Lecturer: Fifi Yang

Contact Information: fifiyang1101@hotmail.com

13566038953/659094
Regular attendance and good performance in class

Preview the text each time before class

Learn the skills of presentation and case analysis by groups

Logic Relations between each chapter

• 1) Part One: Introduction

• 2) Part Two: Procedure of International Trade

• 3) Part Three: Practices--- The International Transactions

• 4) Part Four: Course Review

Reference books

• Export/Import procedures and documentation

By Thomas E. Johnson and Donna L. Bade
4th edition
• Multinational Firms and the Theory of International Trade
By James R. Markusen
• Rethinking International Trade
By Krugman, Paul R.
• Practices of International Product Trade (e-version)
What is Globalization?

• The shift toward a more integrated and interdependent

world economy
• Two components:
– The globalization of markets
– The globalization of production
Globalization of Markets

• The merging of distinctly separate

national markets into a global
marketplace
– Falling barriers to cross-border
trade have made it easier to sell
internationally
– Tastes and preferences converge
onto a global norm
– Firms offer standardized
products worldwide creating a
world market
Globalization of Markets

• Difficulties that arise from the globalization of markets

– Significant differences still exist among national markets
– Country-specific marketing strategies
– Varied product mix
Globalization of Markets

• The most global markets are

not consumer markets
• The most global markets are
for industrial goods and
materials that serve a
universal need the world
over
 Globalization of Production

• Refers to sourcing of goods and services from locations

around the world to take advantage of
– Differences in cost or quality of the factors of production
• Labor
• Land
• Capital
 Globalization of Production

• Historically this has been primarily confined to manufacturing

enterprises
• Increasingly companies are taking advantage of modern
communications technology, and particularly the Internet, to
outsource service activities to low-cost producers in other
nations
 Globalization of Production

• Outsourcing of productive activities to different suppliers

results in the creation of products that are global in nature
• Impediments to the globalization of production include
• Formal and informal barriers to trade
• Barriers to foreign direct investment
• Transportation costs
• Issues associated with economic risk
• Issues associated with political risk
The Emergence of Global Institutions

• Globalization has created the need for institutions to help

manage, regulate and police the global marketplace
• GATT
• WTO
• IMF
• World bank
• United Nations
The Problems and Pitfalls of Exporting

• Firms that do not export lose out on huge opportunities for

growth and cost reduction
• Large firms pro-active in seeking foreign opportunities
• Medium and small-sized firms slow to respond
– Too busy with local side of business
– Ignorance of potential opportunities
– Intimidated by mechanics of exporting to a foreign
country
Barriers to Exporting/Importing

• Sociocultural Barriers
• Economic Barriers
• Trade Barriers
Sociocultural Barriers

• Language
• Religion
• Customs and manners
What is culture?

• It is “the software of the mind"-the social programming

that runs the way we think, act and perceive ourselves
and others. lA more formal definition is that culture is a
set of learned core values, beliefs, standards, knowledge,
morals, laws, and behaviors shared by individuals and
societies that determines how an individual acts, feels,
and views oneself and others.
• It is learned behavior and hence can be changed. It
takes study, a keen sense of observation, and, above all,
a willingness to learn and relinquish the notion that one's
native culture is superior.
• Understanding the cultural context and mindset of a
potential foreign business partner or competitor can help
in developing sound strategy for negotiations and deal-
making.
 Case Study

• Carl was an employee of an international company and he’s working in

Japan now. He’s very pleased to be invited to a party shortly after his
arrival in Japan, where most of the guests were Japanese. At the party,
everyone was expected to entertain, even the senior managers got up to
give a song or tell a joke. All the people seemed so informal and cooperative,
far different from those conventional, stuffy Japanese Carl had read about
before.Read the following story and discuss in pairs or groups: At a meeting
on the next day after the party, Carl found that he was at the same room,
together with the people who had contributed to the merriment of the
evening at the party. Keeping the informality in mind, Carl used the meeting
as an opportunity to present a proposal. After Carl brought up his proposal,
however, he was met with a wall of silence and, even to the end of meeting,
no one had ever offered him any idea about his proposal.Carl totally got
puzzled with the response of his Japanese colleagues. But he didn't know
what was wrong with it.
Language

• current estimates indicate that there are about 6000

languages spoken in the world today. However, many
languages with a smaller number of speakers are in
danger of being replaced by languages with large
numbers of speakers. lThe 10 most widely spoken
languages, with approximate numbers of native
speakers, are as follows: Chinese, 1.2 billion; Arabic,
422 million; Hindi, 366 million; English, 341 million;
Spanish, 322 to 358 million; Bengali, 207 million;
Portuguese, 176 million; Russian, 167 million; Japanese,
125 million; German, 100 million. If second-language
speakers are included in these figures, English is the
second most widely spoken language, with 418 million
speakers
• Language is more than just spoken and written words.
Non-verbal lcommunication, gestures, body language,
facial expressions all convey a message. When two
people do not speak a common language and are forced
to use an interpreter, this non-verbal form of
communication is the only direct contact and method
available for individuals to take a direct read of each
other. By failing to understand the cultural context in
which such non-verbal communication occurs you run
the risk of not only failing to read your colleague across
the table but of actually sending the entirely wrong signal.
A case between
an American Businesswoman And a British Businessman
• "We seemed to get along great on the telephone. It was a relief after
several years in Eastern Europe to actually be doing business
with the British. At least we spoke the same language," says the
American businesswoman. "We thought alike. I trusted him."
• All went well until the American traveled to London to meet face-to-
face with her British colleague to sign a research and development
contract. The first meeting did not go well. "There was something
that didn't seem right," she says."Throughout the presentation none
of the Brits, not even the guy I had developed a phone relationship
with, would look us in the eye. It was like they were hiding
something. After a lot of internal discussion, we decided to sign the
contract, but many of us still felt uneasy. Even when we talked on
the phone later I just couldn't get that failure of them to look me in
the eye out of my head. It almost ruined the relationship and sunk
the deal."
• All that doubt could have been avoided if the
American had been cognizant of one subtle
cultural difference: Whereas Americans believe
that looking someone directly in the eye during
negotiations indicates honesty and sincerity, the
British believe such a gesture to be a mark of
rudeness until a more familiar relationship is
established. "I guess I shouldn't have taken it so
personally," says the American. "I understand it
now, but I still don't like it."
Religion

• Belief in and reverence for a supernatural power

or powers regarded as creator and governor of
the universe.
• A personal or institutionalized system grounded
in such belief and worship.
• The life or condition of a person in a religious
order.
• A set of beliefs, values, and practices based on
the teachings of a spiritual leader.
• A cause, a principle, or an activity pursued with
zeal or conscientious devotion.
Major Religions

• Judaism
• Christianity
• Buddhism
• Islam
 Judaism
• the belief that a single, transcendent God created the universe and
continues providentially to govern it.
• the teleological conviction that the world is both intelligible and
purposive, because a single divine intelligence stands behind it.
lNothing that humanity experiences is capricious; everything ultimately
has meaning.
• The mind of God is manifest to the traditional Jew in both the natural
order, through creation, and the social-historical order, through
revelation.
• The same God who created the world revealed himself to the
Israelites at Mount Sinai.
• The content of that revelation is the Torah (“revealed instruction”),
God’s will for humankind expressed in commandments (mizvoth) by
which individuals are to regulate their lives in interacting with one
another and with God. By living in accordance with God’s laws and
submitting to the divine will, humanity can become a harmonious part
of the cosmos.
Islam

• lslam taught that there was one God, and that Muhammad was the
last in a series of prophets and messengers.
• Through his messengers God had sent various codes, or systems of
laws for living, culminating in the Qur’an (Koran), the holy book of
Islam.
• Islam also taught that the Christian Bible (which includes the
Hebrew Bible as the Old Testament and an additional 27 books
referred to as the New Testament), and the Qur'an were all holy
books.
• Islam taught that the God of Islam had provided humanity with the
means to know good from evil, through the prophets and the
Qur’an. Therefore, on the Day of Judgment people will be held
accountable for their actions.
• Five Pillars of Islam::(1) pronouncing the confession of faith; (2)
performing the five daily prayers (salat); (3) fasting during the month
of Ramadan (saum); (4) paying the alms tax (zakat); (5) and
performing, at least once in life, the major pilgrimage to Mecca (hajj).
• A German investment banker was sent to negotiate a finance deal
for a manufacturing plant in Vietnam-a country that may follow a
communist social philosophy but is heavily influenced by a
centuries-old Confucian philosophy that emphasizes consensus
and places a premium on harmony. After all, lighting incense at a
family shrine is as much a part of contemporary Vietnamese life as
watching videos or attending local Communist Party meetings.
• "My contact proudly boasted of his Communist Party affiliations but
at the same time proclaimed himself a man of the 1990s, tuned into
Western business ways. The negotiations seemed to drag on for
months and it was impossible to find anyone prepared to make a
decision. I just put it down to the inefficiency,'" says the banker. "I
began losing patience. They didn't seem to understand that this deal
could mean a lot of money for their factory, for my bank and for me. I
was shouting trying to make my point. I banged my fist. I was out of
control. Days later the Vietnamese broke off the talks and suggested
I leave. I thought they just don't get it."
• But it was not the inefficiency that sabotaged the
mission. It was the failure to fully understand the
influence of Confucian thought on Vietnamese
perceptions. Decision making is slow in Vietnam partially
because Confucian beliefs dictate decision by
consensus. Adversity-and contract talks-is faced with
calm and patience. Lastly, the Vietnamese have little
respect for anyone who loses patience (the German
banker's first mistake) or appears selfish (banker mistake
number two-by highlighting how much money he could
make from the deal). A little more homework and
understanding of the cultural context in which the banker
was dealing and the deal might have been saved.
Economic Barriers

• Exchange Rate
• Extra Costs: Ocean Freight
Packing Cost
Marine Insurance
Cost of Document
Trade Barriers

• Tariffs:
specific duties ad valorem duties
compound duties
• Nontariffs:
quota
licensing system in importing countries
new barriers
Tariffs

• Tax levied upon goods as they cross national boundaries,

usually by the government of the importing country. The
words tariff, duty, and customs are generally used
interchangeably. Usually assessed on imports, tariffs
may apply to all foreign goods or only to goods produced
outside the borders of a customs union. A tariff may be
assessed directly, at the border, or indirectly, by requiring
the prior purchase of a license or permit to import
specified quantities of the good. Examples of tariffs
include transit duties and import or export taxes, which
may be levied on goods passing through a customs area
en route to another destination.
• In addition to providing a source of revenue, tariffs can
effectively protect local industry by driving up the price of
an imported item that competes with domestic products.
This practice allows domestic producers either to charge
higher prices for their goods or to capitalize on their own
lighter taxes by charging lower prices and attracting
more customers. Tariffs are often used to protect "infant
industries" or to safeguard older industries that are in
decline. They are sometimes criticized for imposing
hidden costs on domestic consumers and encouraging
inefficiency in domestic industries. Tariffs are subject to
negotiation and treaties among nations
• An ad valorem tariff is a fixed percentage of the
value of the good that is being imported.
Sometimes these are problematic as when the
international price of a good falls, so does the
tariff, and domestic industries become more
vulnerable to competition. Conversely when the
price of a good rises on the international market
so does the tariff, but a country is often less
interested in protection when the price is higher.
• A specific tariff is a tariff of a specific
amount of money that does not vary with
the price of the good. These tariffs may be
harder to decide the amount at which to
set them, and they may need to be
updated due to changes in the market or
inflation.
Quota
• In international trade, a government-imposed limit on the
quantity of goods and services that may be exported or
imported over a specified period of time. Quotas are
more effective than tariffs in restricting trade, since they
limit the availability of goods rather than simply
increasing their price. By limiting foreign goods, a quota
aims to allow domestic goods to compete more
successfully, though the price of the goods may also rise.
Quotas restricting trade were first imposed on a large
scale during World War I. In the 1920s, quotas were
progressively abolished and replaced by tariffs, but their
use was revived in the wave of protectionism set off by
the Great Depression. After World War II, the western
European countries began a gradual dismantling of
quantitative import restrictions, but the U.S. was slower
to discard them.
Information sources

