Trade Interfaces & Incoterms

INTERNATIONAL TRADE
Interfaces
© Krishnan Subramaniam
International Trading
History
§ Trade between people and countries is as old as human history

§ Land and sea routes connected the first civilizations in Mesopotamia and
around the Mediterranean
§ Phoenicians of the eastern Mediterranean traded metals, cedar wood,
cloth, and animals across the sea as early as 3000 BC
§ Silk Road, connected China in the east with the Roman Empire in the west
§ In the 15th and 16th centuries, the development of sea-going vessels and
advances in navigation by the Portuguese and Spanish led to a vast
increase in
world trade, as European merchants sought out new markets in Africa and
Asia and brought back rare spices and other exotic goods
ICC (International
Chamber of Commerce)
History
§ ICC was founded in 1919

§ HQ in Paris
§ Objective of ICC
- To promote trade and investment across continents
- Open markets for goods and services
- Free flow of capital
§ First President of ICC: Etienne Clémentel (Former French Minister of
Commerce)
§ ICC International Court of Arbitration established in 1923
What does ICC do?
ICC (International Chamber of Commerce) is the voice of world business championing

the global economy as a force for economic growth, job creation and prosperity
§ ICC activities
- Arbitration and dispute resolution
- Making the case for open trade and the market economy system
- Business self-regulation
- Fighting corruption or combating commercial crime
§ ICC has direct access to national governments all over the world through its national
committees
§ ICC's Uniform Customs and Practice for Documentary Credits (UCP 600) are the rules
that banks apply to finance billions of dollars worth of world trade every year
§ ICC Incoterms are standard international trade definitions used every day in
countless thousands of contracts
§ ICC is a pioneer in business self-regulation of e-commerce
INCOTERMS
International Commercial Terms
What is INCO Terms
§ INCO terms means International Commercial Terms

§ These are standard trade definitions mostly used in international sales
contracts
§ First version was introduced by ICC in 1936
§ INCO Terms 2010 is the latest version
§ There are 11 Incoterms (EXW, FOB, CIF, …)
§ Each Incoterm refers to a type of agreement for the purchase and shipping
of goods internationally
§ Incoterms are endorsed by United Nations Commission on International
Trade Law (UNCITRAL)
INCOTERMS Summary
EXW FCA FAS FOB CFR CIF CPT CIP DAT DAP DDP
Mode of
All All Sea Sea Sea Sea All All All All All
Transport
Free Free Cost & Carriage Delivered
Ex Free Cost & Carriage Delivered Delivered
Services Alongside Onboard Insurance Insurance At
Works Carrier Freight Paid To at Place Duty Paid
Ship Vessel Freight Paid To Terminal
Packing Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Loading
Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Charges
Inland
Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Freight
Terminal
Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller
Charges
Insurance Buyer Buyer Buyer Buyer Buyer Seller Buyer Seller Seller Seller Seller
Loading on
Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller
Vessel
Freight Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller
Arrival
Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller
Charges
Duty & Taxes Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller
Delivery to
Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller
Dest’n
Unloading
Charges at Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller
Destination
Ex Works (named place of destination) – 1/2
Risk pass to buyer including payment of all transportation and insurance cost from
the seller's door. Used for any mode of transportation
§ "Ex works" means that the seller delivers when the goods are placed at the disposal of the
buyer at the seller's premises or another named place (i.e., works, factory, warehouse, etc.)
not cleared for export and not loaded on any collecting vehicle
§ This term represents the minimum obligation for the seller, and the buyer has to bear all costs
and risks involved in taking the goods from the seller's premises
§ However, if the parties wish the seller to be responsible for the loading of the goods on
departure and to bear the risks and all the costs of such loading, this should be made clear by
adding explicit wording to this effect in the contract of sale.
§ This term should not be used when the buyer cannot carry out the export formalities directly
or indirectly.
§ In such circumstances, the FCA term should be used, provided the seller agrees to load at
his/her cost and risk
Ex Works (named place of destination) – 2/2
FCA term should be used, if the seller agrees to load at his/her cost and risk
SELLER'S primary duties BUYER'S primary duties

§ Keep the goods ready for
delivery at his premises § Take delivery of the goods at
seller's premises
§ Make all arrangements, incl.
export clearance, at his own
cost and risk to load and bring
the goods to the destination
FCA: FREE CARRIER (named place of destination) – 1/2
Risk pass to buyer including transportation and insurance cost when the seller delivers
goods cleared for export to the carrier
§ "Free Carrier " means that the seller delivers the goods, cleared for export, to the
carrier nominated by the buyer at the named place.
§ It should be noted that the chosen place of delivery has an impact on the obligations of
loading and unloading the goods at that place.
§ If delivery occurs at the seller's premises, the seller is responsible for loading. If delivery
occurs at any other place, the seller is not responsible for unloading
§ This term may be used irrespective of the mode of transport, including multimodal
transport
§ “Carrier " means any person who, in a contract of carriage, undertakes to perform or to
procure the performance of transport by rail, road, air, sea, inland waterway or by a
combination of such modes
§ If the buyer nominates a person other than a carrier to receive the goods, the seller is
deemed to have fulfilled his obligation to deliver the goods when they are delivered to
that person
FCA: FREE CARRIER (named place of destination) – 2/2
§ Deliver the goods at the § Nominate carrier

named point into the custody § Contract for the carriage and
of the carrier named by the pay the freight and insurance.
buyer
§ Insurance should include
§ Provide export clearance storage risk at loading port.
(export license, pay export
taxes and fees, if required)
§ Provide evidence of delivery of
the goods to the carrier
FAS: FREE ALONGSIDE SHIP (named place of destination) – 1/2
Title and risk pass to buyer including payment of all transportation and
insurance cost once delivered alongside ship by the seller. Used for sea or
inland waterway transportation
§ "Free alongside ship " means that the seller delivers when the goods are
placed alongside the vessel at the named port of shipment.
§ This means that the buyer has to bear all costs and risks of loss of or damage
to the goods from that moment
§ The FAS term requires the seller to clear the goods for export
§ This is a reversal from previous Incoterms versions which required the buyer
to arrange for export clearance
§ However, if the parties wish the buyer to clear the goods for export, this
should be made clear by adding explicit wording to this effect in the contract
of sale
§ This term can be used only for sea or inland waterway transport
FAS: FREE ALONGSIDE SHIP (named place of destination) – 2/2
§ Deliver the goods at his § Nominate carrier

