Bill of Lading (B/L)

liner B/L & charter party B/L
– The first is issued by a liner company when the liner transport
is used.
– The second is issued when the charter transport is used, and
is often used together with the charter party or a copy of it.

long form B/L & short form B/L
– The first is more detailed with shipping contract clauses on
the back of the page.
– The second only has the major contents on the face.
Other documents
sea/ocean waybill
 receipt for the goods
 evidence of the contract for carriage (between
the shipper and the carrier)
 not a document of title to the goods (nonnegotiable)
 air waybill (non-negotiable)
 international combined rail waybill (nonnegotiable)国际铁路联运运单
 multimodal transport document (MTD): it
may be or may not be negotiable in practice.

Words

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








consignment [C/U]
consigned goods
consignor 托运人
shipper 托运人
consignee 收货人
carrier 承运人
shipment [C/U]
forwarder/forwarding agent/freight forwarder 货运代
理商(人)
bearer 持票人
freight to collect 运费到付
freight prepaid 运费预付
Cargo transportation insurance
Key words
– insurer 承保人,保险商
– underwriter
– insurance broker
– (the) insured
– claimant
– insurance amount
– insurance coverage/cover
– insurance premium

Losses (Averages)
– total loss
 Actual total loss means the whole lot of the
consignment has been lost or damaged or
found valueless upon the arrival at the port of
destination.
 Constructive total loss might occur if the cargo
is not actually lost, but is so seriously damaged
as to make the goods no longer any use for the
purpose for which they were originally intended.
Averages: partial loss
– particular average 单独海损
 A particular consignment is partially damaged;
it is a partial loss which is suffered by the one
whose goods are partly lost or damaged.
 Other interests in the voyage do not contribute
to the partial recovery of the one suffering the
loss.
Averages: partial loss
– general average 共同海损
 a loss that affects all cargo interests on the
ship and the ship itself.
 It is in use when both the ship and the
consignments on board are endangered and
the captain, for the safety of the ship and the
consignment on board, intentionally and
reasonably does some sacrifices or makes
some expenses.
Ocean marine insurance under CIC
(China Insurance Clause)
Basic marine insurance coverage
– purchased individually
 Additional marine insurance coverage
– purchased with a basic insurance coverage




goods factors
transport factors
cost factors
Ocean marine insurance under CIC
(China Insurance Clause)
Basic marine insurance coverage
– FPA (Free From Particular Average) 平安险
 It covers mainly total loss and general average.
– WA (WPA) (With Average/With Particular
Average) 水渍险
 Aside from the risks covered under FPA
conditions, the insurance of WA also covers
partial losses of the insured goods caused by
heavy weather, lightning, tsunami, earthquake
and/or flood.

Basic marine insurance coverage
– All Risks 一切险
 Aside from the risks covered under the FPA
and WA conditions, the insurance of All Risks
also covers the loss of or damage to the
insured goods whether partial or total, arising
from extraneous risks during transit.
 All Risks cover FPA + WA + General
Additional Risks
Additional risks coverage
General additional risks
– theft, pilferage, and non-delivery (T.P.N.D.)
– fresh water and/or rain damage 淡水雨淋险
– shortage 短量险
– intermixture and contamination 混杂、玷污险
– leakage 渗漏险
– clash and breakage 碰损、破碎险
– taint of odour 串味险
– sweat and heating 受潮受热险
– hook damage 钩损险
– breakage of packing 包装破碎险
– rust 锈损险

Additional risks coverage
special additional risks
– war risks
– strike risks
– failure to delivery 交货不到险
– rejection 拒收险
– on deck 舱面险
– import duty 进口关税险
– aflatoxin 黄曲霉素险
– fire risk extension clause for shortage of
cargo at destination in Hong Kong, including
Kowloon or Macao (FREC)

Case study



Suppose that you are selling glassware to
Britain on the basis of CIF, you have the
following alternatives:
FPA plus Breakage Risk
WA plus Breakage Risk
All Risks plus SRCC (strike, riot, civil
commotion 罢工、暴动、民变险)
Kinds of insurance policies
insurance policy
– containing all the details concerning the
goods, coverage, premium and the insured
value
 insurance certificate
– simplified version
 open policy
– providing all the goods shipped by the
insured while the policy is in effect. (duration)

Insurance clause in the sales
contract


Under CIF & CIP terms:
“Insurance: To be covered by the seller for
110% of total invoice value against All Risks
and War Risk, as per and subject to the
relevant ocean marine cargo clauses of PICC
dated 1/1/1981.”
Under FOB ...
“Insurance: To be covered by the buyer.”
Key words