• U.S. Department of Commerce

– International Trade Administration
– United States and Foreign Commercial service agency
– Provide “best prospects” list, “comparison shopping
service,” and customized market research survey for a
small fee
– Organizes exhibitions at international trade fairs to help
potential exporters make foreign contacts and explore
export opportunities
– Matchmaker program
Information sources

• Trade Commissions
– Maintained by many large cities
– Provide business counseling, information gathering, and
financing
• Commercial banks and major accounting firms
Export Management Companies (EMC)

• Act as the export marketing department for clients

– Help identify opportunities and avoid common pitfalls
• Two types of assignments
– Begin exporting operating operations for firm with the
understanding that the firm will take over operations once it
is well established
– Provide start-up services and have continuing responsibility
for selling the firms products
• Drawback: A firm can fail to develop its own exporting
capabilities
Export Strategy

• Risks can be decreased by taking few steps

• Hire an EMC or experienced export consultant to identify
opportunities and deal with red tape
• Focus on a few markets to learn what is needed to succeed
• Enter on a small scale to reduce costs of any failure
• Invest time and managerial commitment in building export
sales
Export Strategy

• Build strong and enduring relationships with local distributors

and customers
• Hire local personnel
• Keep option of local production open
• Cost-efficient economies of scale
• Greater market acceptance
 International Trade

• 1) Question-discussion moment
• Why do countries trade?
• Why do other countries buy some goods
from USA?
• Shouldn’t a strong country such as the
United States produce all the products rather
than import from Japan?
• 2) Trade news moment:
Read, Puzzle, Ask, Discuss
International Trade

• Objectives:
• To master some basic concepts such as Trade, Visible Trade,
Barter, etc…
• To master the ways to measure the international trade
• To understand causes of the international trade
International Trade

• What is international trade?

• What is the origin of international trade?
• Why trade with other nations?
• What are traded internationally?
• How to measure international trade?
What is international trade?

• International trade is the fair and deliberate exchange of goods

and services across national boundaries
• International trade VS foreign trade
• Free trade
• The movement of goods and services among nations without
political or economic obstruction.
International trade vs. foreign trade

• International trade, also called “world trade”,

generally refers to the exchange of goods and services
among different countries. It is the aggregate of the
import and export of all the nations.
• Foreign trade refers to the exchange of goods and
services of one country (region) with another country
(region). It comprises two parts - import and export.
 Pros and Cons of free trade
• Pros
• The global market contains over 6
billion potential customers for goods
and services.
• Productivity grows when countries
produce goods and services in which
they have a comparative advantage.
• Global competition and lower-cost
imports keep prices down, so inflation
should not curtail economic growth.
• Open trade encourages innovation,
with fresh ideas coming from
foreign markets
• Uninterrupted flow of capital gives
countries access to foreign
investments, which keeps interest
rates low.
• Cons
• Domestic workers in
manufacturing lose jobs due to
increased imports or production
shifts to global markets.
• Workers can face pay-cut
demands from employers, who
can threaten them with the
possibility of sending jobs abroad.
• Competitive pressure often makes
service and white-collar jobs
vulnerable to operations moving
overseas.
• Domestic companies can lose
their comparative advantage when
competitors build advanced
production operations in low-wage
countries.
European Free Trade Zone

• The European Economic

Area is the largest free trade
zone in the world. It
comprises the 15 members
of the European Union (EU),
plus Iceland, Liechtenstein,
and Norway
North American Free Trade Zone

• 加图 • Canada, Mexico, and the

United States comprise the
North American Free Trade
Zone, the world's second
largest free trade area with
more than 365 million
consumers.
South American Free Trade Zone

• Argentina, Brazil, Paraguay,

and Uruguay form Mercosur,
the largest free trade zone in
South America. Bolivia and
Chile are associate members
of Mercosur.
What is the origin of international trade?

• The reason for trading

• The reasons for international trade
Resource reasons
Economic reasons
Preference reasons
Other reasons
Growth of World Trade and World 0utput

2000
1800
1600
1400
1200
Trade
1000
800 GDP Volume
600
400
200
0
1950 1960 1970 1980 1990 1997
 Why trade with other nations? Advantages
• International trade leads to more efficient and increased world
production, thus allowing countries (and individuals) to consume a
larger and more diverse bundle of goods.
• A nation possessing limited natural resources is able to produce and
consume more than it otherwise could.
• the establishment of international trade expands the number of
potential markets in which a country can sell its goods.
• The increased international demand for goods translates into greater
production and more extensive use of raw materials and labor, which
in turn leads to growth in domestic employment.
• Competition from international trade can also force domestic firms to
become more efficient through modernization and innovation.
Why Trade With Other Nations? Importance

• Some nations export only to expand their domestic market or

to aid economically depressed sectors within the home
economy.
• Other nations depend on trade for a large part of their national
income and to supply goods for domestic consumption.
• In recent years foreign trade has also been viewed as a means
to promote growth within a nation's economy. Developing
countries and international organizations have increasingly
emphasized such trade.
 What are traded internationally?
• Merchandise Exports and Imports
They are also referred to as visible exports and imports because their
movements across international borders are visible to observers. They
constitute a crucial link in the international economy and are the major
source of international revenue and expenditure for most countries.

• Exports and Imports of services

They are also referred to as invisibles and include all sales other than
visible goods. As consumption of services has risen steadily in recent
decades, there has been an explosive growth in service trade. Trade in
services generally requires a greater level of commitment and
sophistication than that required by merchandise trade. This is because
the service trade often requires components of training and technology
transfer that demand support from the vendor over time. Growth in
service trade is expected to exceed that of merchandise trade.

• Give some examples of each type.

 Invisible Trade

• Revenue and expenditure incurred by exchange of services and other

nonmaterial commodities.
• Income and expenses concerning the import and export of
commodities, e.g. freight, premium, processing charges.
• Income and expenses irrelevant to the import and export of
commodities, e.g. traveling expenses, diplomatic agent expenses,
overseas remittances, franchise fees, dividends paid to foreign
investors, etc.
• As invisibles do not go through customs clearance, they are not
indicated in customs statistics, but on a country’s statement of balance
of payments.
 How to measure international trade?
• 1) The balance of trade
The balance of trade is a nation’s relationship of exports to
imports.
A favorable balance of trade = trade surplus
an unfavorable balance of trade = trade deficit
• 2) The balance of payment
The balance of payment = the difference between money coming
into a country and money going out of the country + money flows
coming into or leaving a country from other factors.
favorable balance of payments VS unfavorable balance of payments
• About FDI
 The Balance of Payment

• Definition: relationship between the amount of money a nation

spends abroad and the income it receives from other nations. The
balance of payments is officially known as the Statement of
International Transactions and includes two main accounts:
The first, the current account, tracks activity in merchandise trade—
exporting and importing; income earned from investments abroad;
money paid to foreign investors; and transactions on which the
government expects no returns.
The second, the capital account, tracks both loans given to foreigners
and loans received by citizens.
Because the balance of payments is one reflection of a nation's
financial stability in the world market, the International Monetary
Fund (IMF) uses these accounts to make decisions such as qualifying
a country for a loan. The IMF also provides the information to its
members so that they can make informed decisions about investments
and trade.
• The balance of payments can be used as an indicator of a
nation's economic stability. Changes in the balance of
payments can affect the exchange rate of a country's currency.
For example, a deficit in merchandise trade means that the
currency of that nation is flooding the world economy, since it
is being used to buy the imports that cause the deficit. Unless
government controls are used, the value of the currency will
most likely depreciate.
FDI
• Foreign Direct Investment (FDI) is the buying of permanent property
and business in foreign nations. It can take the form of either direct or
portfolio investment. Direct investment occurs when acquisition of
equity interest in a foreign company is made. This interest may vary
between a small percentage and a controlling interest of a company’s
equity. (Ownership of more than 50% is not necessary in securing a
controlling interest in a company). Controlling interest in a foreign
company represents a high level of commitment to foreign operations
and is usually accompanied by personnel and technology transfers
abroad. The appeal of direct investment lies with the access to market
and resources as well as rationalization of global production afforded
by such an arrangement.
• In contrast, portfolio or indirect investments, are chiefly motivated by
short- to medium-term profits. They may include equity investments
that do not involve an active role in management or bonds and other
debt instruments issued by foreign companies and governments. As
financial markets around the world become increasingly integrated in
recent years, international portfolio investments have become popular
with investors as a vehicle of diversification further hastening the
process of international financial integration.
 FDI Inflows
1980-1996

400
350
300
World
250
Dev Ctry
200
Dlvg Ctry
150
100 USA
50 China
0
1985- 1991 1992 1993 1994 1995 1996 1997
90
The National Composition of the Largest Multinationals

• Of the Top 260 in 1973 Of the Top 500 in 1997

• United States 126 (48.4%) 162 (32.4%)

• Japan 9 (3.5%) 126 (25.2%)
• Britain 49 (18.8%) 34 (6.8%)
• France 19 (7.3%) 42 (8.4%)
• Germany 21 (8.1%) 41 (8.3%)
The Reasons for FDI

• The decline of barriers to foreign ownership in most countries

of the world.
• Liberalization of trade and financial markets
• Decline in transportation and communication costs that
resulted from technological breakthroughs.
The Reactions to FDI

• FDI has historically been controversial, especially in the

receiving country’s point of view.
• Radical views
• Middle-ground views
• Positive views
• Radical views: (This has to do with the experience of many former
colonies of the Western industrial countries. )
Contractual terms based on unequal bargaining situations.
Create dependence of the emerging country on the market knowledge
and technology of the foreign investor.
• Middle-ground views: welcome the technology and skills transfer but
watchful to avoid some of the costs. (e.g. the loss of influence as
decisions are made abroad regarding the dismissal of workers or the
closure of a plant.)
• Positive views: encourages free trade; transfers new technologies;
serves as a channel for local firms to internationalize indirectly;
generates positive spillover of ideas, including opening of new
channels of information flows; increases competition, hence
innovation and productivity.
Basic Concepts
• Opportunity cost: the most desired goods and services that
are forgone in order to obtain something else.
• Absolute advantage: the ability of a country to produce a
specific good with fewer resources (per unit of output)
than its trading partners.
• Comparative advantage: the ability of a country to produce
a specific good at a lower opportunity cost than its trading
partner.
International Specialization