premises § Contract for the carriage and
pay the freight
§ Provide export clearance
(export license, pay export
taxes and fees, if required)
FOB: FREE ON BOARD (named place of destination) – 1/2
Title and risk pass to buyer including payment of all transportation and
insurance cost once delivered on board the ship by the seller. Used for sea
or inland waterway transportation
§ "Free on board " means that the seller delivers when the goods on board
the ship at the named port of shipment.
§ This means that the buyer has to bear all costs and risks of loss of or
damage to the goods from that point.
§ The FOB term requires the seller to clear the goods for export
§ This term can be used only for sea or inland waterway transport.
§ If the parties do not intend to deliver the goods across the ship's rail, the
FCA term should be used
FOB: FREE ON BOARD (named place of destination) – 2/2
§ Deliver the goods on board § Nominate carrier

§ Provide export clearance § Contract for the carriage and
(export license, pay export pay the freight
taxes and fees, if required) § Pay loading costs to the extent
§ Provide a clean on board that they are
receipt included in the freight
§ Pay loading costs according to § Pay unloading costs
the custom of the port to the
extent that they are not
included in the freight
CFR: COST AND FREIGHT (named place of destination) – 1/2
Title, risk and insurance cost pass to buyer when delivered on board the ship
by seller who pays the transportation cost to the destination port. Used for
sea or inland waterway transportation
§ "Cost and freight " means that the seller delivers when the goods pass the
ship's rail in the port of shipment
§ The seller must pay the costs and freight necessary to bring the goods to the
named port of destination but the risk of loss of or damage to the goods, as
well as any additional costs due to events occurring after the time of
delivery, are transferred from the seller to the buyer.
§ The CFR term requires the seller to clear the goods for export
§ This term can only be used for sea and inland waterway transport. If the
parties do not intend to deliver the goods across the ship's rail, the CPT term
should be used
CFR: COST AND FREIGHT (named place of destination) – 2/2
§ Contract for the carriage and pay § Accept delivery of the goods upon
the freight to the named port of shipment, when the invoice, the
destination cargo insurance policy or other
§ Deliver the goods on board evidence of insurance document
§ Provide export clearance (export are tendered to him, and receive
license, pay export taxes and fees, the goods from the carrier at the
if required) named port of destination
§ Furnish the buyer with the invoice, § Pay unloading costs to the extent
the usual transport documents and that they are not included in the
the cargo insurance policy or other freight
evidence of insurance coverage
§ Pay loading cost and handling
§ Pay unloading costs to the extent
that they are included in the
freight
CIF: COST, INSURANCE AND FREIGHT (named place of
destination) – 1/2
Title and risk pass to buyer when delivered on board the ship by seller who pays transportation
and insurance cost to destination port. Used for sea or inland waterway transportation
§ Cost, insurance and freight " means that the seller delivers when the goods pass the ship's rail in
the port of shipment
§ The seller must pay the costs and freight necessary to bring the goods to the named port of
destination but the risk of loss of or damage to the goods, as well as any additional costs due to
events occurring after the time of delivery, are transferred from the seller to the buyer.
§ However, in CIF the seller also has to procure marine insurance against the buyer's risk of loss of
or damage to the goods during the carriage
§ Consequently, the seller contracts for insurance and pays the insurance premium.
§ The buyer should note that under the CIF term the seller is required to obtain insurance only on
minimum cover.
§ Should the buyer wish to have the protection of greater cover, the buyer would either need to
agree as much expressly with the seller or to make his/her own extra insurance arrangements
§ The CIF term requires the seller to clear the goods for export
CIF: COST, INSURANCE AND FREIGHT (named place of
This term can be used only for sea and inland waterway transport. If the parties do not intend to
deliver the goods across the ship's rail, the CIP term should be used
§ Contract for the carriage and pay the § Accept delivery of the goods upon
freight to the named port of destination shipment, when the invoice, the cargo
§ Deliver the goods on board insurance policy or other evidence of
§ Provide export clearance (export insurance document are tendered to
license, pay export taxes and fees, if him, and receive the goods from the
required) carrier at the named port of destination
§ Contract for the insurance of the goods § Pay unloading costs to the extent that
during the carriage and pay the they are not included in the freight
insurance premium
§ Furnish the buyer with the invoice, the
usual transport documents and the
cargo insurance policy or other
§ Pay loading cost and handling
§ Pay unloading costs to the extent that
they are included in the freight
CPT: CARRIAGE PAID TO (named place of destination) – 1/2
Title, risk and insurance cost pass to buyer when delivered to carrier by seller who pays
transportation cost to destination. Used for any mode of transportation
§ "Carriage paid to …. " means that the seller delivers the goods to the carrier nominated
(by the seller) but the seller must in addition pay the cost of carriage necessary to bring
the goods to the named destination.
§ This means that the buyer bears all risks and any other costs occurring after the goods
have been so delivered
§ "Carrier " means any person who, in a contract of carriage, undertakes to perform or to
procure the performance of transport, by rail, road, air, sea, inland waterway or by a
combination of such modes
§ If subsequent carriers are used for the carriage to the agreed destination, the risk
passes when the goods have been delivered to the first carrier
§ The CPT term requires the seller to clear the goods for export
§ This term may be used irrespective of the made of transport including multimodal
transport
CPT: CARRIAGE PAID TO (named place of destination) – 2/2
§ Contract for the carriage and § Accept delivery of the goods

