THE INTERNATIONAL MONETARY SYSTEM
 When a member country approaches the IMF for financing, it
The Role of International Monetary Fund
Is an organization of 189 countries, working to foster global
monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world.
MEMBERSHIP OF THE IMF
PHILIPPINES, UNITED STATES, CHINA, CANADA, INDIA,
SOUTH AFRICA, FRANCE, COLOMBIA, UNITED KINGDOM
and other countries.
Is a global organization founded in 1944 in the post-war economic
settlement which included the Bretton Woods system of managed
exchange rates JM Keynes and Harry Dexter.
Functions of IMF
1. Promote International monetary cooperation
2. Promote exchange rate stability
3. Helps deal with economic crisis by providing international
coordination- loans, plus advice
What the IMF does in practice
1. Economic surveillance and monitoring.
IMF produces reports on member countries’ economies
and suggests areas of weakness / possible
2. Loans to countries with a financial crisis.
The IMF has $300 billion of loanable funds. This comes
from member countries who deposit a certain amount on joining
in times of financial /economic crisis the IMF may be willing to
make available loans as part of a financial readjustment
3. Conditional loans/structural adjustment.
When giving loans, the IMF usually insist on certain
criteria being met. These can include policies to reduce inflation
(tightening of monetary policy).
4. Technical assistance and economic training.
The IMF produce many reports and publications. They can
also offer support for local economies. More on technical
assistance of IM.
How is the IMF Financed?
The IMF is financed by member countries who contribute
funds on joining. They can also increase this throughout their
membership.
Special Drawing Rights (SDR)
The IMF uses Special drawing rights to provide a unit for
the amount of foreign currency member states can draw on. SDRs are
defined in terms of a basket of major currencies including Euro,
Pound Sterling, Japanese yen and US Dollar.
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Conditions for lending
may be in or near a state of economic crisis, with its currency
under attack in foreign exchange markets and its international
reserves depleted, economic activity stagnant or falling, and a
large number of firms and households going bankrupt.
 Loans are typically disbursed in a number of installments over
the life of the program, with each installment conditional on
targets being met. Programs typically last up to 3 years,
depending on the nature of the country's problems but can be
followed by another program if needed.
Capacity Development
The IMF works with governments around the world to
modernize their economic policies and institutions, and train their
people. This helps countries strengthen their economy, improve
growth and create jobs.
Management
The IMF has a Managing Director, who is head of the staff
and Chairperson of the Executive Board. The Managing Director is
appointed by the Executive Board for a renewable term of five years
and is assisted by a First Deputy Managing Director and three Deputy
Managing Directors
Staff
The IMF's employees come from all over the world, they
are responsible to the IMF and not to the authorities of the countries
of which they are citizens.
GOLD STANDARD
The gold standard is a monetary system where a country's
currency or paper money has a value directly linked to gold. With the
gold standard, countries agreed to convert paper money into a fixed
amount of gold.
THE ADVANTAGES AND DISADVANTAGES
Advantages
1. It limits the power of governments or banks to cause price inflation
by excessive issue of paper currency although there is evidence that
even before World War I monetary authorities did not contract the
supply of money when the country incurred a gold outflow
2. Creates certainty in international trade by providing a fixed pattern
of exchange rates
Disadvantages
1. It may not provide sufficient flexibility in the supply of money,
because the supply of newly mined gold is not closely related to the
growing needs of the world economy for a commensurate supply of
money
2. A country may not be able to isolate its economy from depression
or inflation in the rest of the world
3. The process of adjustment for a country with a payments deficit
can be long and painful whenever an increase in unemployment or a
decline in the rate of economic expansion occurs
Standards of Value
In the middle Ages, money consisted primarily of coins,
silver and gold coins circulated simultaneously.
The decline of gold
World War I effectively ended the real international gold
standard. Most belligerent nations suspended the free convertibility
of gold. The United States, even after its entry into the war,
maintained convertibility but embargoed gold exports. For a few
years after the end of the war, most countries had inconvertible
national paper standards-inconvertible in that paper money was not
convertible into gold or silver.
The Bretton Woods System
During World War II. Great Britain and the United States
outlined the postwar monetary system. Their plan, approved by more
than 40 countries at the Bretton Woods. Conference in July 1944,
aimed to correct the perceived deficiencies of the interwar gold
exchange standard.
After Bretton Woods
This breakdown of the fixed exchange rate system ended
each country's obligation to maintain a fixed price for its currency
against gold or other currencies. Under Bretton Woods countries had
bought when the exchange rate fell and sold when it rose; now
national currencies floated, meaning the exchange rate rose or fell
with market demand.
After the Bretton Woods system ended in 1973 most
countries allowed their currencies to float but this situation soon
changed.
The euro
Western European countries have traditionally done much of their
trading with each other. Soon after the breakdown of the Bretton
Woods system, some of these countries experimented with fixed
exchange rates within their group. Before 1997, however, all such
attempts had failed within a few years of their inception.
Fixed and Floating Exchange Rate
Fixed exchange rate
Sometimes called a pegged exchange rate is a type of
exchange rate regime where a currency's value is fixed against the
value of another single currency, to a basket of other currencies, or to
another measure of value, such as gold.
Reasons for Fixed Exchange Rate Regimes
A fixed exchange rate is usually used to stabilize the value
of a currency against the currency it is pegged to. This makes trade
and investments between the two countries easier and more
predictable and is especially useful for small economies in which
external trade forms a large part of their GDP.
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How a Fixed Exchange Regime Works
 By either buying or selling its own currency on the open market.
 By simply making it illegal to trade currency at any other rate.
How the Foreign Exchange Market Works
In the retail currency exchange market, a different buying
rate and selling rate will be quoted by money dealers. Most trades are
to or from the local currency. The buying rate is the rate at which
money dealers will buy foreign currency, and the selling rate is the
rate at which they will sell the currency.
Purchasing Power Parity
Purchasing power parity is a way of determining the value
of a product after adjusting for price differences and the exchange
rate.
Balance of Payments Model
The balance of payments model holds that foreign
exchange rates are at an equilibrium level they produce a stable
current account balance. A nation with a trade deficit will experience
a reduction in its foreign exchange reserves which ultimately lowers,
or depreciates, the value of its currency.
Asset Market Model
Like purchasing power parity, the balance of payments
model focuses largely on tangible goods and services, ignoring the
increasing role of global capital flows in other words, money is not
only chasing goods and services, but to a larger extent financial asset
such as stocks and bonds.
Stage of Economic Development
A free-floating exchange rate increases foreign exchange
volatility. which can be a significant issue for developing economies.
Developing economies often have the majority of their abilities
denominated in other currencies instead of the local currency.
Balance of Payments
Flexible exchange rates serve to adjust the balance of trade.
When a trade deficit occurs in an economy with a floating exchange
rate, there will be increased demand for the foreign (rather than
domestic) currency which will increase the price of the foreign
currency in terms of the domestic currency.
Monetary and Fiscal Policy
A big drawback of adopting a fixed-rate regime is that the
country cannot use to monetary or fiscal policies with a free hand. In
general, fixed- rates are not established by law but are instead
maintained through government intervention in the market.
The Floating Exchange Rate
A floating exchange rate or fluctuating exchange rate, is a
type of exchange rate regime wherein a currency's value is allowed to