• The beginning of specialization

• The worth of international specialization
• Law of Comparative Costs: by specializing in the output of
those goods in the production which they have the comparative
advantage, countries can increase the total output of goods.
• Classic Economics
• classical economics starts with Adam Smith, continues with
the British economists Thomas Robert Malthus and David
Ricardo, and culminates in the synthesis of John Stuart Mill,
who as a young man was a follower of Ricardo.
• members of the group agreed on major principles. All believed
in private property, free markets, and, in Mill's words, that
“only through the principle of competition has political
economy any pretension to the character of a science.” They
shared Smith's strong suspicion of government and his ardent
confidence in the power of self-interest represented by his
famous “invisible hand,” which reconciled public benefit with
individual pursuit of private gain.
Adam Smith
• British philosopher and economist, whose celebrated treatise
An Inquiry into the Nature and Causes of the Wealth of
Nations was the first serious attempt to study the nature of
capital and the historical development of industry and
commerce among European nations.
• Smith's Wealth of Nations represents the first serious attempt
in the history of economic thought to divorce the study of
political economy from the related fields of political science,
ethics, and jurisprudence. It embodies a penetrating analysis of
the processes whereby economic wealth is produced and
distributed and demonstrates that the fundamental sources of
all income, that is, the basic forms in which wealth is
distributed, are rent, wages, and profits.
• The central thesis of The Wealth of Nations is that capital is
best employed for the production and distribution of wealth
under conditions of governmental noninterference, or laissez-
faire, and free trade.
• In Smith's view, the production and exchange of goods can be
stimulated, and a consequent rise in the general standard of
living attained, only through the efficient operations of private
industrial and commercial entrepreneurs acting with a
minimum of regulation and control by governments
• Smith proclaimed the principle of the “invisible hand”: Every
individual in pursuing his or her own good is led, as if by an
invisible hand, to achieve the best good for all. Therefore any
interference with free competition by government is almost
certain to be injurious.
David Ricardo

• (1772-1823), British economist, born in London.

• In his first work on economic theory, The High Price of
Bullion, a Proof of the Depreciation of Bank Notes (1809),
he argued for a sound currency based on metal.
• In his major work, Principles of Political Economy and
Taxation (1817), Ricardo offered several theories based on
his studies of the long-range distribution of wealth.
• Ricardo feared increasing population would lead to a
shortage of productive land; his theory of rent is based on
relative land productivity.
The Theory of Absolute Advantage

• Assumption: perfect competition

• A case of absolute advantage
Perfect Competition
• Although rarely possible, perfect competition, as a concept,
provides a useful benchmark for evaluating performance in
actual markets.
• Perfect competition exists when:
• (1) an industry has a large number of business firms as well
as buyers
• (2) the firms on the average are small
• (3) buyers and sellers have complete knowledge of all
transactions within the market
The Theory of Comparative Advantage

• Some cases that illustrate the theory

 Content
• Launching a Profitable Transaction
• Business Negotiation and Establishment of Contract
• Implementing the Contract
Launching a Profitable Transaction
• Market Research
• Sourcing Contacts
Business Negotiation and Establishment of Contract

• Enquiry
• Offer
• Validation, Withdrawal and Revocation of an Offer
• Counter- Offer
• Acceptance
• Conclusion of a Contract
Enquiry

• Inquiry upon the terms of trade

• Can be made by either the seller or the buyer
• Not binding upon either party
• Can be made to more than one client
• A sales opportunity to foster a potential long-term relationship
Enquiry

• An enquiry includes the commodity’s name, quality, mode, the

desired quantity and delivery date etc. e.g.: One of our clients
in Odense is in the market for a parcel of 50 metric tons Bitter
Apricot Kernels of 2002 crop and we, therefore, would ask
you to make us your best possible firm offer on CIFC2%
Odense basis, stating terms of payment and the earliest date of
shipment.
Offer

• A proposal of terms and conditions presented in a potential

contract by one party called the offeror, to another party, called
the offeree.
• Can be made by either party. Buying offer; book; order; bid
• Offer with engagement and offer without engagement
Offer with Engagement

• The kind of offer in which the offeror’s intention of making a

contract is definitely indicated, and under which the offeror
cannot revoke or amend when he has offered during the
validity of the offer.
• Once unconditionally accepted by the offeree within its
validity, it is binding upon both parties.
• Also called “firm offer”, “irrevocable offer”
• An offer with engagement must be clear, complete and final. It
should include:
• A detailed description of the item
• Price, currency
• Packaging
• Minimum or maximum quantity
• Quality
• Shipping date, mode
• Terms of payment
• A timeframe during which the offer is available.
Offer without Engagement

• An offer which is unclear, incomplete or with reservations. It

is not binding upon both parities.
• Indicative expressions: “reference price”, “subject to our final
confirmation”, “subject to being unsold”, “subject to change
without notice”, etc.
Validation, Withdrawal and Revocation of an Offer
According to CISG:
• An offer becomes effective when it reaches the offeree.
• An offer, even if it is irrevocable, may be withdrawn if the withdrawal
reaches the offeree before or at the same time as the offer.
• Until a contract is concluded an offer may be revoked if the revocation
reaches the offeree before he has dispatched an acceptance.
• However, an offer cannot be revoked: (a) if it indicates, whether by stating
a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it
was reasonable for the offeree to rely on the offer as being irrevocable and
the offeree has acted in reliance on the offer.
• An offer, even if it is irrevocable, is terminated when a rejection reaches the
offeror.
Counter-offer

• An offer made by an offeree to an offeror, accepting some

terms and changing other terms.
• Can be made verbally or in writing
• Virtually a rejection of the offer and a new offer
• A reply to an offer which purports to be an acceptance but
contains additions, limitations or other modifications is a
rejection of the offer and constitutes a counter-offer.
• Additional or different terms relating, among other things, to
the price, payment, quality and quantity of the goods, place
and time of delivery, extent of one party's liability to the other
or the settlement of disputes are considered to alter the terms
of the offer materially.
Acceptance

• The assent to the terms of an offer, required before a contract

can be valid.
• Must be absolute and unconditional
• Can only be made in the form of a statement (verbal or in
writing) or any other conduct by an offeree, the particular
person or a group of persons, who are clearly stipulated in a
firm offer.
• Inactivity is no acceptance
• Must be made within the life of a firm offer
• Must use the means authorized by the offeror to communicate
the acceptance.
• A statement made by or other conduct of the offeree indicating
assent to an offer is an acceptance. Silence or inactivity does
not in itself amount to acceptance.
• An acceptance of an offer becomes effective at the moment the
indication of assent reaches the offeror. An acceptance is not
effective if the indication of assent does not reach the offeror
within the time he has fixed or, if no time is fixed, within a
reasonable time, due account being taken of the circumstances
of the transaction, including the rapidity of the means of
communication employed by the offeror. An oral offer must be
accepted immediately unless the circumstances indicate
otherwise.
• However, if, by virtue of the offer or as a result of practices
which the parties have established between themselves or of
usage, the offeree may indicate assent by performing an act,
such as one relating to the dispatch of the goods or payment of
the price, without notice to the offeror, the acceptance is
effective at the moment the act is performed, provided that the
act is performed within the period of time laid down in the
preceding paragraph.
• A reply to an offer which purports to be an acceptance but
contains additional or different terms which do not materially
alter the terms of the offer constitutes an acceptance, unless the
offeror, without undue delay, objects orally to the discrepancy
or dispatches a notice to that effect.
Conclusion of a Contract

• An agreement that creates an obligation, which is a binding,

legally enforceable agreement between two or more competent
parties
• Based on the offer and acceptance of both parties.
• Formal in writing, signed, made in duplicate
• Sales contract vs. purchase contract
Main Clauses of a Contract

• Quantity
• Packing
• Marking
• Price
• Payment
• Shipment: port of loading and port of discharge
• Insurance
• Commodity inspection
• Claims
• Arbitration
• Force majeure
Implementing the Contract

• Import Procedure
• Export Procedure
 Import Procedures
• Import License
• Trade Negotiation
• L/C
• Booking Shipping Space or Ship
• Insurance
• Document Examination and Payment
• Customs Clearance
• Taking Delivery and Inspection
• Claim
• Settlement of Disputes
 Export Procedure

• Export License
• Trade Negotiation
• Cargo Readiness
• L/C
• Customs Clearance
• Shipping
• Insurance
• Document and Payment
I. Contract
Main Transaction Elements
Description of the goods
• Example
Santo Coffee: using the specialist terms-minimum, regular,
good, superior, prime and extra prime.
Quantity specification
• Definition
• Examples: 50 tons of sugar
100 hectoliters of beer
500 linear metres of steel pipe
100 gross of screws
Packing
• The type of packing= the form of transport
• Examples : cans, container…
The applicable trade term
• Definition : It determine the point at which the risks associated
with the goods pass from the seller to the buyer, and which
costs involved with shipment of the goods.
Price
• Related to a certain quantity: weight, volume, length, pieces.
eg. Sugar-$4.5/ton
• Export packing:eg. 15 layers of 200 grams paper bags
• Total proce= quantity *unit price
Time of Delivery
• The time of delivery: This may be *** days after receipt of
order, within or at the end of a certain period, on an agreed
date, or in an _____.
• The place of delivery: specific in the trade term
Mode of shipment
• Varieties: parcel post, truck, rail, special
service, inland waterway, ocen-going
vessel, pipeline, or aircraft.
single

consolidated (joint-cargo)
Terms of Payment
The time through
The place Banking system
The currency
II. The Order Confirmation
• Definition: “If the order received agrees with the quotation, it
is sound practice in all cases that the seller sends an order
confirmation.”
III. Documents
• Invoice
• Packing List
• The Shipping Instructions
• Other documents
III. The Invoice
• It is a commercial document
• As soon as the goods have been delivered, the invoice is raised.
The Invoice- functions
• settlement: the buyer must pay.
• Serves as a working document
• Also an accounting document
The Invoice- content
• The name and address of seller
• The name and address of buyer
• The name and address of the consignee
• The word “Invoice”
• The invoice number
• The date
• The buyer’s reference number
• The VAT NO.
• Others
The example of Invoice
Packing List
• It contains the marks and numbers of the package
• It’s important to the carrier
The shipping instructions
• Content
* stowage requirement
* hazard code of the goods
* notify address to be informed of the shipment
* in the case of shipments by vesel, the FOB value.
* the No. of transport document
* freight prepaid or payable at destination
The Shipping Instruction
Other requirements
• Legalisation
• Certificate of Origin
• Customs Invoice
• Consular invoice
• Transport insurance policy or certificate
• Export/ Import License
• Certificate for claiming import duties
• Certificate for claiming export subsidy
• Specific certificate
Documents
I. Background
• The necessity of International rules
* different legal system
* risk: at what point did the risk pass?
who had to do what?
who had to pay?
• The establishment of INCOTERMS
The INCOTERMS 2000
• Intention of the INCOTERMS 2000
* The division of costs between seller & buyer
* The division of the risk between seller & buyer
* The division of tasks between seller & buyer, eg. Packing, export
and import customs clearance
ICC defines the “Critical points”
eg. Term + place= FOB Hamburg
The Categories
• Group E: Departure
• Group F: Main carriage unpaid
• Group C: Main carriage paid
• Group D: Arrival
Group E
• Ex works (EXW)
*represents the minimum obligation for the seller.
*Delivery: at the seller’s works
the buyer collect the goods
Group F
• Free Carrier FCA
• Free alongside ship FAS
• Free on board FOB
the main carriage is not paid by
the seller
Group C
• Cost and freight CFR
• Cost, insurance and freight CIF
• Carriage paid to CPT
• Carriage and insurance paid to CIP