pay the freight to the named when they are delivered to the
place of destination first carrier and when the
§ Deliver the goods into custody invoice, the cargo insurance
of first carrier policy or other evidence of
§ Provide export clearance insurance coverage, and, if
(export license, pay export customary, the usual transport
taxes and fees, if required) document are tendered to
§ Furnish the buyer with the him, and receive goods from
invoice, the usual transport the carrier at the named place
documents and the cargo of destination
insurance policy or other
evidence of insurance
coverage
CIP: CARRIAGE & INSURANCE PAID TO (named place of
Title and risk pass to buyer when delivered to carrier by seller who pays transportation and insurance cost to
destination. Used for any mode of transportation
§ "Carriage and insurance paid to …." means that the seller delivers the goods to the carrier nominated by the
seller, but the seller must in addition pay the cost of carriage necessary to bring the goods to the named
destination.
§ This means that the buyer bears all risks and any additional costs occurring after the goods have been so
delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of loss of or damage to
the goods during the carriage
§ Consequently, the seller contracts for insurance and pays the insurance premium
§ The buyer should note that under the CIP term the seller is required to obtain insurance only on minimum cover.
Should the buyer wish to have the protection of greater cover, the buyer would either need to agree as much
expressly with the seller or to make his/her own extra insurance arrangements
§ "Carrier " means any person who, in a contact of carriage, undertakes to perform or to procure the performance
of transport, by rail, road, air, sea, inland waterway or by a combination or such modes
§ If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have
been delivered to the first carrier
§ The CIP term requires the seller to clear the goods for export
§ This term may be used irrespective of the mode of transport, including multimodal transport
CIP: CARRIAGE & INSURANCE PAID TO (named place of
§ Contract for the carriage and pay § Accept delivery of the goods when
the freight to the named place of they are delivered to the first
destination carrier and when the invoice, the
§ Deliver the goods into the custody cargo insurance policy or other
of the first carrier evidence of insurance coverage,
§ Provide export clearance (export and, if customary, the usual
license, pay export taxes and fees, transport document are tendered
if required) to him, and receive goods from the
§ Contract for the insurance of the carrier at the named place of
goods during the carriage and pay destination
the insurance premium
§ Furnish the buyer with the invoice,
the usual transport documents and
the cargo insurance policy or other
DAT: DELIVERY AT TERMINAL (named place of
Title, risk and responsibility for import clearance pass to buyer when
delivered to named terminal point by seller. Used for any mode of
transportation
New Term - May be used for all transport modes
§ Seller delivers when the goods, once unloaded from the arriving means of
transport, are placed at the disposal of the buyer at a named terminal at
the named port or place of destination.
§ "Terminal" includes quay, warehouse, container yard or road, rail or air
terminal. Both parties should agree the terminal and if possible a point
within the terminal at which point the risks will transfer from the seller to
the buyer of the goods.
§ If it is intended that the seller is to bear all the costs and responsibilities
from the terminal to another point, DAP or DDP may apply
DAT: DELIVERY AT TERMINAL (named place of
Responsibilities
§ Seller is responsible for the costs and risks to bring the goods to the point
specified in the contract
§ Seller should ensure that their forwarding contract mirrors the contract of sale
§ Seller is responsible for the export clearance procedures
§ Importer is responsible to clear the goods for import, arrange import customs
formalities, and pay import duty
§ If the parties intend the seller to bear the risks and costs of taking the goods
from the terminal to another place then the DAP term may apply
DAP: DELIVERED AT PLACE (named place of destination)
New Term - May be used for all transport modes

§ Seller delivers the goods when they are placed at the disposal of the buyer on the
arriving means of transport ready for unloading at the named place of destination.
§ Parties are advised to specify as clearly as possible the point within the agreed place
of destination, because risks transfer at this point from seller to buyer.
§ If the seller is responsible for clearing the goods, paying duties etc., consideration
should be given to using the DDP term
Responsibilities
§ Seller bears the responsibility and risks to deliver the goods to the named place
§ Seller is advised to obtain contracts of carriage that match the contract of sale
§ Seller is required to clear the goods for export
§ If the seller incurs unloading costs at place of destination, unless previously agreed
they are not entitled to recover any such costs
§ Importer is responsible for effecting customs clearance, and paying any customs
duties
DDP: DELIVERED DUTY PAID (named place of
Title and risk pass to buyer when seller delivers goods to named destination point
cleared for import. Used for any mode of transportation
§ "Delivered duty paid " means that the seller delivers the goods to the buyer, cleared for
import, and not unloaded from any arriving means of transport at the named place of
destination.
§ The seller has to bear all the costs and risks involved in bringing the goods thereto
including, where applicable, any " duty" (which term includes the responsibility for an
the risk of the carrying out of formalities, customs duties, taxes and other charges) for
import in the country of destination
§ Whilst the EXW term represents the minimum obligation for the seller, DDP represents
the maximum obligation
§ This term should not be used if the seller is unable directly or indirectly to obtain the
import license
§ However, if the parties wish to exclude from the seller's obligations some of the costs
payable upon import of the goods (such as value-added tax: VAT), this should be made
clear by adding explicit wording to this effect in the contract of sale
DDP: DELIVERED DUTY PAID (named place of
§ If the parties wish the buyer to bear all risks and costs of the import, the DDU term
should be used
§ This term may be used irrespective of the mode of transport but when delivery is to
take place in the port of destination on board the vessel or on the quay (wharf), the
DES or DEQ terms should be used
SELLER'S primary duties § Take delivery of the goods at the