fluctuate according
to the foreign exchange market. A currency that uses a floating
exchange rate is known as a fixating currency
The Fixed Exchange Rate
 A fixed exchange rate system, or pegged exchange rate
system, is a currency system in which governments try to maintain a
currency value that is constant against a specific currency or good.
The Pegged Float Exchange Rate
Pegged floating currencies are pegged to some band or
value, which is either fixed or periodically adjusted.
Three types of pegged float regimes
 Crawling bands. The market value of a national currency is
permitted to fluctuate within a range specified by a band of
fluctuation.
 Crawling Pegs. A crawling peg is an exchange rate regime,
usually seen as a part of fixed exchange rate regimes, that allows
gradual depreciation or appreciation in an exchange rate.
 Pegged with horizontal bands. This system is similar to
crawling bands, but the currency is allowed to fluctuate within a
larger band of greater than one percent of the currency's value
Managed Float
Managed float regimes are where exchange rates fluctuate,
but central banks attempt to influence the exchange rates by buying
and selling currencies.
THE NTERNATIONAL FINANCIAL MARKET
Introduction
Due to growth in international business over the last 30 years, various
international financial markets have been developed. Financial
managers of MNCs must understand the various international
financial markets that are available so that they can use those markets
to facilitate their international business transactions.
CAPITAL MARKET
Capital markets play an important role in the United States.
Businesses and investors benefit from their participation in capital
markets. These markets are a source of funding for entrepreneurs and
larger established businesses that often rely on capital markets to
grow. Investors. Including individuals saving for a new home,
college, or retirement use capital markets to increase their wealth.
The stock market and the bond market are part of capital markets.
WHAT IS MARKET?
-a market is any arrangement that allows buyers and sellers to
exchange goods and services.
What Are Capital Markets?
Capital markets include the stock and the bond markets. These
markets are a source of financial capital for entrepreneurs who want
to start businesses and for larger established businesses that want to
expand. Capital markets bring together savers who want to invest
with entrepreneurs and businesses that want to borrow
What are Stocks?
In the stock market, customers are able to buy stocks from sellers or
issuers. When the customer purchases stocks, the entrepreneur or
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business that issued the stocks (the seller) receives financial capital
that is, money.
A stock is a share of ownership in a publicly traded company. This is
why "shareholder" is often called a "stockholder" and vice-versa. The
same goes for "share" and "stock" A stockholder's percent ownership
of a company is equal to the number of shares he or she owns relative
to the total number of shares that the company has issued. To issue
stock, a company or entrepreneur works through investment brokers.
These brokers are licensed to sell the stock to those who want to
invest their savings with the hope of earning additional future
income.
What Are Bonds?
when the term bond is used in personal finance, it means something
entirely different. It represents a loan that is similar to an IOU. You
lend money and expect money in return.
An IOU works like this.
Suppose you are out with friends and the group decides to stop for ice
cream, but you realize you don't have any money. Your solution is to
borrow friend, Will. Will lends you the money and asks you to write
out an IOU money from a promising to repay the money borrowed.
When you buy a bond, you are lending money to a corporation or
government. A bond is a certificate of indebtedness (like an IOU).
The government or corporation will use the money--financial capital
gained--to fund a project in return, over time the government that
issued the bond will pay you interest along with the original amount
you paid for the bond.
Interest is the price people pay for using someone else's money. The
corporation or government that issued the bond pays interest because
they are using someone else's money. As with stocks, bonds can be
resold in secondary markets.
What Are the Risks of Buying Stocks and Bonds?
 People buy stocks because they hope to sell them in the future
for a price higher than they originally paid.
 People buy bonds because they expect to be repaid the principal
—the original purchase price--plus interest.
 As with any financial investment, stocks and bonds have risk.
Risk is basically the uncertainty that an investment will gain or
even retain its value. In general, the higher the risk of loss of
principal-with principal meaning the initial investment-the
greater the potential reward, and the lower the risk of loss of
principal, the lower the potential reward.
How do Capital Markets Reduce Risk?
Benefit:
1. Helps to reduce risk of loss from buying stocks and bonds.
2. They give investors a better idea of how much risk is involved in
purchasing a bond. And the same goes for stocks.
3. Helps to relieve some of the uncertainty because of brokerage
firms that sell bonds and investigate companies and
governments issuing bonds. This information is shared with
bond buyers, and the risk of loss included in the price of the
bond.
Who benefits from capital Market
Stock analysis of financial firms gather and share information about
companies issuing stocks. Thus with the help of capital market,
investors reduce risk and make more informed
CAPITAL MARKET
PRIMARY MARKET
 Companies
 Government
SECONDARY MARKET
 Stock and Bond
 Owner
 Example; New York Stock Exchange
Why might a company issue stock?
To raise money from investors who tend to invest their money. This
money is then used by companies for the development and growth of
their businesses.
What about bonds?
to raise funding for large-scale projects – such as business expansion,
takeovers, new premises or product development. They can be used
to replace bank finance, or to provide long-term working capital.
Government may issue a bond to fund a project without raising taxes.
When the bond is purchase, the company or the government receives
financial capital that they can spend. That company or government
agrees to pay the purchase price of the bond with interest. A Bond is
essentially a Loan.
Capital Markets
Brings together businesses and governments in NEED of Financial
Capital
–Money– with investors hoping to earn profit
Market
is any arrangement that allows buyers and sellers to come together to
exchange money for goods, services, or financial assets. Can be
Physical or Virtual.
Physical Markets
Brings buyers and sellers together in the same location. Ex. Shopping
Malls, Department Stores, Auction Houses and etc.
Virtual Markets
- is the use of online or digital techniques to achieve strategic
marketing and sales objectives without resorting to traditional in-
person marketing strategies such as networking at live events, face-
to-face meetings, seminars or trade shows. Ex. Media Markets
(Broadcast Market), Internet Markets (Electronic Commerce),
Artificial Markets.
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PRIMARY MARKETS AND SECONDARY MARKET
Primary Capital Markets
Businesses and entrepreneurs can issue and bonds to raise financial
capital to start or expand businesses.
Both Primary and Secondary Capital Markets - Savers are able to buy
Financial assets from which they hope to gain returns and build
wealth.
Lesson 2. FOREIGN EXCHANGE MARKET
Key Takeaways:
 The ForEx(foreign exchange) Market is an over-the-counter
Marketplace that determines the exchange of global currencies.
 It is, by far, the largest financial markets in the world and
comprised of a global network of financial centers that transact
24 hours a day, closing only on the weekends.
Foreign Exchange Market
is a market in which people or firms use one currency to purchase
another currency and more.
The extraordinary size of foreign exchange markets by:
 April, 2013 : $5.3 Trillion per day was traded on forex
market.
 April, 2019 : $6.6 Trillion
 April, 2022-2023: $7.5 Trillion
In comparison to the US. Real GDP of $20.18 Trillion per year.
PARTICIPANTS IN THE EXCHANGE RATE MARKET
The foreign exchange market is large due to portfolio investment and
the actions of interlocking foreign exchange dealers. Most
transactions are for portfolio investment-relatively short-term
movements of financial capital between currencies. The U.S.
economy has less than 100 foreign exchange dealers, but the largest
12 or so dealers carry out more than half the total transactions.
The foreign exchange market is huge not due to tourists, firms, or
foreign direct investment, but due to portfolio investment and the
actions of interlocking foreign exchange dealers. International
