Chapter 19
Financing International Trade
Lecture Outline
Payment Methods for International Trade
Prepayment
Letters of Credit
Trade Finance Methods
Accounts Receivable Financing
Factoring
Agencies that Motivate International Trade
Export-Import Bank of the U.S.
2 Financing International Trade
Chapter Theme
This chapter first suggests why international trade can be difficult. Then, it explains the various ways in
which banking institutions can facilitate international trade by resolving problems faced by the exporter
and importer.
Topics to Stimulate Class Discussion
1. Assume that you receive a call from an old friend who has set up a computer parts store. He says that
he plans to begin exporting these parts soon. What potential complications should he consider?
POINT/COUNTER-POINT:
Do Agencies that Facilitate International Trade Prevent Free Trade?
COUNTER-POINT: No. It is natural for any government to facilitate exporting for relatively
not.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: This issue will lead to many conflicting answers. Students will vary in what they perceive as
Financing International Trade 3
Answers to End of Chapter Questions
1. Banker’s Acceptances.
a. Describe how foreign trade would be affected if banks did not provide trade-related services.
b. How can a banker’s acceptance be beneficial to an exporter, an importer, and a bank?
ANSWER: Foreign trade would be reduced without the trade-related services by banks, because
2. Export Financing.
a. Why would an exporter provide financing for an importer?
b. Is there much risk in this activity? Explain.
ANSWER: An exporter could increase sales by allowing the importer to pay at a future date. There
3. Role of Factors. What is the role of a factor in international trade transactions?
4. Export-Import Bank. a) What is the role today of the Export-Import Bank of the U.S.? b) Describe
the Direct Loan Program administered by the Export-Import Bank.
ANSWER: The role today is to finance and facilitate the export of American goods and to
5. Bills of Lading. What are bills of lading, and how do they facilitate international trade transactions?
4 Financing International Trade
6. Forfaiting. What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
ANSWER: A forfaiting transaction involves an importer that issues a promissory note to pay for the
7. PEFCO. Briefly describe the role of the Private Export Funding Corporation (PEFCO).
8. Government Programs. This chapter described many forms of government insurance and guarantee
programs. What motivates a government to establish so many programs?
ANSWER: Governments may be able to boost exports by establishing policies that either protect the
9. Countertrade. What is countertrade?
10. Impact of September 11. Every quarter, Bronx Co. ships computer chips to a firm in central Asia. It
had not used any trade financing because the importing firm always pays its bill in a timely manner
upon receipt of the computer chips. After the September 11, 2001 terrorist attack on the U.S., it
reconsidered whether it should use some form of trade financing that would ensure that it would be
paid for its exports upon delivery. Offer a suggestion to Bronx Co. on how it could achieve its goal.
11. Working Capital Guarantee Program. Briefly describe the Working Capital Guarantee Program
administered by the Export-Import Bank.
ANSWER: The Working Capital Guarantee Program allows exporters to obtain short–term loans
12. Small Business Policy. Describe the Small Business Policy.
13. OPIC. Describe the role of the Overseas Private Investment Corporation (OPIC).
ANSWER: The OPIC insures direct U.S. investments in foreign countries against the risks of
Financing International Trade 5
Advanced Questions
14. Letters of Credit. Ocean Traders of North America is a firm based in Mobile, Alabama, that
specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It
recently experienced a problem, however. Ocean Traders had an irrevocable L/C issued by a Russian
bank to ensure that it would receive payment upon shipment of 16,000 tons of fish to a Russian firm.
This bank backed out of its obligation, however, stating that it was not authorized to guarantee
commercial transactions.
a. Explain how an irrevocable L/C would normally facilitate the business transaction between the
Russian importer and Ocean Traders of North America (the U.S. exporter).
ANSWER: The letter of credit was issued by a Russian bank to guarantee payment for the goods to
b. Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian
firms.
ANSWER: If exporting firms can not rely on letters of credit, they must resort to trusting the
c. Why do you think situations like this (the cancellation of the L/C) are rare in industrialized
countries?
ANSWER: Governments or regulators have a vested interest in ensuring that banks follow through
d. Can you think of any alternative strategy that the U.S. exporter could have used to protect itself
better when dealing with a Russian importer?
ANSWER: The U.S. exporter could have attempted to obtain a letter of credit from a U.S. bank,
Solution to Continuing Case Problem: Blades, Inc.
1. Assuming that banks in Thailand issue a time draft on behalf of Sports Equipment Inc. and Major
Leagues Inc., would Blades receive payment for its roller blades before it delivers them? Do the
banks issuing the time drafts guarantee payment on behalf of the Thai retailers if they default on the
payment?
ANSWER: No, Blades would not receive payment before it delivers roller blades to Sports
6 Financing International Trade
2. What payment method should Blades suggest to Sports Gear Inc.? Substantiate your answer.
ANSWER: Blades should suggest to Sports Gear Inc. that its bank issue a letter of credit on its
3. What organization could Blades contact in order to insure its sales to the Thai retailers? What type of
insurance do these organizations provide?
ANSWER: Blades could contact the Export-Import Bank of the U.S. (Eximbank), which provides
4. How could Blades use accounts receivable financing or factoring, considering that it does not
currently have accounts receivable in Thailand? If Blades uses a Thai bank to obtain this financing,
how do you think the fact that Blades does not have receivables in Thailand would affect the terms of
the financing?
ANSWER: Blades could use accounts receivable financing and factoring using its accounts
5. Assuming that Blades is unable to locate a Thai bank that is willing to issue an L/C on Blades behalf,
can you think of a way Blades could utilize its bank in the U.S. to effectively obtain an L/C from a
Thai bank?
Financing International Trade 7
ANSWER: Blades could inquire whether its U.S. bank has a correspondent bank in Thailand. In that
6. What organizations could Blades contact to obtain working capital financing? If Blades is unable to
obtain working capital financing from these organizations, what are its other options to finance its
working capital needs in Thailand?
ANSWER: There are several organizations Blades could contact to obtain working capital financing.
Solution to Supplemental Case: Ryco Chemical Company
a. Ryco could attempt to work out a countertrade agreement. Ryco could provide chemicals that
Concellos needs in exchange for the chemicals that Ryco normally purchases from Concellos.
Ryco could benefit because its cost of importing some chemicals would no longer be tied to
Brazilian inflation. Instead its cost would be tied to its own cost of producing the chemicals it
c. Concellos’ cost of obtaining imports is the cost of producing the chemicals it uses for exchange
(based on the countertrade agreement). Given high inflation in Brazil, these production costs
will rise. However, it may be able to raise its prices on its final products by the inflation rate to
8 Financing International Trade
Small Business Dilemma
Ensuring Payment for Products Exported by the Sports Exports Company
1. How could Jim use a letter of credit to ensure that he will be paid for the products he exports?
ANSWER: A letter of credit could be issued by a bank on behalf of the distributor promising to
2. Jim has discussed the possibility of expanding his export business through a second sporting
goods distributor in the United Kingdom; this second distributor would cover a different territory
than the first distributor. This second distributor is only willing to engage in a consignment
arrangement when selling footballs to retail stores. Explain the risk to Jim beyond the typical
types of risk he incurs when dealing with the first distributor. Should Jim pursue this type of
business?
ANSWER: With a consignment arrangement, the Sports Exports Company would retain title to