§ Deliver the goods at the named named place of destination
place of destination
§ Provide import clearance (import
license, pay import duties, taxes
and fees, if required)
§ Provide documents to enable the
buyer to take delivery at the
named place of destination
Risks, Payments,
Letter of Credit
Risk Issues in International Trade
COUNTRY RISKS
§ Stable political climate? War?
Revolution?
In any business transaction, § Positive economic environment?
there are risks. However, § Solid legal infrastructure?
§ Foreign exchange restrictions?
these risks are emphasized
when dealing internationally.
FOREIGN EXCHANGE RISKS
Added to the commercial
§ Volatile foreign currency?
risks present in a domestic
transaction are foreign
COMMERCIAL RISKS
exchange as well as country
§ Reliable information concerning the
risks company’s track record? Insolvency of
your trading partner?
§ Default or termination on your
contract?
Making and Receiving Payment Internationally:
International Payment Instruments
Clean
We now introduce you to the Payments
different payment methods
available in settling an
international trade Documentary
transaction. The mechanics Collections
of these methods and their
advantages and
disadvantages from the point Letters of
of view of both the Importer Credit
and the Exporter will be
discussed
Clean Payments
Introduction: Basic Facts: Mechanics: Risk Analysis:

What is a Open Account How does a Advantages
Clean & Payment in Clean Payment and
Payment? Advance transaction Disadvantages
work?
Clean Payments
Introduction: What is a Clean Payment?

§ Clean Payments are characterized by trust. Either the Exporter sends the
goods and trusts the Importer to pay once the goods have been received, or
the Importer trusts the Exporter to send the goods after payment is effected
§ In the case of Clean Payment transactions, all shipping documents, including
title documents, are handled directly by the trading parties. The role of banks
is limited to clearing funds as required
Clean Payments
Basic Facts: Open Account & Payment in Advance

§ There are two types of Clean Payments: Open Account & Payment in
Advance
§ Open Account. The Importer is trusted to pay the Exporter after receipt of
the goods
§ Payment in Advance. An arrangement whereby the Exporter is trusted to
ship the goods after receiving payment from the Importer
Clean Payments
Mechanics: How does an Open

Account transaction work?
OPEN ACCOUNT: The Exporter
ships the goods and the Exporter
documents directly to the
Importer and waits for the
1 2
Importer to send payment.
Payment
Goods
Importer
Clean Payments
Mechanics: How does a Payment

in Advance transaction work?
PAYMENT IN ADVANCE: The
Importer sends payment directly Exporter
to the Exporter and waits for the
Exporter to send the goods and
2 1
documents
Payment
Goods
Note: The Payment in
Advance and Open Account
schematics vary only in the
order in which events take
place
Importer
Risk Analysis: Clean Payments
Open Account Payment in Advance

Advantages to None – but could clinch Assumes no risks
Exporter the sale!
Disadvantages Assumes all risks None
to Exporter
Advantages to § Assumes no risks None - but could secure
Importer § Delays use of low cost!
company’s cash
resources
Disadvantages § None § Assumes all risks
to Importer § Opportunity cost of
using company’s cash
resources until goods
are received
International Payments Risk Spectrum
As we move through the different ways to effect payment in international trade,
we will build the Risk Spectrum. The Risk Spectrum is intended to summarize the
risks associated with the payment methods in relation to the Exporter and the
Importer. Notice that Open Account and Payment in Advance sit at opposite ends
of the Risk Spectrum
Highest risk Least risk to

to exporter importer
§ Open Account
§ Payment in Advance
Least risk to Highest risk

exporter to importer
Documentary Collections
Introduction
§ What is a Documentary Collection?
Basic Facts
§ Documents Against Payment (D/P) &
§ Documents Against Acceptance (D/A)
Mechanics
§ How does a Documentary Collection work?
Risk Analysis
§ Advantages and Disadvantages of Documentary Collections
Introduction: What is a Documentary Collection?

§ A method of payment used in international trade whereby the Exporter
entrusts the handling of commercial and often financial documents to
banks and gives the banks instructions concerning the release of these
documents to the Importer
§ Banks involved do not provide any guarantee of payment
§ Collections are subject to the Uniform Rules for Collections published by the
International Chamber of Commerce.
§ The last revision of these rules came into effect on January 1, 1996 and is
referred to as the URC 522
Basic Facts: Documents Against Payment (D/P) & Documents Against Acceptance
(D/A)
Documentary Collections may be carried out in two different ways
§ Documents Against Payment. Documents are released to the Importer only against
payment. Also known as a Sight Collection or Cash Against Documents (CAD)
§ Documents Against Acceptance. Documents are released to the Importer only
against acceptance of a draft. Also known as a Term Collection
Mechanics: How does a Documentary Collection work?

The mechanics of a Documentary Collection are easily understood
when separated into the following three steps
1. Flow of Goods
2. Flow of Documents
3. Flow of Payment
Documentary Collections: Flow of Goods
• After the Importer and the

Exporter have established a
sales contract and agree on a
Documentary Collection as Exporter/
the method of payment, the Drawer
Exporter ships the goods.
• In a Documentary Collection,
the Importer is known as the
“drawee” and the Exporter as Goods
the “drawer”.
Importer/
Drawee
Documentary Collections: Flow of Goods
§ After the goods are shipped, documents
originating with the Exporter (e.g.,
commercial invoice) and the transport
company (e.g., bill of lading) are delivered
to a bank, called the Remitting Bank in the 2
Collection process. Exporter/ Remitting
§ The role of the Remitting Bank is to send Drawer
Documents Bank
these documents accompanied by a
Collection Instruction giving complete and
precise instructions to a bank in the
Documents
Importer’s country, referred to as the
Collecting/ Presenting Bank in the 1 3
Collection process.
§ The Collecting/ Presenting Bank acts in Goods
accordance with the instructions given in
the Collection Instruction and releases the
documents to the Importer against
payment or acceptance, according to the
Remitting Bank’s Collection instructions. 4
Collecting/
Importer/
Drawee Documents Presenting
Bank
Note: The Exporter’s Bank and the Remitting Bank
need not be the same. Also, the Collecting Bank
and Presenting Bank need not be the same. Each
role could be performed by a different bank.
Documentary Collections: Flow of Payment
• Payment is forwarded to the