tourism is a large industry, involving $1 trillion per year, and exports
are 23% of global GDP. Foreign direct investment totaled $1.4 trillion
in 2012, but is dwarfed by the $5.3 trillion per day being traded in
foreign exchange markets. Most transactions in the market are for
portfolio investment-relatively short-term movements of financial
capital between currencies and because of the actions of the large
foreign exchange dealers as they constantly buy and sell with each
other.
PARTICIPANTS IN THE EXCHANGE RATE MARKET
 Commercial Banks
 Foreign exchange Brokers
 Central Bank
 MNCs
 Individual and Small Business
1. Commercial Banks
 The major participants in the foreign exchange market are the
large commercial banks, which provide the core of the market.
These banks serve their retail clients, the
bank customers, by conducting foreign
commerce or making international
investments in financial assets that require
foreign exchange.
Operate in the foreign exchange market at two levels:
 Retail Level:
deal with their customers, corporations, exporters, and so forth.
 Wholesale Level:
banks maintain an interbank market in foreign exchange either
directly or through specialized foreign exchange brokers.
 The bulk of activity in the foreign exchange market is
conducted in an interbank wholesale market, a network of large
international banks and brokers. Whenever a bank buys a
currency in the foreign currency market, it is simultaneously
selling another currency.
2. Foreign Exchange Brokers
-They also operate in the international currency market. They act as
agents who facilitate trading between dealers. Unlike the banks,
brokers serve merely as matchmakers and do not put their own
money at risk. They actively and constantly monitor exchange rates
offered by the major international banks through computerized
systems such as Reuters and are able to quickly find an opposite party
for a client without revealing the identity of either party until a
transaction has been agreed upon. A broker is used by interbank
traders to distribute currency quotes to dealers as quickly as possible.
3. Central Banks
-Central banks frequently intervene in the market to maintain the
exchange rates of their currencies within a desired range and to
smooth fluctuations within that range. The level of the bank's
intervention will depend on the exchange rate regime imposed by the
given country's central bank.
4. MNC's MNC's
are the major non-bank participants in the forward market as they
exchange cash flows associated with their multinational operations.
MNCs often contract to either pay or receive fixed amounts in
foreign currencies at future dates, so they are supposed to be exposed
to foreign currency risk. They often hedge these futures cash flows
through the interbank forward exchange market.
4. Individuals and small businesses
Use the foreign exchange market to facilitate the execution of
commercial investment transactions. The foreign needs of these
players are usually small and account for only a fraction of all foreign
exchange transactions. Some of these participants use the market to
hedge foreign exchange risk.
SEGMENTS OF FOREIGN EXCHANGE MARKET:
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There are two segments of foreign exchange market, viz., Spot
Market and Forward Market.
Spot Market:
currencies are exchanged immediately on the spot. This market is
used when a firm wants to exchange one currency for another on the
spot. The procedure is very simple. A banker can either handle the
transaction for the firm or may have it handed by another bank.
Forward Market:
Has come into existence to avoid uncertainties. In forward market, a
forward contract about which currencies are to be traded, when the
exchange is to occur, how much of each currency is involved, and
which side of the contract each party is entered into between firms.
FOREIGN DIRECT INVESTMENT
Foreign Direct Investment in developing countries has a long history.
It hast fluctuated over time, as investors have responded to changes in
the environment for investment, including government policies
toward foreign direct investment and the broader economic policy
framework.
Investment
is using money to purchase assets in the hope that the asset will
generate income over time or appreciate over time.
Consumption
is when you purchase something with the immediate intent of
personal use and with no expectation that it will generate money or
increase in value.
Foreign Direct Investment (FDI)
is an investment in a business by an investor from another country for
which the foreign investor has control over the company purchased.
Advantages of FDI:
1. Access to market
FDI can be an effective way for you to enter into foreign
market. Some countries may extremely limit foreign
company access to their domestic markets. Acquiring or
starting a business in the market is means for you to gain
access.
2. Access to resources:
FDI is also an effective way for you to acquire important
natural resources, such as precious metals and fossil fuels.
3. Reduces cost of production:
FDI is a means for you to reduce your cost of production if
the labor market is cheaper and the regulations are less
restrictive in the target foreign market.
PORTFOLIO INVESTMENT
A portfolio investment is ownership of a stock, bond, or other
financial asset with the expectations that it will earn a return or grow
in value over time, or both. It entails passive or hands-off ownership
of assets as opposed to direct investment, which would involve an
active management role.
Portfolio investment may be divided into two main categories:
1. Strategic investment involves buying financial assets for
their long-term growth potential or their income yield, or
both, with the intention of holding onto those assets for a
long time.
2. The tactical approach requires active buying and selling
activity in hopes of achieving short-term gains.
Types of Portfolio Risk
There are lots of types of investment risks, both at the portfolio
level and the individual security level. Firstly, the following are
examples of risks that are specific to individual securities. These
risks can easily be managed though diversification.
1. Liquidity risk
Is the risk that a company or bank may be unable to meet
short term financial demands
2. Default risk
Is the chance that the bond issuer will not make the
required coupon payments or principal repayment to its
bondholders
3. Regulatory risk
Is the risk that a change in regulations or legislation will
affect a security
A. Tariffs and Trade Policies
Changes to international trade policies may affect companies
that regulatory export and import goods. They also affect
investors that engage in foreign direct investments.
For example, conducting business in China is often restricted by
trade policies. Western businesses are only allowed to operate in
China through partnerships and joint ventures.
B. Minimum wage laws
Increases to minimum wage can be a critical source of
regulatory risk, as they substantially impact businesses,
especially if they hire large quantities of low-skilled labor. In
particular, small businesses suffer greater losses due to their
inability to access economies of scale.
WHY PORTFOLIO HEDGING MATTERS?
The purpose of portfolio hedging is to curtail potential losses. This
safety also comes at a price, since hedging also limits potential
profits. Every hedge has a cost, so investors should weigh the cost of
the hedge against its benefits.
Disadvantage of Portfolio Hedging
The process of portfolio hedging or hedging stocks is a trade-off.
There is usually a cost, and there is no guarantee that a hedge will
perform as planned.
A significant hedging risk can come from a mismatch between the
portfolio being hedged and the instrument being used to hedged.
Constructing a hedge that accurately matches a portfolio is very
costly, so the mismatch has to be accepted.
Rules on the Regional Economic Integration
REGIONALISM
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Can be described as actions by government to liberalize or
facilitate trade on a regional basis, sometimes through free trade areas
or customs union.
1990’s
The number of regional trade agreements has expanded,
and the pace of concluding RTA’s has quickened.
August 31, 2020
Some 505 RTA’s have been notified to the GATT/WTO. Of these,
367 RTA’s were notified under Article XXIV of the GATT; RTA’s
under the ‘Enabling Clause’, and 102 RTA’s under Article V of the
GATS. At the same date, 313 RTA’s are in force.
Examples of RTA’s are:
1. European Union (EU)
2. European Free Trade Association (EFTA)
3. North American Free Trade Agreement (NAFTA)
4. Southern Common Market (MERCOSUR)
5. Common Market of Eastern and Southern Africa
(COMESA)
6. ASEAN Free Trade Area.
WTO Rules on the Regional Economic Integration
Key Characteristic: The parties to such agreements offer each other
more favorable treatment than they offer other trading partners.
WTO Members are allowed to Enter RTA under specific conditions:
1. Article XXIV of the GATT and related rules provide for the