ICC: Institute Cargo Clauses 伦敦保险业协会《协
会货物条款》
the Lloyd’s
 投保:
– insure sth. against (fire)
– cover/effect/purchase/take out/arrange
insurance
 franchise
 lodge/make a claim

3. International payments
Key factors determining the payment method
– the business relationship between the seller
and the buyer
– the nature of the goods
– industry norms
– the distance between the seller and the buyer
– the potential for currency fluctuation
– political and economic stability in both the
exporting and the importing countries

Instruments of payment
Bill of Exchange (Draft)
– a bill (order) signed by the drawer, requiring the
entrusted payer (drawee) to make unconditional
payment in a fixed amount at the sight of the bill or
on a fixed date to the payee or the holder.
– transferable with endorsement
– issue/draw a draft
honour/dishonour a draft
– presentation
– acceptance
– sight draft/demand draft & time draft/usance draft
– banker’s draft & commercial draft

DRAFT
At
Sight
ABC Exporter
Pay to the order of
January 5
$
Eight Thousand Twenty Dollars and 00/100
20 08
8,020.00
Dollars
Drawn under Documentary Credit No. M0491110NS00616, of the
Standard Chartered Bank, Seoul, Korea, dated September 17, 2007
To Standard Chartered Bank
New York, NY
Endorse the
back!
ABC Exporter
Instruments of payment
Promissory note
– an instrument written and issued by a drawer,
promising to pay unconditionally a fixed
amount of money to a payee or bearer at the
sight of the instrument.
 Check
– an instrument issued by a drawer, at the sight
of which the check deposit bank or other
financial institutions unconditionally pay the
fixed amount to the payee or bearer.

Settlement on commercial credit
payment in advance/advance payment
– greatest security for the seller and greatest risk for the
buyer
 open account 赊帐方式
– an agreement between the buyer and the seller
whereby the goods are manufactured and delivered
before payment is required.
 remittance
– a bank (the remitting bank), at the request of its
customer (the remitter), transfers a certain sum of
money to its oversea branch or correspondent bank
(the paying bank) instructing them to pay to a named
person or corporation (the payee or beneficiary)
domiciled in the country.

Settlement on commercial credit

1.
2.
3.
remittance
M/T: mail transfer means the remittance by
airmail.
T/T: telegraphic transfer refers to the
remittance by cable, telex, or SWIFT (Society
for Worldwide Interbank Financial
Telecommunication 全球银行金融电讯协会)
D/D: remittance by banker’s demand draft (the
remitting bank draws a demand draft on the paying bank
at the request of remitter, and the remitter himself sends
the draft to the payee and the payee then presents this
draft to the paying bank for payment)
Settlement on commercial credit
collection
– the seller entrusts a bank to collect payment
from the buyer through the bank’s branch or
correspondent bank in the buyer’s country.
– clean collection: without accompanied by
commercial documents, such as invoice, B/L,
insurance policy
– documentary collection
1. D/P: documents against payment
2. D/A: documents against acceptance

Settlement on commercial credit
collection
– parties related to a collection
 principal: creditor (the seller) 委托人
 drawee: payer (debtor)
 remitting bank 托收行
 collecting bank 代收行
 presenting bank

Buyer Takes
All the Risk
Pre-Pay
Letter
of
Credit
?
? ?
Documents
Against
Payment
Seller Takes
All the Risk
Documents
Against
Acceptance
Open
Account
Who Should Take the Risk?
Settlement on bank credit

Letter of Credit (L/C)
– a written undertaking issued by a bank (the issuing bank) to
the seller (the beneficiary) at the request and in accordance
with the instruction of the buyer (the applicant) to effect
payment (i.e. by making a payment, or by accepting or
negotiating bills of exchange) up to a stated sum of money,
within a prescribed time limit and against stipulated
documents.
 Guaranteed by the issuing bank’s creditworthiness (the
issuing bank undertakes to effect payment)
 Self-sufficient instrument: the L/C is issued on the basis of
the sales contract but independent of it.
 Dealing with documents: under a L/C, banks deal with
documents other than goods.
WHY HAVE A LETTER
OF CREDIT?
IF I SHIP GOODS,
WILL YOU PAY?
IF I PAY, WILL YOU
SHIP THE GOODS?
SOLVES ISSUES OF MUTUAL MISTRUST BY USING
BANKS AS ARBITERS
NEGOTIATE L/C TERMS BEFORE
ENTERING A CONTRACT
Parties to a L/C