Remitting Bank for the
Exporter’s account.
4
• And the Importer can now Exporter/ Remitting
present the transport Drawer Bank
document* to the carrier in
exchange for the goods.
1 3
Goods
1
*In this case, we are assuming that the transport 2
document is a title document. Collecting/
Importer/
Drawee Documents Presenting
Bank
Risk Analysis: Documentary Collections
Documents Against Payment (D/P) Documents Against Acceptance (D/A)

Advantages to § Documents are not released to the § Less costly than a Letter of Credit
Exporter Importer until payment has been § May provide formal/legal means to collect
effected unpaid obligation
§ Less costly than a Letter of Credit
Disadvantages § Risk of refusal of payment § Risk of non-acceptance of documents
to Exporter § Commercial and country risks not § Commercial and country risks not hedged
§ Although bill of exchange/draft is accepted by
the Importer, there is no guarantee of
payment by the banks involved
§ Legal enforcement of unpaid obligation costly
and time-consuming
Advantages to § Ability to examine documents before § Will receive goods before having to make
Importer authorizing payment payment
§ Unlike a Letter of Credit, a line of credit
is not required, and fees are minimal
Disadvantages § In the case that transport documents § Dishonoring an accepted draft is a legal
to Importer carry title, cannot access goods until liability and may ruin business reputation
payment has been made

Documentary Collections offer more of a compromise in risk-taking between the
Importer and the Exporter than Clean Payments as illustrated in the diagram
below

to exporter § Open Account importer
§ Documentary
Collections
- Documents Against
Acceptance
- Documents Against
Payment
Least risk to § Payment in Advance Highest risk
exporter to importer
Letters of Credit
Introduction
§ What is a Letter of Credit?
Basic Facts
§ Revocable & Irrevocable Letter of Credit
§ Sight & Term Letter of Credit
§ Confirmed Letter of Credit
Mechanics
§ How does a Letter of Credit transaction work?
Risk Analysis
§ Advantages & Disadvantages
Why Have a Letter of Credit
If I ship goods,
Will you pay?
If I pay,
Will you ship the
goods?
SOLVES ISSUES OF MUTUAL MISTRUST BY USING

BANKS AS ARBITERS
NEGOTIATE L/C TERMS BEFORE

ENTERING A CONTRACT
Letters of Credit
Introduction: What is a Letter of Credit?
§ A Letter of Credit is a written undertaking by the Importer’s bank, known as the
Issuing Bank, on behalf of its customer, the Importer (Applicant), promising to effect
payment in favor of the Exporter (Beneficiary) up to a stated sum of money, within a
prescribed time limit and against stipulated documents
§ A key principle underlying Letters of Credit is that banks deal only in documents and
not in goods.
§ The decision to pay under a Letter of Credit will be based entirely on whether the
documents presented to the bank appear on their face to be in accordance with the
terms and conditions of the Letter of Credit.
§ It would be prohibitive for the banks to physically check whether all merchandise
has been shipped exactly as per each letter of Credit
§ The International Chamber of Commerce (ICC) publishes internationally agreed-
upon rules, definitions and practices governing Letters of Credit, called “Uniform
Customs and Practice for Documentary Credits” (UCP).
§ The last revision of these rules was effective July 2007 is referred to as the UCP 600
Letters of Credit
Basic Facts: Revocable/Irrevocable & Sight/Term

§ Letters of Credit are either Revocable or Irrevocable:
- A Revocable Letter of Credit can be revoked without the consent of the
Exporter, meaning that it may be canceled or changed up to the time the
documents are presented. Revocable Letters of Credit are very rarely used
- An Irrevocable Letter of Credit cannot be canceled or amended without the
consent of all parties including the Exporter. Unless otherwise stipulated, all
Letters of Credit are irrevocable
§ Letters of Credit may be settled either by sight or by acceptance
- If payment is to be made at the time that documents are presented, this is
referred to as a sight Letter of Credit
- If payment is to be made at a future fixed time from the presentation of
documents, this is referred to as a term Letter of Credit
Letters of Credit
Basic Facts: Confirmed Letter of Credit

§ Under a Confirmed Letter of Credit, a bank, called the Confirming Bank,
adds its commitment to that of the Issuing Bank to pay the Exporter under
the Letter of Credit provided all terms and conditions of the Letter of
Credit are met.
§ The Confirming Bank is usually located in the same country as the Exporter
§ An Exporter would request a Confirmed Letter of Credit if it does not
consider the financial strength of the Issuing Bank or the country in which
it is located to be acceptable risks
Letters of Credit
Mechanics: How does a Letter of Credit work?

The mechanics of a Letter of Credit are easily understood when
separated into the following three steps
1. Issuance
2. Flow of Goods
3. Flow of Documents & Payment
Letters of Credit: Issuance
§ After the trading parties agree on a

sale of goods where payment is Advice/ Confirmation
made by Letter of Credit, the of the Letter of Credit
Importer requests that its bank (the
4
Issuing Bank) issue a Letter of Credit Advising/
Exporter/
in favor of the Exporter Beneficiary Confirming
(Beneficiary). Bank
§ The Issuing Bank then sends the
Letter of Credit to the Advising Request to
Bank. A request may be included for Contract advise & possibly
1 3
the Advising Bank to add its Negotiations confirm the
confirmation. The Advising Bank is Letter of Credit
usually located in the country
where the Exporter does business
and may be the Exporter’s bank,
but does not have to be.
2
§ Next, the Advising/Confirming Bank
Importer/ Issuing Bank
verifies the Letter of Credit for Applicant
Importer applies for
authenticity and sends it to the Letter of Credit
Exporter.
*In this case, we are assuming that the transport
document is a title document.
Letters of Credit: Flow of Goods
Upon receipt of the Letter of