creation and operation of FTA’s and CU’s covering trade in
goods.
2. The 1979 decision on differential and more favorable
treatment, reciprocity and fuller participation of developing
countries, so-called ‘Enabling Cause’, refers to preferential
trade agreements in trade in goods between DC’s members;
and
3. Article V of the GATS governs the conclusion of RTA’s in
the area of trade in services, for both developed and
developing countries’ and the Article V of the GATS
provides for economic integration agreements in services.
Article XXIV of the GATT
Provides for economic integration agreements in services. Paragraph
1 of this article set out:
This agreement shall not prevent any of its members from being a
party to or entering into an agreement liberalizing trade in services
between or among the parties to such an agreement.
Enabling Cause
became a part of the WTO law pursuant to the Annex 1A of the
Marrakesh Agreement, provides exceptions from MFN obligation in
two ways. Firstly, it allows contracting parties to offer non-reciprocal
preferential treatment to imports from DCs. Secondly, it allows the
establishment of RTAs among LDCs.
Some explainations why the rules on RTAs are included in the WTO
law:
1. RTAs can often support the WTO’s multilateral trading
system.
2. Secondly, some of these rules have paved the way for
agreement in the WTO.
3. The WTO agreements recognize that RTAs and closer
economic integration can benefit countries.
4. RTAs should help trade flow more freely among the
countries in the group without barriers, i.e., should
complement the global trading system and not threaten it.
The first evidence of regional economic integration dated back to the
early sixteenth century.
Then, a group of cities in the Northern Europe created the Hanseatic
League, aimed at the protection of their commercial interests on the
basis of the principle of reciprocity.
Since its creation in 1957, the European Economic Community has
been a leading example of regionalism.
Evolution of Regional Economic Integration Models
1. Diversified Free Trade Agreements
2. Trans-Pacific Economic Strategic Partnership Agreement (TPP)
It was concluded in 2005 by four Pacific countries (Chile,
Singapore, Brunei Darussalam, and New Zealand) and called P-4
Agreement.
EU Law and External Trade Restrictions
The EU was created after the end of the World War II.
The founding fathers of this idea were Winston Churchill, Konrad
Adenauer, Alcide De Gasperi, Robert Schuman, and Jean Monret.
EU set a criterion for a country to join the EU:
1. Democracy and rule of law;
2. Functioning market economy; and
3. Ability to implement EU law.
EU INSTITUTIONS
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A. The European Council
It is the Summit of the heads of state and government of all
EU countries.
It is the major body of the EU, including the governments of 27 EU
countries, yet is not an EU institution.
The European Council is held at least four times a year.
The European Council decides by consensus, except if the
treaties provide otherwise.
B. The European Parliament
The European Parliament is definitely elected beyond is the
choice of the EU people for a term of office of five years.
The European Parliament is one of the EU’s main law-making
institutions and decides EU laws and budget together with the
Council of Ministers and supervises all of the EU’s work.
C. The Council of Ministers ( The Council of EU)
The voice of the member states. It is the supreme-making
body of the EU. Member states are usually represented by foreign
affairs ministers or ministers responsible for the subject under
discussion.
Actually, in principle, a ‘qualified majority’ needed for
many decisions is 255 votes and a majority of 27 EU countries vote
in favor.
From 2014, the ‘double majority’ will be required with the two
types of majorities: most countries and a majority at least.
D. The European Commission – Promoting the common interests
The European Commission compromises 27 independent members
who have commissioners, one from each EU country.
The European Commission is the EU’s executive body and has
competence to propose new legislation.
Concurrently, it is the guardian of the treaties.
The European Commission represents the EU on the international
stage.
E. The Court of Justice of the European Union
It is the common judicial institution of the EU and of the European
Atomic Energy Community (EURATOM), including three courts
namely:
 The Court of Justice
 The General Court (created in 1988)
  The Civil Service Tribunal (created in 2004).
The Court of Justice: Before entry into force of the Lisbon Treaty on
1 December 2009, this was known as the European Court of Justice.
They are appointed for a term of six years, which is renewable.
The Court of Justice has following tasks:
i. Interpretation of the EU law
ii. Settlement of legal disputes between EU
governments and EU institutions.
Before entering Lisbon Treaty on 1 December 2009, this was known
as the Court of First Instance (CFI).
The General Court created in 1988 and deals with cases brought
forward by individuals, companies and some organizations, and cases
relating to competition law.
The Civil Service Tribunal - created in 2004 and rules on disputes
between the EU and its staff.
The European Court of Auditors - monitors the EU’s financial
activities. Its task is to check that the EU funds are used properly. It is
authorized to audit any person or organization dealing with the EU
funds.
The European Economic and Social Committee - is an advisory
committee, representing the voice of civil society. It promotes the
involvement of civil society in the EU matters.
The Committee of the Regions - is also an advisory committee,
representing the voice of local government.
The European Council Bank - is controlling the monetary policy
within Eurozone, consisting of 17 countries.
The Council of Europe is an international organization
founded in 1949 to protect human rights and strengthen democracy
throughout Europe.
It also seeks to promote European cultural identity and is a key link
between Eastern and Western Europe.
Ordinary Legislative Procedure - is the EU’s standard decision-
making procedure following the European Parliament has to approve
the EU legislation together with the European Council.
EU Law Structures: Three Pillars
1. The fist pillar is the law concerning economic and social
rights.
2. The second pillar concerning the EU Common Foreign
and Security Policy
3. The third pillar concerning Police and Judicial
Cooperation
SOURCES OF THE EU LAW
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A. Legislation
Primary Legislation (Treaties) Are effectively the ‘constitutional
law’ of the EU. They are created by government from all EU
member states’ acting in consensus.
Secondary Legislation Sets out how the objectives expressed in the
treaties (primary legislation) are to be accomplished.
 REGULATION
-is a binding legislative act.
 DIRECTIVE
-sets out a goal that all EU member states must achieve, while
allowing member states to decide how to achieve the goal.
 DECISION
-is bringing upon those to whom it is addressed and is directly
applicable.
 RECOMMENDATION
-is not binding.
 OPINION
-is not binding.
SUPREMACY OF THE EU LAW
-The principle of the primary also referred to as "precedence" or "
supremacy " of European Union (EU) Law is based on the idea that
where a conflict arises between an aspect of EU Law and an aspect
of law in an EU member state, EU Law will prevail.
Direct Effect of the EU Law
The principle of direct effect of the community law in the member
states was started from which how enable European citizens to rely
directly on rules of the EU law before their national court.
Two types of Direct Effect:
 HORIZONTAL DIRECT EFFECT
-member states do not have to ‘transpose’ a treaty or a regulation into
national law, and citizens may ensure one another based on this act.
 VERTICAL DIRECT EFFECT
-Is of consequence in relations between individuals and the
country. Directives allow members states to make some choice
of how they transpose a directive into national law.
Two Main Objectives of the EU Trade Policy
 Firstly: Lower barriers to the EU export and EU
investment through negotiations and where necessary
despite settlement.
 Secondly: Improve conditions for third country operations
importing into the EU.
DIMENSIONS OF THE EU TRADE POLICY
A. Multilateral Dimension
- Concerning External actions, the EU maintain its
commitment to multilateral, which offers the means to
eliminate trade barriers.
B. Bilateral Dimension
 -As well as Multilateralism, the EU must also endeavor to
promote faster and more comprehensive trade liberalization
within the framework of its bilateral trade relation.
C. Unilateral Dimension
-Dimension where variations are only allowed one side of
the nominal size.
4. Single market for services – FREEDOM TO PROVIDE
SERVICES AND FREEDOM OF ESTABLISHMENT
- In 2006, the EU adopted the ‘Services’ Directive, which aims at
removing barriers to trade and services, and at facilitating cross-
border trade operations.

