Chapter 19
Financing International Trade
Lecture Outline
Payment Methods for International Trade
Prepayment
Letters of Credit
Drafts
Consignment
Open Account
Trade Finance Methods
Accounts Receivable Financing
Factoring
Agencies that Motivate International Trade
Export-Import Bank of the U.S.
Private Export Funding Corporation (PEFCO)
Overseas Private Investment Corporation (OPIC)
Financing International Trade ❖ 2
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?
2. Why do exporters sometimes sell off their banker’s acceptances? Would they be better off obtaining
a short-term loan instead? What information is necessary to answer this question?
3. What is the common role of a banking institution in international trade besides financing?
POINT/COUNTER-POINT:
Do Agencies that Facilitate International Trade Prevent Free Trade?
POINT: Yes. The Export-Import Bank of the U.S. provides many programs to help U.S. exporters
conduct international trade. The government is essentially subsidizing the exports. Governments in other
countries have various programs as well. Thus, some countries may have a trade advantage because their
exporters are subsidized in various ways. These subsidies distort the notion of free trade.
COUNTER-POINT: No. It is natural for any government to facilitate exporting for relatively
inexperienced exporting firms. All governments provide a variety of services for their firms, including
public services, and tax breaks for producing products that are ultimately exported. There is a difference
between facilitating the exporting process and versus protecting an industry from foreign competition.
The protection of an industry violates the notion of free trade, but facilitating the exporting process does
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.
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?
Financing International Trade ❖ 3
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.
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.
5. Bills of Lading. What are bills of lading, and how do they facilitate international trade transactions?
6. Forfaiting. What is forfaiting? Specify the type of traded goods for which forfaiting is applied.
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 such programs?
Financing International Trade ❖ 4
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.
12. Small Business Policy. Describe the Small Business Policy.
13. OPIC. Describe the role of the Overseas Private Investment Corporation (OPIC).
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).
Financing International Trade ❖ 5
b. Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian
firms.
c. Why do you think situations like this (the cancellation of the L/C) are rare in industrialized
countries?
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?
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
2. What payment method should Blades suggest to Sports Gear Inc.? Substantiate your answer.
3. What organization could Blades contact in order to insure its sales to the Thai retailers? What type of
insurance do these organizations provide?
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?
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
Financing International Trade ❖ 7
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.
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?
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?