Credit, the Exporter reviews the
Exporter/
Letter of Credit to ensure that it
Beneficiary
corresponds to the terms and
conditions in the purchase and
sales agreement; that the
documents stipulated in the
Letter of Credit can be produced;
Goods
and that the terms and
conditions of the Letter of Credit
can be fulfilled. Assuming the
Exporter is in agreement with
the above, it arranges for
shipment of the goods Importer/
Applicant
Letters of Credit: Flow of Documents & Payment
§ After the goods are shipped,

the Exporter presents the
documents specified in the 3
Letter of Credit to the
Advising/
Advising/ Confirming Bank Exporter/ 2 Confirming
Beneficiary
§ Once the documents are Documents Bank
checked and found to comply
with the Letter of Credit (i.e.,
Documents
without discrepancies), the 1 4 5
Advising/ Confirming Bank Goods
forwards these documents to
the Issuing Bank. The drawing
is negotiated, paid or accepted
as the case may be.
Con’d … Importer/ Issuing Bank
Applicant
Letters of Credit: Flow of Documents & Payment
§ In turn, the Issuing Bank

3
examines the documents to
Advising/
ensure they comply with Exporter/ 2 Confirming
Beneficiary
the Letter of Credit. If the Documents Bank
documents are in order, the

Issuing Bank will obtain
Documents
payment from the Importer 1 4 5
for payment already made Goods

to the Confirming Bank
§ Documents are delivered to Documents
the Importer to allow it to
6
take possession of the Importer/ Issuing Bank
goods Applicant
Types of LCs – 1/2
Revolving credit and Installment shipment

§ Revolving credits are used between buyers and sellers who have a long-
standing trading relationship and experience in the shipment of the goods
described in the credit
§ The buyer and seller arrange for a credit to be issued which allows the
amount available on the credit to be reinstated usually without any
specific amendment
§ Availability of credit revolves upon shipment and/or presentation of
documents
Transferable Credit
§ The credit issued in favor of the trader (beneficiary) can be used as a
means of paying the sources from which the trader obtains goods and as
security for payment for such goods or the transfer of the credit
undertaking to another beneficiary
§ Under this LC, Beneficiary (first beneficiary) may request the bank
authorized to pay, accept or negotiate (“Transferring Bank”), or in the case
of a freely negotiable credit, the bank authorized in the credit as a
Transferring Bank, to make the credit available in whole or in part to one or
more other beneficiary - (second beneficiary)
§ The name of the first beneficiary can be substituted
§ The first beneficiary has the right to substitute his own invoice and drafts
for those of the second beneficiary
§ Upon such substitution of invoice and drafts, the first beneficiary can draw
for the difference, if any, between his invoice and the second beneficiary’s
invoice
Types of LCs
Advance payment credit (Red Clause credit)

§ At the sellers request the buyer may agree to make a part of the purchase
price available to the seller as a pre shipment advance and further agree that
such advance should be made from with the credit issued
§ The arrangement provides for the amount of the advance to be deducted
from the amount to be paid to the seller upon presentation of documents
§ The advance payment is to be made against beneficiary providing
- A receipt for the advance duly signed by the beneficiary
- An undertaking from the beneficiary to utilize the funds to purchase and
pack the merchandise
- The undertaking of the beneficiary to present the full set of documents as
stipulated in the credit to the Negotiating Bank within the expiry of the
credit
LC – Back to Back
§ A credit is first issued in favor of the trader/middlemen by the ultimate
buyer . (Credit-LC A)
§ The trader /middleman uses this credit as a means by which to request a
bank to issue a separate credit on his behalf in favor of the supplier . Credit
–LC B
§ When the second credit (B) is issued by the same bank that advised credit
(A) in favor of the trader/middlemen, the second credit (B) is referred to as a
back-to back credit. This is because the advising bank of Credit (A) opens
Credit (B) on “the back of “ Credit (A)
§ When the second credit (B) issued by the trader/middleman’s own bank
(not being the advising bank of credit (A), the second credit is referred to as
a “counter credit” because credit (A) is the “counter” for credit (B)
§ The two credits are entirely separate and each Issuing Bank is liable on its
own obligation
§ The documents from credit (B) may be used in part to make the
presentation under credit (A)
§ The trader/middleman is obligated to pay the bank that issued credit (B) on
his or her behalf irrespective of whether or not proceeds are obtained for
Credit (A)
§ Credit (A) does not provide security to the bank that issued credit (B). Credit
(A) merely evidences the means of payment that may be forthcoming to
meet the payment obligation on credit (A)
§ Accordingly, credit (A) provides “Comfort” to the bank that issued Credit (B),
not security
Risk Analysis: Letter of Credit
Importer Exporter
Advantages § Importer is assured that, for § An undertaking from the Issuing Bank
the Exporter to be paid, all that you will receive payment under the
terms and conditions of the Letter of Credit provided that you meet
Letter of Credit must be met all terms and conditions of the Letter of
§ Ability to negotiate more Credit
favorable trade terms with the § Shifts credit risk from the Importer to
Exporter when payment by the Issuing bank
Letter of Credit is offered § Not obligated to ship against a Letter of
Credit that is not issued as agreed
Disadvantages § A Letter of Credit assures § Documents must be prepared in strict

correct documents but not compliance with the requirements
necessarily correct goods stipulated in the Letter of Credit.
§ Ties up line of credit § Non-compliance leaves Exporter
exposed to risk of non-payment
Trade Finance: Letter of Credit Documents
BANKS DO NOT DEAL IN

THE MERCHANDISE
WHICH THE LETTER OF
CREDIT COVERS
BANKS DEAL ONLY IN

DOCUMENTS
The Bank’s Commitment in the Letter of Credit
The L/C says what it means & means what it says

§ Amount
§ Expiration
§ Latest Shipment Date
§ Documents Required
Payment will be made only when all terms and conditions are met
Resolve unclear items prior to shipment
The Documents Required by the Letter of Credit
All documents must conform to the letter of credit and be consistent with
each other. Three forms of documents
1. The Financial Claim
2. The Transport Document
3. Other Documents
The Financial Claim: The “Draft”
(A Negotiable Instrument Similar To A Check)