the seller pays the main carriage

Group D
• Delivered at frontier DAF
• Delivered ex ship DES
• Delivered ex quay DEQ
• Delivered duty unpaid DDU
• Delivered duty paid DDP
(the sellers maximum obligation)

arrival contract
The division by type of transport
Division by type of transport
II. Application of the INCOTERMS
• Do not have the force of law or treaty
• Determined by the law agreed on the parties concerned.
• CIF & FOB are most widely used terms
Rules (general rules )
• Export customs clearance seller
• Import customs clearance buyer
• Exception EXW
DDU
DDP
“export license” “import license” are included in the “clearance”
Rules (general rules)
• Loading and unloading
* the buyer is responsible for the unloading under all Incoterms.
* variance
eg. “liner terms” CFR unloading
“landed” CIF be covered by the seller
Rules (general rules)
• Cost & Risks transfer
* C-Group: “the goods pass the ship’s railing or upon delivery
to the first carrier, even though the costs have to be borne by
the seller for a longer pat of the journey”.
* F-Group
* D-Group
Rules (general rules)
• Incoterms 2000. pdf
Three types of standard contracts
• general world wide business practice.
eg. Incoterm 2000 No Problem
• specific industry arises
eg. Commodity trade. No problem arise
• Used at the individual company level Problem may arise
Problems may arise
Some aspects of company specific
terms & conditions
Claim handling
• Within 8 days after receipt of the goods.
• In 2 situations, No claim can be made
*when PSI has been agreed upon and the buyer has accepted
the relevant certificate.
*the buyer is allowed to take samples of the consignment
before he takes physical possession of them, if the samples
are accepted as being according to specification.
Dispute resolution
• Which law?
• Which court?
• Arbitration?
• Execution?
Retention of ownership
• “the ownership only passes when the goods have been paid
for”.
Force majeure & hardship
• = “Acts of God”
eg. War, strike, riots and terrorism
Product liability
• “any product liability claim may be referred to the seller”.
Company specific conditions
• “As an example, in the equipment industry these may indicate
the period of warranty, the period during which service is
provided and the time that spare parts can be obtained”.
International sales contract synohronisation
• CISG
I. Overview
• Packing & Packaging
• Transport as a cost price factor
• The Parties involved in transport
• The Choice of transport
* by air
* by sea
* by rail
* by inland waterway
Packing & Packaging
• Packing: “ the action of putting the goods into a pack”
• Package: “the materials of which the pack is comprised”

“about 70% of all tramsport losses could have been

avoided through better packing/packaging and more
careful handling”.
Procedure of packing & packaging
Important Issues in Packing and Packaging
• Protecting:
“ be matched to the type of transport and the nature of the
storage and handling it will receive”
“ The protection may be against pilferage (expensive goods),
moisture (tropics), salty sea air, high temperature, difference in
air pressure and temperature (condensation in containers),
corrosion, spoilage or the formation of mould.”
• Handling and transport
*pallet 20ft
*wooden cases
*container 40ft
*stowage
*standardization of packaging formats
Transport as a cost price factor
• “the rates fluctuate”
• “freight rates”
The parties involved in transport
• Shipper: He who orders the shipment to be made is referred
• Consignee: the buyer, or someone else
• Carrier: the transporter is referred to …
 Other Parties involved
• The forwarding agent : 1.acting on behalf of the shipper.
2.arranges the transport of the goods.
• The customs agent : 1.registered with customs
2.look after the processing of the
customs documents.
• The ship agent or ship-broker : 1. shipping company’s agent
2. arranges cargo for the vessel in
place where the carrier does not
have its own offices.
• The stevedore : take care of the export loading and discharging of ships

• The packer : works on instructions from shippers and forwarding agents

All Parties involved in transport
The Choice of transport
• Nature of goods: volume, weight, value…
• The characteristics of transport mode: flexibility, reliability…
• Examples:
high value-to-weight ratio of the good air transport
low “value density” by ship
Transport modes
• Transport by sea
• Transport by air
• Transport by road
• Transport by rail
• Transport by inland waterway shipping
Transport by sea---variations
• Liner traffic:
fixed schedules of sailing, depending on the supply of cargo on
particular route.

conference : a sort of carted association which regulate the level

of capacity through…
non-conference : “outsiders” “operate liner service, however, if a
particular route is attractive…” “lower than
conference route, less…”
Transport by sea---variations
• Tramp or general traffic :
operate on a non-scheduled basis and sail where the cargo
presents itself
Transport by sea---freight rates
• General cargo rate structure : goes by product & product style
* “Liner or conference rates include loading & unloading
charge”
* “high-value goods are sometimes subject to ad valorem rate”
• Container rate structure: are quoted per type of container,
whatever they contain
Transport by sea---document (B/L)
• Functions: receipt by the carrier
contract of transport and
documentary proof of title
• Variety: order B/L: transferable by endorsement in blank or
in full
straight B/L : non-transferable and may be used for
unaccompanied personal baggage.
Transport by sea---document (B/L)
The Charter
• “This is a form of leasing of a vessel or airplane including
crew”
the voyage charter = for a specific voyage

the time charter = for a specific time

charter party
Transport by air
• IATA
• Freight rates
• Air waybill
Other modes of transport
• Road haulage
• Rail transport
• Inland shipping
Introduction

• Cash: rare & raise the question of illegal transaction

• Payment in kind: such as barter, outside the scope of this book
• Negotiable financial instruments: check; B/E; Promissory Notes
 Cheques

order

buyer beneficiary
• An unconditional written order to a bank to pay against
surrender of the cheque a certain sum of money to a
beneficiary named in the cheque or to his order.
I (buyer) order you(my bank) to pay to the seller.
Cheque---2 ways of payment by checks
“the buyer instructs his bank to
pay the amount mentioned on
the cheque to the seller.”

“the seller will endorse the cheque

and send it to his own bank with
the instruction to collect the money
and to deposit or credit it to his
account with his bank
Cheques--- a cheque may be made payable

• To a name person, the seller, to order

“order cheque”: can be transferred by endorsement
Regular endorsement: pay to or to the order of…

Black endorsement: signature and then payable to bearer

always for the full value and unconditional
• To bearer
• To a named person, marked “not negotiable”
Cheque--- parties to the cheque
• The drawer: i.e. “the buyer who writes out the cheque…”
• The drawee: i.e. “the buyer’s bank which has to make payment…”
• The payee or beneficiary: i.e. “the seller, to whom the amount
stated on the cheque is paid to …”
• The endorser(s): “the first one always being the payee…”
• The guarantor: “the party guarantees payment of the cheque are
writes on the face of the cheque…”
Cheque-Collection and Clearing
• When presented with a cheque, that bank may do 2 things:
1. send check

collect money
seller’s bank buyer’s bank
2.
pay collect
upon presentation
seller’s bank buyer’s bank the buyer
• Clearing system
“This is an interbank institution engaged in the settlement of
debits and credits between bank”
Check/Cheque---Elements
• The word “cheque”
• The unconditional order to pay
• The name of drawee, the bank that must make payment
• The name of the beneficiary, the seller
• The drawer’s, buyer’s signature
• The date and place of drawing
• The amount and currency to be paid.
Check/Cheque---Elements
Check/Cheque---Elements
Check/Cheque---Elements
Bill of Exchange(B/E; draft)

• Drawer=the seller (beneficiary) drawee=the buyer

• “a written order from the drawer to the drawee to pay a
specific sum of money on a specific date to a specific person.”
I (seller) order you (buyer) to pay me.
B/E---the due date
• Difference between B/E & cheque is that the former may have
a due date.
* at sight: must be paid immediately upon presentation.
“sight bill” or “sight draft”
* deferred: 1. at a stated number of days after presentation
“after sight bill”
2. at a stated number of days after the date the bill
was drawn. “bill after date”
3. on a specific day
B/E---as a financial instrument
B/E examples
The importance of B/E’s
• It is easy to transfer
• It achieves legal separation between delivery and payment
• It can serve as a financing instrument
• A high degree of uniformity has been achieved in the law
The promissory note

• drawer=the buyer drawee= the buyer

• “a promise to pay a specific amount of money to a named
person on a specific date.”
I (buyer) commit myself to pay to you (seller)
“used in international private-to-government or government-to
government transactions.”
 Conclusion
• I (seller) order you (buyer) to pay me B/E
• I (buyer) order you (my bank) to pay to the seller Cheque
• I (buyer) commit myself to pay to you (seller) Promissory note
 SWIFT
• The way to speed up the money transactions
by telephone
by fax
through the SWIFT-system

• SWIFT:
Society for World-wide Inter-bank Financial Telecommunication
for normal money transfers
Also transfers narrative texts
Introduction
• Credit risks & management
• Main forms of payment form
* advance payment
Remittance: T/T; M/T; D/D
* open account
* documentary collection
* documentary credit
 Credit risks--- transaction varieties
• Short term transaction: less than 12 months between delivery and
payment
• Long term transaction: longer credit term
*supplier credit
*forfeiting
*buyer credit
2 extremes of payment risks
• Advance payment: the buyer pays before the goods are
delivered.
risk
buyer seller

• Open account: the seller delivers and sends and invoice to be

paid on whatever term agreed.
risk
buyer seller
 Credit management
• Primary task obtaining credit…
monitoring receivable…
active collection of …
• Credit limit: maximum the buyer owes the seller at any given moment.
How to obtain credit information
• How to manage credit risks own experience
colleagues
other sources: D & B
4 main forms of payment
• Advance payment
Remittance: T/T; M/T; D/D
• Open account
• Documentary collection
• Documentary credit
Open account
• “the major part of international trade in the world is settled in
this manner”
* 1.obtaining credit information on the buyer
* 2.deliveries are made on open account
* 3.when the goods arrived, cash payment ( pay within 8 days)
credit be given by check
by bank transfer
Remittance
• Outline of Remittance
• Procedure for Remittance
• Application of Remittance
Outline of Remittance
• Definition of Remittance
• Types of Remittance
• Parties to a Remittance
• Characteristics of Remittance
Definition of remittance
• A bank, at request of its customer, transfer a certain sum of
money to its overseas branch or correspondent bank,
instructing it to pay a named person domiciled in that country.
Parties to a Remittance
• Remitter/importer
*remittance application
*submit the same amount of funds and commission
• Payee/exporter
• Remitting bank
*payment order should be made out as instructed in the
application and indicate the reimbursement of remittance cover.
• Paying bank
*paying in strict compliance with the P.O. and authenticate the
relevant signature or test key;
*usually paying after its receipt of the funds from the remitting
bank.
Types
• Based on the movement direction of the instruments in relation
to the funds.
1. remittance
2. reverse remittance
Remittance & Reverse remittance
Talk freely