C. REGULATION ON OTHER FIELDS

Regulations on the EU Internal Market - The Social Chapter refers to those posts of the TEC that deal with
the equal treatment of men and women under Article 141 of the TEC
A. INTERNAL MARKET and the regulation of working time under the Working Time
Directive.
- The ‘singles or ‘internal’ market, defined by reference to the ‘four
freedoms’.

-Created in 1993 EU Competition Law

-The core of EU economic and social policy is summed up under the -In the EU, competition law is an important part of ensuring the
idea of “FOUR FUNDAMENTAL FREEDOMS”. completion of the internal market, meaning the free flow of working
people, goods, services, and capital in a borderless Europe.

Four Main Competition Policy Areas

B. REGULATIONS ON “FOUR FUNDAMENTAL
FREEDOMS” 1. cartels
2. monopolies
3. mergers
4. state aid
1. Single Market for Goods –
FREE MOVEMENT OF GOODS Monetary Policy

- The free movement of goods, with the objective of ensuring
trade within the EU, is most important in the internal market.
THREE ASPECTS TO FREE MOVEMENT OF GOODS:
i. Creation of a customs union
ii. Prohibition of discriminatory internal taxes
iii. Prohibition of quantitative restrictions and measures having
equivalent effect on imports and exports.
-Economic and Monetary Union involves the close coordination of
the economic policies of the member states at the EU level and
requires member states to avoid excessive budget deficits. The EMU
has led to the introduction of a single currency: the euro. It was
launched on 1 January 1999.
Countries from EUROZONE

1. Austria
2. Belgium
1.2.Free Movement of Goods and Common Agricultural Policy 3. Cyprus
4. Estonia
-Common Agricultural Policy (CAP). The CAP dates back to early 5. Finland
days of European integration, when member states made a 6. France
commitment to restructuring and increasing food production, which 7. Germany
had been adversely affected as a result of WWII. 8. Ireland
9. Italy
TWO MAIN OBJECTIVES OF CAP: 10. Luxemburg
11. Malta
 FIRST. Helping European farmers to be competitive.
12. Netherlands
 SECOND. Promoting Development in Rural Areas, particularly
13. Portugal
in the least-favored regions
14. Slovakia
15. Slovenia
2. FREE MOVEMENT OF WORKERS
16. Spain
- It has also become much easier to live and work in another
EU country.
D. Strategies of Legal Integration
SCHENGEN AREAs- Free travel area (visa-free)
1. Unification of laws
3. FREE MOVEMENT OF CAPITAL 2. Harmonization of member states laws
-Protects the principle of full liberalization movements 3. Mutual recognition of the standards
between member states with effect from 1 July 1990.
-designed to give the single market its full financial dimension.
North American Free Trade Agreement (NAFTA)

