CHAPTER 16
INTERNATIONAL TRADE FINANCE
1. Unaffiliated Buyers. Why might different documentation be used for an export to a
nonaffiliated foreign buyer who is a new customer, as compared with an export to a
nonaffiliated foreign buyer to whom the exporter has been selling for many years?
A new nonaffiliated buyer presents a credit risk for the exporter because the exporter may be
unable to assess the credit worthiness of that importer due to geographic distance, language,
culture or lack of a record of payments to other suppliers. A letter of credit, accompanied by
2. Affiliated Trade Relationship. Affiliated exporters and importers resort to some types of
trade protection. What is the difference between trade protection used by affiliated and non-
affiliated businesses?
Even in the case of intra-firm trade between units or subsidiaries of the same firm, trade
protection is often used. But the protection is not as substantial as that used in the case of
3. Intra-firm Trade. Why has the volume of intra-firm trade surged in the past two decades?
What are the main advantages and disadvantages of intra-firm trade?
Intra-firm trade is the exchange of goods and services between two or more subsidiaries of
the same parent company. While goods and services are traded globally, they stay within the
ambit of the MNE. Intra-firm transactions represent a significant portion of international
trade in comparison to trade among unrelated parties (known as arm’s-length trade). In order
4. Foreign Trade Documents. What are the instruments that reduce risks of foreign trade
partners?
Trade partners usually use financial instruments in trade financing to reduce the risks that can
arise when exporters and importers enter into foreign trade transactions. The most widely
used instruments are letters of credit issued by the importer’s bank and forwarded to the
5. International Trade Transaction Risks. What are the two main risks associated with
international trade transactions? How can these risks be managed?
The two main risks associated with international trade transactions are currency risk and the
risk of non-completion. Currency risks arise when currencies fluctuate during the delay
6. Secure Letter of Credit (L/C). What is an L/C? What is the most secure type of L/C for
exporters?
Letters of credit are typically used by importers and exporters for large transactions and to
ensure that delivery (by the exporter) and payment (by the importer) are made. The
importer’s bank issues the letter of credit (L/C) in the form of a formal document issued by
the importer’s bank guaranteeing that an exporter will receive payment in full as long as
certain delivery conditions have been met. The exporter’s bank ensures that the exported
7. Letters of Credit. What is the difference between confirmed and unconfirmed letters of
credit?
A confirmed letter of credit adds a second (or more) guarantor(s) that are committed to pay
the letter of credit in case the importer defaults. A confirmed letter of credit is typically used
when the bank that issues the letter of credit may have doubtful creditworthiness or when the
8. Documenting an Export of Hard Drives. List the steps involved in the export of computer
hard disk drives from Penang, Malaysia, to San Jose, California, using an unconfirmed letter
of credit authorizing payment on sight.
1. The San Jose importer applies for a letter of credit (L/C) from its California bank.
2. California bank issues an L/C in favor of the San Jose importer and sends the L/C to
exporter’s Malaysian bank.
3. Malaysian bank advises the Penang exporter of the opening of the L/C.
6. Malaysian bank forwards the draft, accompanied by the order bill of lading and any other
required documents, to the California bank.
7. California bank pays the Malaysian bank for the sight draft, receiving the order bill of
lading, now endorsed by the Malaysian bank. At this point the California bank has legal
title to the merchandise.
9. Export Credit Insurance. Exporters face substantial non-payment risks from the importing
party. One method to mitigate this risk is export credit insurance. What is export credit
insurance? What are its advantages and disadvantages?
Export credit insurance gives the exporter conditional assurance that payment will be made if
the foreign buyer is unable to pay. It protects exporters’ foreign receivables against a variety
of risks. It is provided by the government or by private sector insurance firms and/or
specialized export development banks either on a single-buyer basis or on a portfolio multi–
buyer basis.
10. Governmental Trade Promotion Measures. As part of an overall export-promotion
strategy, various governments have followed measures to enhance their exports and
international trade mainly through providing export credit insurance and by extending
financing to exporters. Explain the economic effectiveness of these measures and their
impact on societal welfare.
Many factors govern the flow of international trade, but export promotion remains one of the
principal methods by which governments can influence the volume and types of trade. To
attract foreign investment, especially trade-related FDI, governments follow overall
strategies that involve export subsidies and foreign exchange changes. These entail public