The advantage and

disadvantage of remittance
and reverse remittance
 Types of Remittance
Based on the manner by which the payment instruction is transmitted.
• M/T: mail transfer
remittance by means of sending/posting a payment instruction
• T/T: telegraphic transfer
remittance by cable/ telex / SWIFT
• D/D: demand draft
the remitting bank, at the request of the remitter, draws a bill of
exchange on the paying bank, ordering the latter to pay on demand a
certain sum of money to the beneficiary ( the payee of the draft).
Procedure for M/T
Procedure of T/T

(1) remittance application with funds and commission;

(2) receipt;
(3) Sends P.O/telex/SWIFT instructing paying bank to make payment
(4) After authenticating, notifies the payee
(5) Upon receipt, the payee provides the paying bank a receipt
(6) The paying bank debited the remitting bank’s a/c and make payment
(7) Sends the debit advice and payment receipt from payee to the remitting
bank
Procedure for D/D
Comparison of the M/T, T/T and D/D
Collection
• The exporter, as drawer of a draft (bill of exchange), hands the
draft to his bank, the remitting bank, who in turn forwards it to
the buyer through a collecting bank in the buyer’s country. A
draft (also called a bill) is a written order to a bank or a
customer to pay someone on demand or at a fixed time in the
future a certain sum of money. If shipping documents
accompany the draft, the collection is called “documentary
collection.”
Collection
D/P & D/A
• Documents against payments: as the term suggests, is that
the collecting bank will only give the shipping documents
representing the title to the goods on the condition that the
buyer makes payment
• Documents against acceptance: the collecting bank will only
give thee buyer the shipping documents after buyer’s
acceptance of the bill drawn on him, i.e. the buyer signs his
name on the bill promising to pay the sum when it matures. In
return he gets what he need--- the shipping documents.
Documentary Collections
2.
Shipment

Buyer 1. Contract of Sale Seller

(Importer) (Exporter)

3. Lodgment 7. Payment
of shipping
5a. Payment 5b. Shipping documents
documents

4. Shipping documents

6. Payment Remitting
Presenting Bank
Bank
Collections
• In a collection banks act as a trusted third party who

holds the documents pending payment or promise of

payment

Advantages for Importer Advantages for Exporter

•Payment/acceptance may be •Control of goods through banks

deferred •Right of action through B/E
•Right to view shipping dox
Disadvantages to Importer Disadvantages for Exporter

•May have to pay before •May have to wait for payment

arrival of goods •No guarantee of payment
Letter of Credit

• Issued by a bank at the request of the importer

• Bank pays a specified sum to a beneficiary, normally the
exporter, on presentation of particular, specified documents
• Fee paid by importer for letter of credit
• May reduce borrowing ability of importer since the letter is a
financial liability
Documentary Letters of Credit
5.
Shipment

1. Contract of Sale

Buyer Seller
(Importer) (Exporter)
2. Application for

9. Documents

11. Payment
issue of LC

Released

7. Despatch of Documents

3. Transmission of LC
Issuing Exporter’s
Bank 10. Payment Bank
Documentary Credits (Letters of Credit)
• A conditional guarantee by a bank to make payment.

Advantages for Importer Advantages for Exporter

• Terms must be met
or payment can be refused.
• Expensive
Disadvantages to Importer
• May have to pay before
arrival of goods
•Banks deal in documents
ONLY – if documents comply
must pay.
• Bank guarantee of payment if
terms met
• Finance instrument – can use
to receive payment or to
guarantee payment to others
•Administratively burdensome
•Disadvantages for Exporter
• Must comply to be certain of
payment
Typical International Transaction
 Exchange Risks
• Convertibility of a currency: “means that it can be freely exchanged
for other currencies and that exchange rates are established on a
regular basis.”
• Exchange rate fluctuations occurs
a devaluation or revaluation: “ when the central banks concerned…”

a depreciation or appreciation: “the result of market machanism”

• Foreign exchange quotation: price currency/base currency
“four digits after the decimal point”
eg. EUR: USD= 0.9013:1
The movement of exchange rates
• Factors influencing the exchange rate: national income
inflation
balance of trade & payment
economic growth forecasts
unemployment
war risk
• The characteristics of floating capital
The risk period
• Advance payment
quotation Advance payment

• The documents against immediately payment, such as CAD,

D/P, Cash, or negotiation L/C.
quotation Document transfer

• Deferred payment, such as open account, acceptance B/E.

Advance payment Receipt of deferred payment

Hedging against exchange risks
• The most current hedging techniques
The forward foreign exchange transaction
• Example

contract 5.1
USD 150,000

US importer non-US exporter

The forward foreign exchange transaction
• The forward rate may be either higher or lower than the spot
rate
premium: the forward rate is higher
discount: the forward rate is lower
at par: the forward rate is equal

• 2 factors influencing whether a forward currency is at …

The relationship between the interest rate
and the exchange rate

NO
High interest rate lead to discount
? forward foreign exchange transaction
Low interest rate lead to premium
YES
Main risks in international business
Introduction of credit insurance
• Credit Insurance
• Transport Insurance
Credit Risk
 Categories of non-payment causes
• The supplier: delivery was too late or incorrect in some other aspect
never be insured
• The customer: he will not or cannot pay.
can be insured
• The debtor’s country: the country may have a shortage of…
can be insured
Case Study
• Credit insurance business: there is usually one company per
country through which… such as…

• In order to avoid excessive competition

1. Berne Union (public)
2. ICISA (private)
Insured risks on short term transactions
• After shipment, but before presentation of the documents
political risk

• In the event of refusal of the customer to take up the

documents with a scale on D/P, D/A, or CAD terms
commercial risk

• In the event of inability or refusal by the customer to pay,

where the terms are open account or D/A.
commercial risk
Case Study
• Insolvency
“ The customer cannot legally pay, This includes bankruptcy,
suspension of payment and other situation…”
• Protracted default
“For whatever non-legal reason, the customer dues not pay…”
The policy for short term transactions
• Definition: an insurance contract is called a policy
• All insurance policies consist of
General Terms
Conditions: name of customer
countries
premium
payment condition
Turnover policy
• Most common: intended for consumer goods, semi-finished
products and raw materials
• How it runs: “the exporter insures his total sales to…
Insured risk on long term transactions
The policy for long term transactions
• The premium is higher
• Also insures risks during the production process
A. a policy which occurs…
B. a combined cover for the risk before and after…
Transport Insurance
• Basic principles: “ the cause of loss or damage…”
• Transport Insurance covers only materials loss or damage
• Transport insurance covers the actual loss incurred
 Marine Cargo Insurance

• Types of risks, losses and expenses

covered.
• Scope of insurance coverage
• Procedures of marine insurance
 8.2.1 Types of Risks, Losses and
Expenses Covered
• Risks in cargo transport are of many kinds.
Different risks mean different losses, and
different risks are covered by different insurance
clauses and further different insurance clauses
mean different premiums. So we need to have a
good understanding of the different risks and
losses before we know how to effect insurance.
In marine cargo transport insurance, risks fall
into perils of the sea and extraneous risks.
 Perils of the Sea

• Perils of the sea can further be either natural

calamity and fortuitous（意外事故） accidents.
• Natural calamity (自然灾害) refers to the
perils under force majeure（不可抗力）such as
vile weather, thunder storm and lightening,
tsu’nami（海啸）, earthquake, flood, etc. (The
ordinary action of the winds and waves is not
taken as natural calamities.)
• Fortuitous accidents are such risks as ship
stranding, striking upon the rocks, ship sinking,
ship collision, colliding with icebergs or other
objects, fire, explosion, ship missing, etc..
 Extraneous Risks

• Extraneous risks can further be general

extraneous risks and special extraneous risks.
Risks caused by theft, rain, leakage, shortage,
breakage, dampness, mildewing, heating, taint
of odor, hooking and rusting are general
extraneous risks（一般外来风险）, while risks
caused by on deck, war, strikes, failure of
delivery and rejection, etc. are special
extraneous risks.（特殊外来风险）
 Losses Covered by Marine
Insurance

• Losses sustained by the insured because

of the risks listed above come from not
only the loss of the goods or the damage
done to the goods, but also from the
expenses the insured sustained in
rescuing the goods in danger. The losses
and damages done to the goods can fall
into total loss and partial loss.
 Total Loss

• Total loss of goods can further be actual total loss and

constructive total loss.
• Actual total loss（实际全损） means the whole lot
of the consignment has been lost or damaged or found
valueless upon the arrival at the port of destination. The
constructive total loss （推定全损） is found in the
case where the actual loss of the insured goods is
unavoidable, or the ship or the consignment has to be
abandoned because the cost of salvage or recovery
would exceed the value of the ship and the consignment
in sound condition upon the arrival of the port of
destination.
• When constructive total loss takes place,
the insured can ask the insurer to cover
part of his loss or all of his loss. Under the
later case, the insured must present to the
insurer a notice of abandonment, by which
he means to transfer all his interest and
obligations to the insurer so that he might
cover his total loss. The abandonment is
effective only after it is accepted by the
insurer.
 Partial Loss

• Partial loss means that the loss or

damage to the goods is only partial. Partial
loss can be either general average （共
同海损）or particular average. （单独海
损）
• Particular average （单独海损）
means that a particular consignment is
partially damaged.
• General average （共同海损） 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
consignments on board, intentionally and reasonably
does some sacrifices or makes some expenses. For
example, when a ship goes aground and both the ship
and the consignments on board are in peril, the captain,
after all his efforts to refloat the ship have failed, may
decide to jettison part of the consignments on board to
lighten the ship. The loss, the sacrifice done for that
purpose, is to be borne by both the carrier and the
consignors in proportion to the value of their interest thus
saved. This is called general average contribution（共
同海损分摊
 Expenses Incurred for the Rescue
of Insured Cargo
• Expenses here fall into the following kinds:
• 1) Sue and labor expenses
• Sue and labor expenses （施救费用）are made by
the insured or his agent to prevent them from suffering
further losses.
• 2) Salvage charges（救助费用）
• Salvage charges are made to those other than the
insured, the carrier and the insurer who come to the
salvage of the ship and the consignments.由保险人和被
保险人以外的第三人采取了有效的救助措施，在救助成功
后，由被救方付给救助人的一种报酬。
• 3)Continuation expenses
• Continuation expenses are made for
continuing the journey of consignments after the
journey has been stopped by risks under the
cover of the insurance policy
• 4)Loss evaluation charges （估损费用）
• After a loss is sustained, experts would have
to be invited to evaluate the loss to be covered
by the insurer. These expenses are usually
covered by the insurer.
•
8.2.2 Scope of Insurance Coverage

• Basic Coverage: - FPA - WPA - All

Risks
• Additional Coverage: - general additional
coverage - special additional coverage
 Basic Coverage