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 - The North American Free Trade Agreement or NAFTA is a The Association of South-East Asian Nations (ASEAN) was
free trade agreement between Canada, Mexico, and the established on August 8, 1967 in Bangkok, Thailand by the five
US. founding members of ASEAN, namely, Indonesia, Malaysia,
- With a combined GDP of 17.6 trillion USD in 2010, the Philippines, Singapore, and Thailand.
NAFTA is the largest free trade area in the world.
- The NAFTA was negotiated between 1991 and 1993, and Brunei joined on January 7, 1984, Vietnam on July 28 1995, Lao
it was approved by the national legislatures of the three PDR and Myanmar on July 23 1997, and Cambodia on April 30
countries in 1993 before entering into legal force on 1 1999. Its constitute instrument, the ASEAN Declaration (or Bangkok
January 1994. declaration) state that one of main objective of ASEAN is to
accelerate regional economic growth.
The NAFTA imposes strict rules on a range of barriers to
trade and investment. It includes: ASEAN Countries and their Currencies:
1. Opening of government purchasing regimes to 1. Indonesia Indonesian Rupiah
businesses in all three countries.
2. Eliminating restrictions on foreign investment and 2. Malaysia Malaysian Ringgit
ensures non-discriminatory treatment for local
companies owned by investors in other NAFTA countries. 3. Philippines Philippine Peso
3. Eliminating barriers that prevent services companies from
operating across North America borders, including in such 4. Singapore Singaporean Dollar
key sectors as financial services.
4. Provides comprehensive rules to protect intellectual 5. Thailand Thai Baht
property rights.
5. Provides three dispute settlement mechanisms for state- 6. Brunei Darussalam Brunei Dollar
to-state disputes, investor-state disputes, and disputes on 7. Cambodia Cambodian Riel
antidumping measures and countervailing duties.
8. Myanmar Myanmar Kyat
Types of Reservation:
9. Laos PDR Laotian Kip
1. NT – National Treatment
2. MFN – Most Favored Nation 10. Vietnam Vietnamese Dong
3. Local Presence

Using above, only Mexican nationals by birth may serve as:

Four Pillars of ASEAN:
a. Captains, pilots, ship master, machinist, mechanics, and
crew members manning vessels or aircraft under the 1. Single market and production base
Mexican flag:
b. Harbor pilots, harbor masters, and airport administrators; 2. Competitive economic region
and
c. Custom brokers. 3. Equitable economic development

4. Fully integrated region in the global economy

Cross Border Service Providers and Immigration Laws

 In the GATS , negotiators established four modes of supplying

services. SINGLE MARKET & PRODUCTION BASE
 NAFTA, allow natural persons to work in their countries under
chapter 16, temporary entry for business persons. • Free flow of products

The Arbitral Tribunal decides upon the dispute in accordance with • Free flow of services
the provisions of NAFTA and the applicable rules of international
law. • Free flow of investments

The Arbitral Tribunal is a panel of unbiased adjudicators which is • Free flow of skilled labor
convened and sits to resolve disputes by way of arbitration.
• Free flow of capital
Arbitration is a procedure in which a dispute is submitted, by
• Priority integration in food, agriculture and forestry
agreement of the parties, to one or more arbitrators who make a
binding decision on the dispute.

In choosing arbitration, the parties opt for a private dispute resolution COMPETITIVE ECONOMIC REGION
procedure instead of going to court.
• Competition policy

• Consumer protection

• Intellectual property rights

Rules of ASEAN’s Economic Integration
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• Infrastructure development The ASEAN-China Free Trade Area (hereinafter the ‘ACFTA’)

• Taxation ASEAN Trade in Goods Agreement (AK-TIG)

• E-commerce ASEAN-Korea Trade in Services Agreement (AKTIS)

ASEAN-Korea Agreement on Investment (AKAI)

EQUITABLE ECONOMIC DEVELOPMENT ASEAN-Korea Agreement on Dispute Settlement Mechanism

• SME development

• Narrow development gap between members & • According to ASEAN FDI Statistics Database, as of May 2009,
among ASEAN’s Dialogue Partners, Japan ranked as the second
accelerate integration of Cambodia, Laos, largest source of FDI flows to ASEAN.
Myanmar and Vietnam

• Prime Minister Koizumi of Japan proposed the idea of an idea

ASEAN-Japan Comprehensive Economic Partnership (AJCEP)
INTEGRATION TO GLOBAL ECONOMY
Agreement in January 2002.
• Coherent approach regarding external economic

relations
• The ASEAN-India Framework Agreement on Comprehensive
• Enhanced participation in global supply networks Economic Cooperation, which includes free area in goods, services
and investment, was signed on 8 October 2003.

• The ASEAN-India Trade in Goods Agreement (hereinafter the

The main objectives of AFAS are: ‘AITIG’) and the ASEAN-India Agreement on Dispute Settlement
Mechanism, both signed on 13 August 2009.
1. To enhance cooperation to services amongst member states

2. To eliminate substantially restrictions to trade in services amongst

members
3. To liberalize trade in services
The 1987 Agreement contains the generally defined standards of
protection in line with many other investment treaties, such as full
protection, fair and equitable treatment, an umbrella clause, the
repatriation of capital and earnings, and dispute settlement.
As in the legal relationship in economic integration between ASEAN
and Japan, the rules governing economic cooperation between
ASEAN and Australia and New Zealand are provided in a
comprehensive document, the Agreement Establishing the ASEAN-
Australia-New Zealand Free Trade Area (hereinafter the
‘AANZFTA’), signed in Thailand on 27 February 2009. Four
ASEAN countries have ratified it.
APEC’s Operation Objectives and Principle:

ASEAN Comprehensive Investment Treaty (ACIA) Asia-Pacific Economic Cooperation Forum (APEC) was
established in November 1989 in Canberra(Australia) with a view to
ASEAN free trade area (AFTA) boosting economic growth and prosperity in the region and currently
tightening relationships within the Asia-Pacific Community as well as
ASEAN Framework Agreement on services (AFAS) meeting the globalization trend in economic-trade life.
ASEAN Investment Area (AIA)

AEC [ASEAN Economic Community] The APEC has 21 members including:

Free flows of: 1. Australia
• Goods 2. US
• Services 3. Canada
• Investment 4. Japan
• Capital 5. Korea
• Skilled Labor 6. Brunei
• PIS & Food, Agri & Forestry 7. Indonesia