§ Generally The Draft Is:
- Drawn On The Bank That Issued The L/C
- Payable At A Certain Time (Or Tenor)
- In The Currency Specified In The L/C
§ Examples Of “Tenor”: At Sight, At 120 Days Bill Of Lading Date, On August
31, 20xx, 30 Days Date, Or Any Determinable Date.
Note: “At Sight” Is For Immediate Payment. For Any Tenor Beyond Sight, The
Bank “Accepts” The Draft To Mature/Be Payable At A Future Date. (This Is
Called A Banker’s Acceptance, And Can Be Discounted)
The Transport Document: The Bill of Ladding
1. A “Contract Of Carriage” To Ship Goods

2. A “Title Document” To Ownership Of The Goods (Except Truck, Rail, Air
B/L’s)
3. Consignment “To Order”=negotiable
4. Notify Party (For Arrival Of Goods)
5. Freight Charges (Prepaid Or Collect)
6. Shipping Ports (“From” & “To”)
Note: all aspects must conform to the L/C, and be consistent with other documents
Other Documents
Invoice PKG. List Insurance Origin L/C Docs

Cert.
§ Commercial Invoice – Description Of Goods Critical—must Be Verbatim

§ Packing List – Amount Of Goods In Each Package Or Container
§ Insurance Certificate – Usually 110% Of Value Of Goods, Covering Risks
Specified In The L/C
§ Certificate Of Origin – Attests To The Country Of Origin
§ Inspection Certificate – Independent Verification Of Quality/Quantity
§ Other Documents – Any Required For Certain Products
We have completed the International Payments Risk Spectrum. Whereas

payment settled via Open Account and Payment in Advance represent a high
degree of risk for one of the parties involved, both Documentary Collections and
Letters of Credit offer a compromise in risks facing the Importer and the
Exporter § Open Account
§ Documentary
to exporter importer
Collections
- Documents Against
Acceptance
- Documents Against
Payment
§ Letters of Credit
- Unconfirmed
- Confirmed
Least risk to Highest risk
exporter § Payment in Advance to importer
Import/Export
Documentation
Invoices
Commercial Invoice
§ Refers to a specific shipment
§ Tells exactly what the importer is billed for. It must include
- A precise product description
- An accurate Harmonized System number
- The terms of trade (INCOTERMS)
- A detailed list of the items that the exporter has pre-paid
- The terms or payment
- The currency of payment
- The complete shipping information (itinerary,
shipping carrier, etc.)
- The customary information (names, addresses, etc.)
Export Documents
Export License
§ Export license is the express authorization by a country’s government to
export a specific product before it is shipped
§ Reasons for a country requiring an export license
- Government is trying to exert some control over foreign trade for political
or military reasons
- Government is attempting to control the export of natural resources
- Government is attempting to control the export of national treasures or
antiques
U.S. Export Controls
§ U.S. export policy has been based on denying some countries access to
certain [military or dual-use] technologies
Import Documents
Certificate of Origin
§ A document provided by the exporter’s Chamber of Commerce that attests
that the goods originated from the country in which the exporter is located
§ Used by importing country to determine tariff of goods
Certificate of Inspection
§ A document provided by an independent inspection company that attests
that the goods conform to the description contained in the invoice provided
by the exporter
§ A Certificate of Inspection also attests that the value of the goods is reflected
accurately on the invoice
§ A Certificate of Inspection is always obtained by the exporter in the exporting
country, before the international voyage takes place
§ The Certificate of Inspection is the result of a Pre-Shipment Inspection (PSI)
Import Documents
Pre-Shipment Inspection
§ A Pre-Shipment Inspection is requested by the importer or by the importing
country
- A Certificate of Inspection protects the importer using a Letter of Credit or
Documentary Collection since these methods are based on the
documentation for payment; the inspection makes sure that the goods are
conform
- The inspection is conducted at the request of the importing country’s
government to ensure that the invoice reflects accurately the type of goods
shipped by the exporter and their value
Import License
§ A document issued by the importing country, and designed to prevent import of
non-essential or overly luxurious product in developing countries short of foreign
currency supply
Certificate of Insurance
§ Some Incoterms (CIF, CIP) require that the exporter provide insurance. A
certificate of insurance offers proof of coverage
Transportation Documents
Bill of Lading
§ A generic term used to describe a document issued by the carrier to the
shipper
§ A bill of lading is
- An evidence of a contract between the carrier and the shipper
• The carrier agrees to transport the goods from point of origin to point
of destination for a given amount
- A receipt for the goods
• The carrier certifies that the goods were received in good condition at
the point of origin
- A Certificate of Title
• The carrier will only deliver the goods to the
party that has the original bill of lading
Different types of Bill of Lading

§ Ocean Bill of Lading: A bill of lading used in international transportation of
goods on ocean-going vessels
§ Air Waybill: A bill of lading used in the transportation of goods by air,
domestically or internationally
§ Uniform Bill of Lading: A bill of lading used for inland transportation.
Intermodal Bill of Lading. A bill of lading used for intermodal or multi-modal
shipments, i.e., shipments that take more than one mode of transportation
Bill of Lading as a Receipt for the goods

Clean Bill of Lading
§ A bill of lading that certifies that the goods were received by the carrier in
good condition
§ No annotation are made on the BOL, other than a signature for receipt of
the goods
§ All Letters of Credit and Documentary Collections require a clean BOL
Soiled (or Fouled) Bill of Lading
§ A bill of lading that reflects the fact that the carrier received the goods in
anything other than good condition
§ It is characterized by the presence of additional
comments or notes in addition to the signature
of the carrier’s representative
Transportation Documents – 1/2
Bill of Lading as a Certificate of Title