• Under China Insurance Clause, basic risks

coverage falls into three groups: free from
particular average（FPA平安险）, with
average（WPA水渍险）, and all risks（一
切险）. The insured may choose any one
from these suitable for the carriage of his
goods.
 Free from Particular Average
(F.P.A.) （平安险）
• F.P.A. covers the following losses:
• 1) Actual total loss or constructive total
loss of the consignment caused by natural
calamities such as vile/bad weather, tsunami,
earthquake, flood. When the consignment is
carried by a lighter to or from the ship, the goods
aboard the lighter can be taken as a whole
consignment. When the consignor asks the
insurer to cover the constructive total loss, he
must present the insurer a notice of
abandonment
• 2) Reasonable expenses the insured makes for
the salvage of the goods insured, and for
averting or minimizing the losses, provided the
expenses do not exceed the insured amount.
• 3) Expenses incurred by discharge of the
insured cargo at a port of distress following a
sea peril as well as special charges arising from
loading, warehousing, and forwarding of the
goods at an intermediate port of call or refuge.
 With Average (W. A.) （水渍险）

• Aside from the risks covered under the

F.P.A. condition as above, this insurance
also covers partial losses of the insured
goods caused by vile weather, lightening,
tsunami, earthquake and/or flood.
 All Risks （一切险）

• Aside from the risks covered under the F.P.A.

and W.A. conditions as above, this insurance
also covers all risks of damage to the insured
goods whether partial or total, arising from
extraneous risks during transit.
•
• All Risks === F.P.A. （平安险）+ W. A. （水渍
险）+ General Additional Risks （一般附加
险）， excluding Special Additional Risks
（特殊附加险）
Commencement and Termination of
the Insurance

• Insurance takes effect as soon as the insured cargo is taken away

from the warehouse listed on the insurance policy irrespective of
whether it is carried by overland transport, ocean transport, river
transport, or lighterage（驳船装卸）. It terminates when the goods
are carried to the final warehouse listed on the insurance policy, or
60 days after the goods are discharged from the ship in case they
fail to reach the warehouse during a reasonable period of time. If
within 60 days after the goods have been discharged from the ship,
the goods are taken to some other destination other than the one
specified on the insurance policy, the insurance terminates they fail
to reach the warehouse during a reasonable period of time. If within
60 days after the goods have been discharged from the ship, the
goods are taken to some
 Exclusions

• For the three basic risks insurance coverage, the insurer is entitled
to the following exclusions:
• 1)Losses caused by the deliberate act or fault of the insured.
• 2） Losses falling under the liability of the consignor.
• 3) Losses arising from the inferior quality or shortage in quantity of
the consignment before the insurance takes effect.
• 4) Losses arising from the natural loss, inherent vice or nature of the
insured goods; losses arising from fluctuation of market and/or delay
in transit and any expenses arising thereof.
• 5)Risks and liabilities covered and excluded by the war risks clauses
and strike, riot, and civil commotion clauses under C.I.C.
 Additional Coverage

• Additional risks complement the basic

risks. When you ask for one or several of
the additional risks coverage, you will have
to ask for one of the basic risks coverage
at the same time. Additional risks under
C.I.C. fall into general additional risks and
special additional risks.
 General Additional Risks （一般附
加险）
• General additional risks cover the losses caused by
extraneous risks. They are together covered by all risks
in basic insurance coverage. Hence, you do not need to
ask for general additional risks coverage if you have
asked for all risks coverage. General additional risks fall
into 11 types:
• 1) Theft, pilferage, and non-delivery ( T.P.N.D.)
• 2) Fresh water and/or rain damage
• 3) Shortage
• 4) Intermixture and contamination
• 5) Leakage
• 6) Clash and breakage
• 7) Taint of odor
• 8) Sweat and heating
• 9) Hook damage
• 10) Breakage of packing
• 11) Rust
 Special Additional Risks （特殊附
加险）

• Special additional risks cover losses caused by special

extraneous risks. They fall into 8 types.
• 1) War Risks
• War risks cover losses attributable to war, piracy,
armed conflict, warlike or antagonistic acts, detention,
seizure, and confinement because of acts therefrom. It
also covers the general average, salvage charges, and
sue and labor expenses arising from the above-listed
acts. Losses caused by torpedoes and bombs of various
kinds (except atomic bombs) are also answerable by war
risk. But war risk commences when the goods have
• been shipped on board and terminates when
the goods are unloaded from the ship. In
case the goods remain on board the ship after
the ship has arrived at the port of destination,
war risks insurance stops l5 days after the
arrival of the goods at the port of destination.
• 2) Strikes
• This covers the losses caused by strikes,
civil commotion and riot. There will not be
additional charges for strikes if the insured has
effected war risks.
• 3) On deck
• Under this insurance coverage, the insurer
will cover the loss caused by cargo dropping into
the sea because it is loaded on deck.
• 4)Import Duty
• Sometimes when the goods have been
partially damaged during transit, the insured will
still be asked to pay as much import duty as if
the goods were in good condition. Import duty
risk insurance covers the loss therefrom.
• 5) Rejection
• Under this insurance coverage, the insurer
will cover the loss caused by the rejection or
confiscation of the goods by the authority of the
importing customs or country.
• 6) Aflatoxin （黄曲霉素险）
• Under this insurance coverage, the insurer
will cover the loss arising from the rejection,
confiscation of the goods, or confinement in the
usage of the goods because the aflatoxin the
goods contain exceed what is allowed by the
importing country.
• 7) Failure to Deliver
• Under this insurance coverage, the insurer will cover
the loss of the insured because of failure to deliver the
goods within six months after its shipping, whatever the
reason is.
• 8) Fire Risk Extension clause --- for storage of
cargo at destination of Hongkong, including Kowloon, or
Macao.
• Under this insurance coverage, the insurer will cover
the loss caused by fire when the goods are in the
warehouse appointed by the transfer bank. The
insurance coverage terminates when the transfer bank
has completed its negotiation or 30 days after the goods
have been unloaded from transportation vehicles.
 Procedures of Marine Insurance

• Apply for marine insurance

• Determine the insurance value of the
goods to be insured
• Determine the insurance average and
coverage
• Determine insurance premium
• Sign an insurance policy
• Lodge an insurance claim
 Apply for Marine Insurance

• The applicant should fill in the special form

– the proposal form, which gives all the
details concerning ownership, value, time
span insurance will be for, risks and
coverages, etc
 Determine the Insurance Value

• The value to be insured is generally based on

the invoice value.
• The recommended minimum amount is the total
CIF value plus 10%.
• Other methods of arriving at a valuation of goods
may also be agreed upon to meet individual
needs.
• The calculation and determination of the value to
be insured vary from country to country
 Determine the Insurance Average
and Coverage

• When determining insurance average and

coverage, the following factors should be taken
into consideration:
• the nature of the goods
• packing conditions
• modes of transport
• shipping route and ports consideration The
average is closely linked with the goods and the
goods are related with the coverage.
 Determine Insurance Premium

• The factors determining the insurance premium rates

include:
• The carrying vessel
• Nature of the packing used
• Type of merchandise involved
• Nature of transit and related warehouse accommodation
• Previous experiences
• The extent of cover needed
• The volume of cargo involved
 Sign an Insurance Document

• The most common insurance documents

are:
• Insurance policy
• Insurance certificate
• Open policy
 Insurance Policy 保险单/大保单
• This is the most often used insurance document. It has legal effect,
and is binding upon the insurer and the insured. It has the following
content:
• 1) policy No.
• 2) name and address of the insurer
• 3) subject matter to be insured (marks and No., quantity,
description of goods, amount insured.)
• 4) premium
• 5) conveyance steamship
• 6) sailing date, port of shipment and port of destination
• 7) risks to be covered
• 8) place where claim can be made
• 9) insurance date
• On the back of the insurance policy, there are more clauses
about the obligations and rights of the insurer and the insured.
Insurance Certificate 保险凭证/小
保单

• Insurance certificate is the simplified

insurance policy. It doesn’t have the
clauses on the back, while on the front
page, it has the same clauses as listed on
the insurance policy. It has the same legal
effect as the insurance policy.
 Open Policy or Open Cover预约
保单
• Open policy or open cover is a pre-contract concluded
between the insurer and the insured by which the insurer
offers insurance to the insured for the consignments he
dispatches within a certain period of time. Open policy is
only applicable to the imported goods from foreign
countries to China. As soon as the carriage for the
consignment under the open policy is made, it is under
the insurance cover of the open policy in accordance
with the terms listed on the open policy. But every time
when the dispatch is made, the insured should present
to the insurer a dispatch notice (on which there are
descriptions of goods, quantity, insured amount,
transport vessel or vehicle, starting place of the voyage,
and dispatch or shipment date.)
 Lodge an Insurance Claim

• If the exported goods are damaged or lost during transit, the

consignee or his agent should settle claims against the Survey and
Claim Settlement Agent of the insurer at the place of destination.
The Survey and Claim Settlement Agent will come to examine the
damages and losses of the consignment and pay indemnity to the
consignee. The address of the Survey and Claim Settlement Agent
of the insurer is given on the insurance policy.
• Sometimes on the insurance policy there is only the name and
address of a surveying agent of the insurer. He is only responsible
for the survey of the damages to the goods and after that he will
present to the consignee a survey report on examination of damage
or shortage. Then the consignee will send the insurer relevant
documents such as survey report, insurance policy, invoice, bill of
lading for the indemnity of the damage of the goods.
• Sometimes the consignee sends the documents
to the consignor, who is then to decide who
should be responsible for the damages or losses
of the consignment. If the damages or losses
done to the goods are caused by the perils
covered by the insurer, the consignor should
send the documents to the insurer for claim
settlement. If he is responsible for the losses or
damages, such as under the case when the
losses are caused by innate defects of the
goods or inappropriate packing of the goods, he
should then settle it properly by himself.
• It is to be borne in mind that even for sales
under CIF, the risks are not borne by the
exporter but by the importer, for as soon
as the goods are carried over the rail of
the ship, the risks will be transferred to be
borne by the importer. So, when the goods
are damaged or lost during transit, it is the
importer instead of the exporter that
should come to the insurer or his agent for
claim settlement.
• Once the insured has learned that the goods have been
damaged or lost during transit, he should immediately
notify the insurer or his agent. Meanwhile, he should get
the cargo damage or loss report, which is provided by
the stevedore and signed by the carrier or his agent. The
insured should produce a cargo survey report together
with the insurer, and if necessary, they should ask the
relevant cargo inspection institution to make the cargo
survey report. Listed on this report are generally not only
the damages or loss of the goods, but also the reasons
which are supposed by the surveyor to have caused the
damages or losses.
• Meanwhile, the insured should take measures to
minimize the damages or losses to the goods.
The expenses in so doing will be covered by the
insurer in so much as they do not exceed the
insured amount of the consignment. And also
the insured should launch claims against the
third party who is responsible for the damage or
loss of the goods. This right will be transferred to
the insurer if he has duly got the insurance
money from the insurer.
• In conducting claim settlement with the insurer, the
insured should present the following documents:
• 1) Insurance policy or the like
• 2) bill of lading, airway bill, or the like
• 3) invoice
• 4) packing list and weight memo
• 5) cargo damage or loss report
• 6) sea protest 船长证明书
• 7) cargo survey report
• 8) statement of claim
• 9) document testifying the claim against the third
party
 8.3 Insurance of land, Air and
Postal Transportation