8. Singapore
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9. Malaysia 3. Trade in Services

10. Philippines 4. Standards and Harmonization

11. Thailand 5. Cooperation in the Future

12. New Zealand

13. China The Asia-Europe Meeting (hereinafter the ASEM) was established
in March 1995 in Bangkok, Thailand, with a view to boosting
14. Hong Kong political dialogue to improve mutual understanding and unanimous
viewpoints of the two continents with regard to political and social
15. Taiwan
affairs of the world; boosting trade and investment exchange among
16. Chile member states and enhancing cooperation in scientific, technical
environmental and human resource development affairs so as to
17. Mexico create sustainable growth in both Asia and Europe
18. Papua New Guinea

19. Vietnam

20. Russia RULES GOVERNING IMPORT AND EXPORT OF GOODS

21. Peru
In business operations in general and international
Fundamental Principles of APEC’s Operation: business in particular, the sales of goods are key
• Comprehensiveness transactions.
• GATT/WTO consistency; On the domestic scale, it is the exchange of goods
• Comparability within a country, while on the international scale, it is
the exchange of goods among different countries
• Non-discrimination
through the import and export transactions.
• Transparency

• ‘Standstill
10 Key Clauses of an International Sales Contract
• Simultaneous start

• Flexibility 1. Description of goods

• Technical cooperation 2.Contract price

3. Delivery terms
Fundamental Characteristics of the APEC:
4. Time of delivery
• The APEC is a dialogue forum, but not a negotiation forum. The
commitments within the APEC are generally not as closely binding as 5. Payment Condition
within the ASEAN and WTO;
6. Document
• APEC closely associates its commitments with realization of the
commitments within the WTO framework in the direction of deeper 7. Inspection of Goods
and sooner realization within APEC framework;

• Always associating the APEC’s activities with the world’s major

8. Retention of title
political events on the basis of friendship and cooperation.
9. Force of majeure

Some APEC members have gradually become strategic partners in

10. Resolution of disputes
the country’s plants to develop closer and more comprehensive
economic, trade and investment relationships.

1. Tariff and Non-Tariff Barriers Issues REGULATIONS ON INTERNATIONAL SALES OF GOODS

2. Customs Issues

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´There are many different sources of law that govern the 1980
international sales of goods, of which the three main
sources are domestic law, international treaties, and
international mercantile customs and usages. OTHER CONTRACTS

The Rome Convention on the law applicable to

contractual obligations
A. Domestic Law Conflict of laws on contract forms
1980
B. INTERNATIONAL TREATIES

1. Treaties to Unify the Substantive Rules

The unification of the substantive rules occurs when
countries agree to create the substantive rules, in order
to govern international sales of goods transactions.
2. Treaties to Unify the Rules of Conflict
Applying rules of conflict therefore causes considerable
difficulties and risks in resolving the conflicts of laws.
C. International Mercantile Customs and Usages
Some international mercantile customs and usages
applied to the international sales of goods include
International Commercial Terms (hereinafter the
INCOTERMS") codified and issued by the International
Chamber of Commerce.

The Hague Convention 1955 on the Law Applicable to

International Sales of Goods

´According to this Convention, a sales contract must be

in compliance with the law chosen by the involved
parties. If there is no agreement on the applicable law,
the law of the country where the seller has his/her
office upon received orders shall apply, with the
following exceptions: () if an order is assigned to be
performed by a branch of the seller, the law where the
branch locates shall apply: (i) if an order is received by
the seller or his/her agent in the buyer's country, the
law of the country where the buyer has his/her
permanent residence shall apply (Article 3).
D. Other Legal Sources The Model Contracts' and
'General Principles of Contract Law'
Firstly, regarding the Model Contracts, it is necessary to
distinguish a model contract drafted by a professional
association, from one provided to the parties by an
independent organization. In international commercial
practices, the first type of Model Contracts is very
common.

STATUTORY CHOICE OF LAW INCOTERMS - Their use in international sales is

TRADE IN MOVABLES encouraged by trade councils, courts and international
lawyers.
The Hague International Sales Convention

1955
CISG- is a multilateral treaty that provides substantive
contract law on international contracts for the sale of
goods.
TRADE IN MOVABLES

The United Nations Convention on Contracts of

International Sale of Goods (CISG) WHAT IS THE IMPORTANCE OF CISG?

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  Reduce barriers to International
 Simplify the process of buying and selling
 To eliminate some of that uncertainty
 To provide a body of rules Avoid difficult conflict
of – law issues
 Fill in gaps in contracts
The CISG includes 101 articles and is divided into four
(4) parts
sold, and the liability of the seller for the injuries caused
by the goods to any person ( Articles4-5)
C. Formation of International Sales of Contract
1. Offer
An offer is a definite expression of the offeror’s will
(intention to be bound),addressed to one or more
specific persons.
2. Acceptance

By accepting, the offeree indicates his assent to the

offer.
1. Part 1- Rules on its application and general
provisions;
2. Part 2- Formation of the contract;
D. The Buyer’s and Seller’s Obligation
3. Part 3- Rules for the sales of contract,
4. Part 4 - Rules on ratification and entry into
force, including the reservations.
According to the CISG, the buyer and seller are under
the following main obligations:
The CISG reflects main following contents
1. Obligations of the Seller
(A) the criterion for identifying an international sale of
A. The seller must deliver goods that conform and are
contract according to the CISG’s application;
free of third party rights.
(B) scope of the CISG’s applications;
B. The seller must hand over any documents relating to
´(C) formation of international sales contract; the delivered goods.
(D) the buyers and sellers obligations ; and 2. Obligation of The buyer
(E) remedies for breach of international sales contract. A. The buyer must take delivery of the Goods
A. The Criterion for identifying an International Sales B. The buyer must pay for the goods
Contract According to the CISG

B. Sphere of The Two Cases of Application

The Three Cases of Non-Application

Firstly, non-application of the CISG to certain types of
transaction, such as consumer sales, auctions or
executions or other sales of by authority of law, sales of
securities ( Article 2(a)-(d));
Secondly, non-application of the CISG to certain specific
goods, such as ships, aircraft, electricity, property; and
non-application of the CISG.
Thirdly, non-application of the CISG to some subject
matter, such as validity of the contract, the effect which
the contract may have on the property in the goods
E. Remedies for Breach of International Sales of
Contract
1. Remedies of the Buyer
If the seller fails to perform any of his obligations, the
buyer may, depending on the circumstances, resort to a
number of remedies such as;
 Specific performance
 Additional period for performance