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applicant or opener: importer or buyer (margin)
beneficiary: exporter or seller
issuing bank or opening bank:
advising bank 通知行
confirming bank 保兑行
negotiating bank 议付行
paying bank 付款行
accepting bank 承兑行
reimbursing bank 偿付行
Parties to a L/C
PARTY
LETTER OF CREDIT TERM
B U Y E R ’S B A N K
IS S U E R
IS S U IN G B A N K
O P E N IN G B A N K
P A Y IN G B A N K
A C C E P T IN G B A N K
DRAW EE
IS S U IN G B A N K
CO RRESPO NDEN T
A D V IS IN G B A N K
C O N F IR M IN G B A N K
T R A N S F E R R IN G B A N K
N E G O T IA T IN G B A N K
A C C E P T IN G B A N K
P A Y IN G B A N K
LETTER OF CREDIT
Uniform Customs and Practice for
Documentary Credits (2006 Revision),
International Chamber
of Commerce, Publication No. 600
Contents of a L/C

Statements about the credit: the name and
address of the issuing bank, the beneficiary, and the
applicant; type of the credit; amount of the credit and its
currency; L/C number and date of issue; expiry date and
place.

Requirements on the documents:
– draft
– commercial invoice
– shipping document (B/L)
– packing list
– insurance policy/certificate
– certificate of origin
– inspection certificate
– other documents
Contents of a L/C

Descriptions about the goods transacted:
name, quantity, quality, unit price, packing, shipping
marks, etc.

Details of the transportation of the goods: the
shipment port/place, the destination port/place, time of
shipment, transshipment allowed/not allowed, partial
shipment permitted/not permitted.

Other items: instructions to the advising bank or
negotiating bank or paying bank, the undertaking clauses
of the issuing bank…
General procedure


1. Applying for issuing a L/C in favour of the
seller (the beneficiary) by the applicant (the
buyer) — the application form
2. Issuing and advising the L/C:
the issuing bank issues the L/C and transmit it
to another bank through which the L/C will be
advised to the beneficiary (so that the
beneficiary may make necessary preparation
for shipping the goods and drafting the
documents stipulated in the credit)
General procedure
3. Examining the L/C and presenting the
documents by the beneficiary
– the terms and conditions of the L/C are in
accordance with those in the sales contract
– to contact the applicant and request an
amendment of the L/C
– to present the documents to the negotiating
bank for negotiation
 4. Examining and negotiating the documents
by the negotiating bank

General procedure
5. Examining the documents and making the
payment by the issuing bank
– After negotiation, the negotiating bank
presents the documents to the issuing bank for
payment.
– The issuing bank examines the documents and
make the payment.
– the right to recourse the beneficiary
 6. Examining the documents and paying to the
issuing bank by the applicant

Some common pitfalls
Things that stop payment under the L/C: ‘discrepancies’
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L/C expired
L/C overdrawn
tenor incorrect
draft not endorsed
goods description not
as per L/C
late shipment
B/L not “on board”
B/L not endorsed
insurance coverage
not sufficient
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ports incorrect
freight payment not as
per L/C
B/L notify party
incorrect
insurance policy not
negotiable
signatures not present
certifications absent
descriptions not
consistent
Major types of credit

clean credit
– payment is made only against a draft without any shipping
documents
documentary credit
– payment is made against documents representing title to
the goods and thus making the transfer o title possible

revocable L/C
– can be amended or cancelled at any moment by the
issuing bank without previous notice
irrevocable L/C
– constitutes a definite undertaking of the issuing bank and
can be amended or cancelled by the issuing bank only on
condition that all parties concerned
Major types of credit

sight L/C
– calling for payment on the presentation of the documents
either with or without a sight draft
usance/time L/C
– a time draft is to be drawn at any length of time (30 days,
60 days…)

confirmed L/C
– advised to the beneficiary with another bank’s confirmation
added.
unconfirmed L/C
– advised to the beneficiary without adding any other bank’s
confirmation.
Major types of credit

transferable L/C
– the beneficiary is allowed to transfer all or part of the
proceeds/amount of the L/C to a second beneficiary. (be
noted “transferable” and be transferred only once)
nontransferable L/C
– the beneficiary is not allowed to transfer the proceeds of
the L/C to another.
Exercises

pp.48-49
“Letters of credit”
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