• Overland Transportation Insurance

• Air Transportation Risks Insurance
• Parcel Post Insurance
 8.3.1Overland Transportation
Insurance

• Overland transportation insurance falls into

overland transportation risks（陆运险）,
overland transportation all risks （陆运一切
险）, overland transportation insurance--
frozen products （陆上运输冷藏货物险） and
overland transportation cargo war risks --by train.
The first three types are basic risks while the last
one is accessory risk.
• Overland transportation insurance--frozen products
not only covers the partial or total losses caused by
natural disasters and fortuitous accidents but also the
losses caused by the failure of refrigerating machines
and the moisture isolating facilities. It begins to take
effect as soon as the goods have been loaded on the
transportation vehicles at the warehouse as listed in the
insurance policy. It terminates when the goods have
been unloaded and put into the warehouse at the
destination. In case they are not put into a warehouse
after the goods have been carried to the station of
destination, the insurance expires ten days after the
goods have been carried to the station of destination.
• Overland transportation risks （陆运险）can
be compared to W.P.A （水渍险）. of marine
transportation. Under this insurance the insurer
answers for the total or partial losses caused by
natural disasters such as storm, lightening, flood,
earthquake, and fortuitous accidents such as
collision, overturn, derailing, fire, explosion, etc..
The insurer also covers the salvage charges
（救助费用） and sue & labor expenses （施救
费用） provided they do not exceed the insured
amount
• Overland transportation all risks（陆运一切
险）, like All Risks in marine transportation, not
only covers the losses by natural disasters and
fortuitous accidents, but also covers the losses
caused by extraneous perils.
• Overland transportation insurance has the
same time limit of filing claims as under marine
transportation, i.e. the insured should file the
claim within two years after the goods have
been carried to the station of destination.
• Overland transportation cargo war risks--by train is effected by
the People's Insurance Company of China while many foreign
insurance companies would not cover it. It can only be included in
one of the above-mentioned basic risks and is only applicable to
train transportation. This kind of insurance coverage covers the
losses caused by war, warlike activities, antagonistic activities,
armed conflict, losses caused by conventional weapons or bombs.
But it does not cover the losses caused by nuclear bombs and the
losses or expenses caused by the detention or detainment by the
relevant authorities or military groups. It commences as soon as
the goods are loaded on the train at the station listed in the
insurance policy. It terminates when the goods have been
unloaded from the train at the station of destination as listed in
the insurance policy(以货物置于运输工具时为限).
 8.3.2 Air Transportation Risks
Insurance
• Air transportation insurance falls into air transportation risks
（航空运输险）, air transportation all risks （航空运输一切险）
and air transportation cargo war risk. The first two are basic risks
while the third is a kind of additional risks.
• Air transportation risks can be compared to W.P.A. in marine
transportation, which covers the total or partial losses caused by
natural disasters like thundering, lightening, explosion, vile weather,
or the like and the fortuitous accidents like collision, falling, or
disappearance of the airplanes. Air transportation all risks cover the
total or partial losses caused by extraneous perils.
• The exclusions for air transportation risks and air transportation
all risks are the same as in marine transportation.
• “Warehouse to warehouse” is also applicable
to transportation insurance, except that in case
the goods are not carried to the warehouses
listed in the insurance policy after they are
unloaded from the plane, the insurance
terminates 30 days after the goods are
discharged from the plane at the place of
destination. Within this period, if the goods are
carried to the place not listed in the insurance
policy, the insurance terminates when the
carriage takes place.
 8.3.3 Parcel Post Insurance

• Parcel post insurance falls into parcel post risks（邮

包险）, parcel post all risks （邮包一切险）, and
parcel post war risks （邮包战争险）. The first two are
basic risks while the third one is a kind of additional risk.
• Parcel post risks cover the losses caused by natural
disasters and fortuitous accidents, while parcel post all
risks cover the losses caused by extraneous risks. Under
these insurance coverage, the insurer does not cover the
losses caused by war, warlike activities, armed conflicts,
antagonistic activities, strikes, and the delay in transport,
innate defects, deliberate activities or blunders of the
parcel deliverer, and the natural deterioration or waste.
• Parcel war risks is a kind of additional risks. It
can take effect only after either of the basic risks
has been effected and after the insured has
negotiated with the insurer. It has the same
insurance coverage as under marine
transportation. It commences as soon as the
parcel has been received by the post office. It
terminates after the parcel has been delivered to
the parcel receiver by the post office at the place
of destination as listed in the insurance policy
 8.4 Fundamental Principles of
Cargo Insurance
• Insurable interest
• Good faith
• Indemnity
 Export Documents
• Key Information
– Description of the goods
– Mode of transportation
– Terms of sale (which party pays for
what)
– Origin of goods
– Identity of the seller/shipper
– Terms of payment
– Shipping instructions
– Evidence of shipment
Section 1 Price Principles Strategy and
Method
1. The Pricing Principles
(1) The construction of the price.
The price involves unit price and total price.
A price term can be expressed , “USD 100 per metric ton CIF
London”.

USD 100 Per metric ton CIF London

Money of account Unit price Measuring unit Trade Term

(2) The pricing principles.

In order to make a good price, we carry out correctly our pricing
principles and be sure to master the changing trend of the
international market.
Section 1 Price Principles Strategy and
Method
In order to pricing properly, the following three principles
should be adhered to:

① To price according to the international market:

Based on international merits and market competition.

② To price based on the situations of different policies of

various countries and regions:
With the diplomatic policies and with references in
international market.

③ To price based on the purpose of purchasing:

The price can be a little higher or lower and the quality of.

3
Section 1 Price Principles Strategy and
Method
2. The Pricing Strategy

(1) The pricing object.

Management should decide on its pricing objectives before
determining the price itself: long-term objectives and short-term
objectives.
Long-term objectives are usually concerned with profitability
and market share.
Short-term objectives are usually specified in annual budgets,
for a number of items including profits, sales volume and
market share.
The main objectives whether long-term or short-term,
established by the company are oriented either toward profits,
toward sales, or toward maintaining the status quo.
Section 1 Price Principles Strategy and
Method
(2) The pricing strategy.
It is part of the process of developing an overall marketing
strategy.
Three well-known pricing strategies are penetration pricing,
skimming price and early cash recover pricing, which are often
used by firms introducing new products to a market.

① Penetration pricing.
To achieve a large share of the market for a new product is
to set a relatively low price initially to stimulate demand and
attract more buyers.
A low initial price strategy, discouraging actual and
potential competition and is consequently protective
element in the firm’s armory.
Section 1 Price Principles Strategy and
Method
② Skimming pricing.
It is designed to gain a premium from those buyers who
want to take advantage of the readiness of a market.
After a time, when the premium segment is saturated, the
firm gradually reduces prices to draw in the more price
sensitive segments of the market.

③ Early cash recovery pricing.

Companies sometimes do not believe that the market for
their product will exist for a long period, so they tend to set
a price which will bring in cash at an earlier stage rather
than in the long term.
Section 1 Price Principles Strategy and
Method
3. The Pricing Method

(1) Pricing.
In international sales of goods, the following methods of pricing
can be used:
① Fixed pricing.
② Flexible pricing.
③ Partial fixed price and partial unfixed price.
④ Floating pricing.

In order to master the pricing well, three pricing techniques are

illustrate here.
Section 1 Price Principles Strategy and
Method
- Cost-plus pricing approach is one in which the exporter
calculates his “costs” and adds the desired mark-up to cover
unassigned costs either in total or per unit.

- Break-even pricing is a method in use by a number of firms

which extends the cost approach somewhat along the road to
considering the market, and also the method of determining
the quantity of sales at which the firm’s revenues will equal its
cost identifying a break-even point at the specific price.

- Marginal price is another appproach.

Section 2 The Selection of Money of
Account and Precautions
1. Money of Account

In international trade, the money of account can be the currency of the

export country, the currency of the import country, or the
currency of a third country agreed by both parties, it can also be
a unit of account agreed upon by both parties.

If unfavorable currency has to be adopted for the conclusion of a deal,

the following two remedies may be taken:
- To corresponding adjustment to the quotation according to the
possible trend of the currency in the future and to get the Price
Protected against the currency risks.

It is our practice to use the hard currency during exports and the soft
currency during imports.
Section 2 The Selection of Money of
Account and Precautions
2. The Selection of Money Account
Generally say, there are three ways to select the money of
account in international trade.
They are the money of account of exporter’s country, the
money of account of importer’s country, the money of
account of the third country.
According to the trade principles of China, when we engage in
export, we should choose the hard currency and if we do
the import we should choose the soft one. We should pay
attention to the following factors.
- Use the exchangeable currency.
- Follow the principles of “export with hard currency and
import with soft currency”.
- Combine kinds of money of account together.
- Take good use of exchange clause in order to avoid the
risk caused by the foreign exchange rate.
 Section 3 Foreign Exchange Rate

1. Native Currency Exchange into Foreign Currency

– Buy-in Price
In international trade, if the foreign client requires us to make
the offer on the basis of foreign currency, we should exchange
the native currency into the foreign currency by the way of buy-
in price.

Foreign Currency = Native Currency / Buy-in price

e.g.
When we export some toys with total value of RMB 40,000, the buyer
requires to make offer on the basis or US dollar. At that time, the buy-in
price is USD$100=RMB727.21, sell out price is USD$100=RMB 729.69.
We should choose the buy-in price during export, therefore, the offer based
on US dollar should be as follows:

40,000/(727.21/100) = RMB 5,500.48

 Section 3 Foreign Exchange Rate

2. Foreign Currency Exchange into Native Currency –

Sell-out Price

Native Currency = Foreign Currency ×Sell –out Price

e.g.
We import some commodities valued USD$ 5,500.48 and at that
time the buy-in price is USD$ 100 = RMB727.21, and sell-out price
is USD$100 =RMB 727.69. When we do the payment to the foreign
country, we should provide the bank RMB calculated by sell-out
price.

USD$5,500.48 ×(729.69/100) = RMB 40,136.45

 Section 3 Foreign Exchange Rate

3. Foreign Currency Exchange into Another Foreign Currency

In international trade, sometimes the exporter makes offer based on

one foreign currency (currency of country A), however, the importer
requires changing into another foreign currency(currency of country
B).

e.g.
We export some commodities at price of £ 300 per metric ton CIF New
York. The foreign buyer requires the offer based on US dollar. At that time,
the foreign exchange rate in the market is £ pound/RMB: 1021.22/1029.42
(buy-in price/sell-out price), US dollar/RMB: 680.82/683.54 (buy-in price/
sell-out price). Therefore, we should make offer based on US dollar in this
way:

£ 300 ×(1021.22/680.82) = USE$ 450.00

Section 4 Commission and Discount

1. Commission

(1)The implication of commission.