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2. Remedies of the Seller
S/he may require the performance of an obligation,
declare the contract avoided, and claim damages. The
seller may fix an additional period of time for the
performance of the buyer’s obligations. As may the
buyer, the seller may suspend the performance of
his/her obligation or declared the contract avoided, if it
is clear in advance that the buyer will not perform
his/her obligations. Furthermore , the seller may make
the necessary specifications when the buyer failed to
supply missing specifications.
A. The PICC- Overview
The nature and possible uses of the PICC are stated in
their Preamble:
 These Principles set forth general rules for
international commercial contracts, are listed
below.
 They shall be applied when the parties have
agreed that their contract be governed by them.
 They may be applied when the parties have
agreed that their contract be governed by
general
 principles of law, the lex mercatoria or the like.
 They may be applied when the parties have not
chosen any law to govern their contract.
 They may be used to interpret or supplement
international uniform law instruments.
 They may be used to interpret or supplement
domestic law.
 They may be serve as a model for national and
international legislators.
B. The PICC and International Sales Contracts
 The PICC are not especially designed to regulate
sales contracts.
 The CISG set rules applicable to many of the
most important aspects of a sales contract: the
formation, the obligations of the seller (the
delivery of the goods, the conformity, the third
party claims) and the corresponding remedies
available to the buyer, the obligations of the
buyer (the payment, and taking delivery) and
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the corresponding remedies available to the
seller and passing of risk, as well as some
provisions common to both parties’ obligations.
3. Principles of European Contract Law (PECL)
The PECL are considered as useful rules governing
international sales contracts, but in connection with
European countries.
A. Application of The PECL
B. Freedom of Contract
C. FORMATION OF THE CONTRACT
D. REMEDIES FOR NON-PERFORMANCE
Article 15 of the Commercial Law
 states that data messages which satisfy all
technical conditions and standards provided by
the law shall be recognized as being legally valid
as are written documents.
 The formation of the contract cannot be found
in the Commercial La w thud general principles
in the Civil Code shall be applied.
 A contract is formed and the parties are bound
by its provisions when an offer to buy or sell
goods is accepted.
Application of the UCP Article 1 of the UCP provides:
The Uniform Customs and Practice for Documentary
Credits, 2007 Revision, ICC Publication No. 600 (UCP)
are rules that apply to any documentary credit ("credit')
(including to the extent to which they may be
applicable, any standby letter of credit) when the text of
the credit expressly indicates that it is subject to these
rules. They are binding on all parties thereto unless
expressly modified or excluded by the credit.
From the scope of application above, three legal matters
should be taken into consideration.
1. UCP Rules Apply to Documentary Credit
2. Applied in the Case where the Text of the Credit
Expressly Indicates that It Is Subject to These Rules
3. The UCP Is Binding on All Parties thereto unless
Expressly Modified or Excluded by the Credit
Types of Documentary Credits
1. Irrevocable and Revocable Credits
A. Irrevocable credit
An irrevocable credit constitutes a definite undertaking
by the issuing bank that it will honor the credit,
provided that there is a complying presentation of the
documents specified in the credit (UCP 600 Articles 2
and 7(a)). Except as otherwise provided by Article 38 of
the UCP (transferable credits), an irrevocable credit may
not be modified or cancelled after it has been
communicated to the seller as the beneficiary, without
the consent of the seller, issuing bank and confirming
bank if any (UCP 600 Article 10
B. Revocable credit
is a credit that may be cancelled or the terms altered at
any time without the consent of the beneficiary.
Revocable credits therefore afford the beneficiary either
no or the lowest level of security protection
2. Unconfirmed and Confirmed Credits
Confirmation means a definite undertaking of the
confirming bank, in addition to that of the issuing bank,
to honor or negotiate a complying presentation.
Therefore, in unconfirmed credit, only the issuing bank
provides an undertaking to pay the beneficiary;
although the credit will be advised to the seller by the
advising bank, the advising bank has no undertaking to
pay.
A. Confirmed plus irrevocable credits
This type of credit constitutes an undertaking of
payment by two banks.
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B. When a credit should be 'confirmed'?
When the issuing bank is a well-known, first-class bank
of high standing, located in a country with a stable
political and economic climate, confirmation has little
practical value.
C. Operation of a credit confirmed
´The instruction to an advising bank to confirm a credit
must be given by the issuing bank, which will be
responsible for the confirmation fee unless it instructs
that the fee is to be charged to the beneficiary.
D. Silent confirmation
´ Silent confirmations fall outside the current provisions
of the UCP. A silent confirmation is an undertaking given
by a bank (at the request of the beneficiary, without the
request or authorization of the issuing bank) to add its
undertaking to a letter of credit to pay according to the
terms of the credit, providing all documents are
presented in order.
3. Sight Payment, Acceptance and Deferred Payment
Credits
Classified by the time at which the seller is entitled to
payment, documentary credits may be divided into the
following categories:
 Payment at sight' : the bank undertakes to pay
the seller (the beneficiary under the credit)
upon presentation of the specified documents.
 Deferred payment: the bank undertakes to pay
the seller at some future date determined in
accordance with the terms of the credit.
 Acceptance credit' : the bank undertakes to
accept bills of exchange drawn On it by the
seller. The bill will usually be a time bill payable
at a future date.
4. Straight (or Special Advised) Credits and Negotiation
Credit
In some credits, known as 'straight credits' , the issuing
bank's payment undertaking is directed solely towards
B. Performance Bonds and Guarantees
the seller.
The terms 'performance bond' and 'performance
guarantee are sometimes called 'on demand'
5. 'Red Clause' and 'Green Clause' Credits performance bond or demand guarantee) (hereinafter
the 'demand guarantee). The bank issuing a demand
Red clause' credits are those allowing the seller to draw
guarantee agrees to make payment on production of a
on the documentary credit in advance of shipment. The
written demand by the beneficiary, or his/her
advances are made against the warehouseman's
declaration that the principal has defaulted.
receipt, even though the beneficiary is able to deal with
the goods.

"Green clause' credits came to be used in the coffee

trade in Zaire and operate similarly to 'red clause'
credits. The only difference is that in this type of credit,
the goods are stored in the name of the bank.

6. Revolving Credits

A credit revolving around value enables the beneficiary

to present the documents as often as s/he wishes
during the credit period so long as the overall limit
specified in the credit is not exceeded.

7. Transferable and Non-Transferable Credits

A transferable credit allows the seller (the original

beneficiary of the credit) to transfer the rights
embodied in the credit to a third party, e.g., his/her own
suppliers.

8. Demand Guarantees and Standby Credits

These types of credit are within the UCP; they are,

however, of different character from the ordinary
documentary credits.

A. Standby Credit

A standby letter of credit is similar to an ordinary

documentary credit in that it is issued by a bank and
embodies an undertaking to make payment to a third
party (the beneficiary) or to accept bills of exchange
drawn on his/her, provided that the beneficiary tenders
conforming documents.
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