Straight Bill of Lading
§ A bill of lading on which the name of the consignee has been entered
§ Such a bill of lading is non-negotiable, which means that the ownership of
the goods cannot change while the goods are in transit
§ The party named on a bill of lading is called the consignee
§ The consignee is the owner of the goods upon arrival or the party to whom
the goods should be surrendered at their destination
§ The consignee will have the original bill of lading at the point of arrival of
the goods
Transportation Documents – 2/2
Negotiable or “To Order” Bill of Lading

§ A bill of lading on which the name of the consignee has been left blank, or
where the words “to order” have been entered where the consignee’s
name is expected
§ A negotiable BOL allows the owner of the goods to sell them while they
are in international transit
§ The transfer of ownership to the new owner is done with the bill of lading,
since it is a Certificate of Title to the goods
§ Whoever has the original bill of lading when the cargo arrives in the port is
the owner of the goods
§ Only Ocean Bills of Lading can be negotiable (air waybills, uniform bills of
lading and multimodal bills of lading are all straight)
Kinds of BL – 1/2
Seaway Bill
§ Unlike the bill of lading, the seaway bill is not a document of title
§ There is no need for the consignee to present any transport document at the port of
discharge, as long as he can identify himself as the party named as consignee in the
seaway bill
§ Seaway bill obliges the carrier to deliver goods to the consignee named in the
document
§ The carrier's only responsibility in this respect is to exercise due diligence when
confirming the identity of the person claiming to be the consignee
House bill of lading
§ It is the document issued by the freight forwarder to the shipper giving the detail of
the consignment to be carried to the destination country
Kinds of BL – 2/2
Master bill of lading

§ It is the document issued by the original carrier or the liner to the freight forwarders
giving the detail of the cargos to be carried by the liner
Express bill of lading
§ It is a document required for the express delivery of the consignment .
§ The original bill of lading is not required in this case which is surrendered at the load
port
Switch bill of lading
§ Often called “the trader’s second set” and intended to replace the first set of bills of
lading issued.
§ Usually used where a seller/trader wishes to keep the name of his supplier, named as
shipper, secret from the ultimate buyer of goods.
§ Due care and consideration must be exercised when issuing such bills of lading
because of inherent exposure to fraud/conversion of factual data
Other Shipping Documents

Packing List
§ It documents what each shipment contains: how the goods are packaged, marked,
what merchandise is in each container, and their respective weight and dimensions
Shipper's Letter of Instruction
§ Delivered to shipping company if shipper wants specific directions followed during
transport. It can be critical in livestock shipments
Manifest
§ Shipping document that is internal to the carrier, but is often examined by
government entities
§ A list of the entire cargo that a vessel, aircraft or container transports, as well as the
ownership, port of origin, port of destination, specific handling instructions of that
cargo
Dangerous Goods
The shipment of dangerous goods is regulated by a number of organizations and rules
§ International Maritime Organization's International Maritime Dangerous Goods Code
§ International Air Transport Association's Dangerous Goods Regulations
§ Local shipment codes, such as the United States' Code of Federal Regulations, Title
49 (abbreviated 49CFR)

Trade Interfaces &amp; Incoterms

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INTERNATIONAL TRADE

§ Trade between people and countries is as old as human history

§ ICC was founded in 1919

ICC (International Chamber of Commerce) is the voice of world business championing

§ INCO terms means International Commercial Terms

SELLER'S primary duties BUYER'S primary duties

SELLER'S primary duties BUYER'S primary duties

§ Deliver the goods at the § Nominate carrier

SELLER'S primary duties BUYER'S primary duties

§ Deliver the goods at his § Nominate carrier

SELLER'S primary duties BUYER'S primary duties

§ Deliver the goods on board § Nominate carrier

SELLER'S primary duties BUYER'S primary duties

SELLER'S primary duties BUYER'S primary duties

CPT: CARRIAGE PAID TO (named place of destination) – 1/2

CPT: CARRIAGE PAID TO (named place of destination) – 2/2

SELLER'S primary duties BUYER'S primary duties

§ Contract for the carriage and § Accept delivery of the goods

DAP: DELIVERED AT PLACE (named place of destination)

New Term - May be used for all transport modes

SELLER'S primary duties § Take delivery of the goods at the

Introduction: Basic Facts: Mechanics: Risk Analysis:

Introduction: What is a Clean Payment?

Basic Facts: Open Account & Payment in Advance

Mechanics: How does an Open

Mechanics: How does a Payment

Open Account Payment in Advance

Highest risk Least risk to

Least risk to Highest risk

Introduction: What is a Documentary Collection?

Mechanics: How does a Documentary Collection work?

• After the Importer and the

• Payment is forwarded to the

Risk Analysis: Documentary Collections

Documents Against Payment (D/P) Documents Against Acceptance (D/A)

International Payments Risk Spectrum

Highest risk Least risk to

SOLVES ISSUES OF MUTUAL MISTRUST BY USING

NEGOTIATE L/C TERMS BEFORE

Basic Facts: Revocable/Irrevocable & Sight/Term

Basic Facts: Confirmed Letter of Credit

Mechanics: How does a Letter of Credit work?

3. Flow of Documents & Payment

§ After the trading parties agree on a

Upon receipt of the Letter of

Letters of Credit: Flow of Documents & Payment

§ After the goods are shipped,

§ In turn, the Issuing Bank

documents are in order, the

for payment already made Goods

Revolving credit and Installment shipment

Advance payment credit (Red Clause credit)

Disadvantages § A Letter of Credit assures § Documents must be prepared in strict

BANKS DO NOT DEAL IN

BANKS DEAL ONLY IN

The L/C says what it means & means what it says

2. The Transport Document

(A Negotiable Instrument Similar To A Check)

1. A “Contract Of Carriage” To Ship Goods

Invoice PKG. List Insurance Origin L/C Docs

§ Commercial Invoice – Description Of Goods Critical—must Be Verbatim

We have completed the International Payments Risk Spectrum. Whereas

Different types of Bill of Lading

Bill of Lading as a Receipt for the goods

Trade Interfaces & Incoterms

Trade Interfaces & Incoterms