Commission is the remuneration paid by the principal to the
agent in recompensing the latter for his sales work or
services rendered for the former.
A commission is generally based on a certain percentage of the
sales involved.
When selling through an agent, the commission may be
included in the quoted price.
In the sales contract, the price including commission is
expressed by two ways:

- Plus “C” into the trade term, for example USD$200 per
metric ton CIFC3 London.
- Express by words, for example, USD$200 per metric ton
CIF London, including 3% commission.
Section 4 Commission and Discount

(2) The calculation of commission.

The commission should be calculated based on the price in actual

business.
Commission = Price including commission × Commission Rate
Net Price = Price including commission × (1- Commission Rate)
Price including commission = Net price/ (1- Commission Rate)

Based on terms:

FOB price including commission = FOB net price/ (1- Commission Rate)
CIF price including commission = CIF net price/ (1- Commission Rate)
CFR price including commission = CFR net price/ (1- Commission Rate)
Section 4 Commission and Discount

① Change net price into price including commission

e.g.

The offer is USD$ 2,000 CFR ***, change it into CFRC4% and
keep the net income of the seller unchanged.

Key:
Price including commission = Net price/ (1-Commission Rate)
= USD$2,000/ (1-4%)
= USD$2,083.33
Section 4 Commission and Discount

② Readjust the commission rate

e.g.
The offer is USD$1,2000 CFRC 3%, change it into CFR 5% and keep
the net income of the seller unchanged.
Key:
1. Change CFRC 3% into CFR net price.
Commission = Price including commission × Commission Rate
= USD$ 1,200 ×3%
= USD$36
CFR net = CFRC 3% - Commission
= USD$1,200 – USD$36
=USD$1,164
Section 4 Commission and Discount

② Readjust the commission rate

e.g.
The offer is USD$1,2000 CFRC 3%, change it into CFR 5% and keep
the net income of the seller unchanged.
Key:
2. Change CFR net into CFRC 5%
CFR price including commission = CFR net price/ (1- Commission
Rate)
CFR 5% = USD$ 1,164/ (1-5%)
= USD$ 1,225,26
Section 4 Commission and Discount

2. Discount

(1) The implication of discount.

Discount is the reduction based on the price.
Discount always be deducted while the buyer pay for the
commodity.

(2) The calculation of discount.

Discount = Amount ×Discount Rate

Price less discount = Price ×(1 – Discount rate)
Section 5 The Price Calculation of
Export
1. The Component of Exports’ Price

(1) Cost.
The cost of export refers to the purchase cost which is the price
by which the exporter buys the commodities from the suppliers.
The purchase cost takes very important role in the export price.
Section 5 The Price Calculation of
Export
(2) Express/ Charges.
① Packaging charges.
The goods may need to be repacked if they are not up to
the contract stipulations.
The cost of packaging for overseas shipment will vary
according to the product, destination and means of
transportation.
② Warehouse charges.
③ Inland transport charges.
Section 5 The Price Calculation of
Export
④ Port charges.
⑤ Inspection charges.
⑥ Duties and taxes.
⑦ Interests.
⑧ Operating charges.
⑨ Banking charges.
⑩ Freight.
⑪ Insurance premium.
⑫ Commission.
(3) Exported profit.
It is the income of exporter in future by which we can know
whether the business is done successfully or not.
Section 5 The Price Calculation of
Export
2. The Calculation of Exports’ Price

(1) Calculation of Cost.

To the exporter, the cost is the price by which the exporter
purchases the commodities from the suppliers.
Example:
The purchase price in domestic is RMB90 per set (including
17% additional value tax), refund tax rate is 8%. The calculation of
cost is as follows:
Actual Cost = Purchase Cost – Tax Refund
Tax Refund = Purchase Cost/ (1+ Additional Value Rate) × Tax
Refund
Rate
= 90/ (1+17%) ×8%
= RMB 6.15
Section 5 The Price Calculation of
Export
Example:
The purchase price in domestic is RMB90 per set (including
17% additional value tax), refund tax rate is 8%. The calculation
of cost is as follows:
Actual Cost = Purchase Cost – Tax Refund
Tax Refund = Purchase Cost/ (1+ Additional Value Rate) × Tax
Refund Rate
= 90/ (1+17%) ×8%
= RMB 6.15
Actual Cost = 90 – 6.15 = RMB 83.35
Section 5 The Price Calculation of
Export
(2) Calculation of freight.
Bulk Freight = Basic Freight + Additional Charges
Contract Freight = Basic Freight + Additional Container Charges

(3) Calculation of insurance.

Insurance amount = CIF (CIP) Price ×(1 + Percentage of Addition)
Insurance Premium = Insurance Amount ×Premium Rate

The percentage of addition of insurance is 10% according to

PICC.
Section 5 The Price Calculation of
Export
(4) Calculation of commission.
Commission is the payment to the agent in international trade,
it is calculated on the basis of the amount of invoice.

(5) Calculation of profit and loss for export goods.

The profit and loss rate of export goods =
Export distribution net RMB incoming – export total cost
× 100%
Export total cost
The foreign exchange cost of export products =
Export total cost(RMB)
×100%
Export sales net income(USS)
Section 5 The Price Calculation of
Export
3. The Calculation of Price among Different Trade Terms

1. From CIF price to FOB price.

FOB price = CIF – I (Insurance) – F (Freight)
2. From CIF price to CFR price.
CFR price = CIF price – I (Insurance)
3. From FOB price to CIF price.
FOB + F(Freight)
CIF price =
1 − Insurance Rate × (1 + Percentage of Additional)
4. From FOB price to CFR price.
CFR price = FOB price + F (Freight)
5. From CFR price to FOB price.
FOB price = CFR price – F (Freight)
 Section 5 The Price Calculation of
Export
6. From CFR price to CIF price.
CFR price
CIF price =
1 − Insurance Rate × (1 + Percentage of Additional)
7. From FCR price to CPT price.
CPT price=FCA price+F(Freight)
8. From FCA price to CIP price.
FCA price + F(Freight)
CIP price =
1 − Insurance Rate × (1 + Percentage of Additional)
 Section 5 The Price Calculation of
Export
9. From CIP price to FCA price.
FCA price = CIP price – I (Insurance) – F (Freight)
10. From CIP price to CPT price.
CPT price = CIP price – I(Insurance)
11. From CPT price to CIP price.
CPT price
CIP price =
1 − Insurance Rate × (1 + Percentage of Additional)
12. From CPT price to FCA price.
FCA price = CPT price – F (Freight)
• Exercise 1
• FOB C3%=USD 100/piece, freight is USD 10, insurance rate is 1%,
CIF C5%?
• 1. change FOB C3% to FOB C5%
Net Price = Price including commission × (1- Commission Rate)
FOB net price=100×(1-3%)=97
FOB C5%= net price/(1-commission rate)=97/(1-5%)=102.11

• 2. change FOB C5% to CIF C5%

FOB + F(Freight)
CIF price =
1 − Insurance Rate × (1 + Percentage of Additional)
CIF C5%=(102.11+10)/(1-1%*110%)=113.36
Section 6 Price Clause in Sales
Contract
1. The Content of Price Clause

Prices occupy a position of first-rank importance and present

some of the key problems with which they are forced to
contend.

To some extent, the pricing problem and exporter tackles is

more complicated than that in home trade.

In calculating an export price the exporter has first to take into

account the various costs and charges involved in procuring
the goods.

In some cases, ocean freight and insurance premiums are also

covered in the quotation.
Section 6 Price Clause in Sales
Contract
2. Points of Attention

Pricing according to the quality of commodity;

Pricing according to the quantity of the trade;

Pricing according to season and time;

Pricing according to the payment terms;

Pricing according to the quality latitude and tolerance;

Pricing according to foreign exchange rate;

Pricing according to the banking charges;

Pricing according to international market situation.

- THE END -
 Content
• Export/Import Procedure
• Export/Import Documentation
 Import Procedures
• Import License
• Trade Negotiation
• L/C
• Booking Shipping Space or Ship
• Insurance
• Document Examination and Payment
• Customs Clearance
• Taking Delivery and Inspection
• Claim
• Settlement of Disputes
Import License

• Import license system

• An importer must make sure whether a license is needed and
whether it is obtainable before he starts the negotiation with an
exporter.
• Under DEQ, the buyer is required to clear the goods for import
(Incoterms 2000)
Trade Negotiation
• Inquiry
• Offer
• Counter-offer
• Acceptance
• Establishment of contract
Establish L/C
• Apply to the financial institution for
opening an L/C based on the sales
contract
• Open after receiving the seller’s
confirmation of the time of delivery
• Pay special attention to the type of L/C
and documents required
• Avoid unnecessary amendments
Book shipping space or ship
• Under FOB or FCA, the importer is responsible
for arranging shipment.
• Get the information of cargo readiness, the
gross weight and volume of the cargo before
booking shipping space
• Keep the exporter informed of the progress to
facilitate smooth delivery of the goods.
• Supervise the shipment at the port of loading
Arrange insurance
• Under FOB, FCA, CFR and CPT terms,
the cargo insurance should be arranged
by the importer Ask the exporter to advise
the shipment in time so that the goods can
be covered without delay.
Document examination and
payment
• Under L/C settlement, the issuing bank will
notify the importer to make the payment
before the importer get the documents
Under documentary collection, the
importer should examine the documents
on his own Arbitration
• Force majeure
Customs Clearance
• Declaration
• Examination
• Imposition
• Release
• ClearanceForce majeure
 Taking delivery and inspection

• Get the shipping documents and take

delivery of the goods from the carrier
according to set procedures Apply for
inspection
• Make immediate claim against the relevant
party
 Claim

• Problems such as shortage, inferior

quality or wrong shipment should be
claimed against the importer
• Loss or damage caused by carrier should
be claimed against the carrier
• Covered damage or loss should be claimed
against the underwriter
• Claims should be filed within the time
limit stipulated in the contract with
the evidence like survey report
 Settlement of disputes

• Through negotiation
• Through arbitration
• Through litigation
 Export Procedures

• Export License
• Trade Negotiation
• Cargo Readiness
• L/C
• Customs Clearance
• Shipping
• Insurance
• Document and Payment
 Export license

• Make sure whether the export license can

be obtained or not According to
Incoterms2000, under FAS, the seller is
required to clear the goods for export
 Trade negotiation

• Inquiry
• Offer
• Counter-offer
• Acceptance
• Establishment of contract
 Cargo readiness

• Ensure the readiness of the goods as

soon as the contract is signed
• Get goods ready before the time of
delivery
• Follow the stipulations of the contract
• Arrange inspection at proper time
 L/C

• Urge the importer to open the L/C in time

Check the L/C against the sales contract
Ask for amendment if necessary
 Customs clearance

• Declaration
• Inspection of the documents
• Examination of the goods
• Imposition
• Release
 Shipping

• Arrange shipment according to the

contract terms
• Fill in the Shipping Note
• Get the Shipping Order and start to load
the goods
• Supervise the loading process and get the
shipping documents
• Send sufficient notice to the importer
(especially under CFR)
 Insurance

• Under CIF or CIP, the exporter should

insure the goods If the importer is
responsible for insurance, the exporter
should send sufficient notice to the
importer
 Documents and payment

• Make out documents according to L/C

stipulations Present the documents to the
negotiating bank for negotiation If
documentary collection is used, the
documents should be sent through banks
to the importer for payment