SCMT 340 Exam #1 Review:

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Foreign Corrupt Practices Act: Anti-Bribery Convention:

In several countries, the bribing of government officials is a common and accepted form of conducting business. ---The Foreign Corrupt Practices Act (FCPA) of the United States attempts to eliminate the practice of bribery, by punishing the companies and the individuals paying the bribes. ---The Organization for Economic Co-operation and Development (OECD) has implemented an Anti-Bribery Convention, which several countries have adopted, and that also criminalizes bribery practices.

Utilities Infrastructure: Theft:

In some areas, theft of utilities is common, making it difficult for utility companies to earn a profit and invest in new infrastructure.

Letter of Credit (Other Issues): Red-Clause Letter of Credit:

In some cases, the exporter may not have enough working capital to finance the manufacturing of the goods that it is selling to the importer. In that case, it is possible to ask the importer to issue a red-clause letter of credit, with which the importer provides the exporter with a cash down payment, prior to shipment, to finance the production of the goods.

Communication Infrastructure (Mail): Speed:

In some countries, mail delivery is quick. In others, very slow.

Communication Infrastructure (Mail): Reliability:

In some countries, not all mail is delivered: it is lost, abandoned, or sometimes pilfered.

Communication Infrastructure (Mail): Delays:

In some countries, postal unions have a lot of power and strikes can delay the delivery of important documents.

Court Infrastructure: Fairness:

In some countries, the court system is perceived as corrupt or unfair, and that hinders good business relationships.

Common Errors in Incoterms® Rules Usage (III): Not Specifying the Incoterms® rule version:

Incoterms rules have changed from 2000 to 2010. Until the 2010 rules are solidly established, it would be advisable to always specify "Incoterms 2010". --Since the FOB point of delivery changed from Incoterms 2000 to Incoterms 2010, some possible problems may develop should cargo be damaged during the loading of a ship if the version (2010) is not specified.

Sales Contract Elements: Terms of Trade:

Incoterms® rules determine the costs the exporter should pay, the costs the importer should pay, and the point at which the responsibility for the cargo shifts from one to the other.

Business Services Infrastructure: Couriers:

It allow firms to ship documents and small parts using the "next available flight."

Cost and Freight (CFR): Scope:

It can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.

Free Alongside Ship (FAS): Scope:

It can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.

Free On Board (FOB): Scope:

It can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.

Free Alongside Ship (FAS): Modality:

It can only be used for ocean transportation.

Free On Board (FOB): Modality:

It can only be used for ocean transportation.

Characteristics of International Payments: Credit Information:

It is much harder to find credit information on a person in a foreign country.

Incoterms® rule Variant (CIF):

It is possible for the exporter and the importer to agree to a higher level of insurance (coverage A). In this case, the Incoterms syntax changes to: CIF · Naigai Lines, 176 Higashi-Machi, Chuo-Ku, Kobe 650-0031, Hyogo, Japan, Incoterms® 2010, maximum cover.

CIP: Incoterms® rule Variant:

It is possible for the exporter and the importer to agree to a higher level of insurance (coverage A). In this case, the Incoterms syntax changes to: CIP · Ulitsa Poruchik Nedelcho Bonchev, Sofia, Bulgaria, Incoterms® 2010, maximum cover

Credit Insurance:

It is possible to sell internationally on an open-account basis and still take little risk, by transferring the risk of non-payment to an insurance company. --Insurance companies sell __________, a policy that will cover non-payment by the importer. --This method was subsidized by some European countries in the 1980s, and exporters from the EU frequently use credit insurance when selling on open account.

Port Operations:

Many ports have strong unions which limit operations.

(Airport Infrastructure): Space:

Most airports are landlocked and cannot expand.

Cost, Insurance, and Freight (CIF): Syntax:

CFR [Address of the dock in the Port of Destination where goods are delivered], Incoterms ® 2010. CIF · Naigai Lines, 176 Higashi-Machi, Chuo-Ku, Kobe 650-0031, Hyogo, Japan, Incoterms® 2010.

Cost and Freight (CFR): Syntax:

CFR [Address of the dock in the Port of Destination where goods are delivered], Incoterms ® 2010. CFR · ENL Multi-purpose Terminal, Apapa Wharf, Lagos,Nigeria, Incoterms® 2010.

Carriage and Insurance Paid To (CIP): Syntax:

CIP [Address in the City of Destination where goods are delivered], Incoterms ® 2010. CIP · Ulitsa Poruchik Nedelcho Bonchev, Sofia, Bulgaria, Incoterms® 2010

Carriage Paid To (CPT): Syntax:

CPT [Address in the City of Destination where goods are delivered], Incoterms ® 2010. delivered], Incoterms ® 2010. CPT · Graacher Straße 20, Köln, Deutschland D-50969, Incoterms® 2010.

(Railroad Infrastructure): Multi-modal:

Cargo rail transport has shifted from traditional railcars to multi-modal cars, carrying either containers or truck trailers.

Carriage Paid To (CPT): Modality:

Carriage Paid To can be used for any mode of transportation.

Carriage Paid To (CPT): Scope:

Carriage Paid To can be used for any type of product.

Carriage and Insurance Paid To (CIP): Modality:

Carriage and Insurance Paid To can be used for any mode of transportation.

Carriage and Insurance Paid To (CIP): Scope:

Carriage and Insurance Paid To can be used for any type of product.

Business Services Infrastructure: Multiple Other Services:

Carriers, delivery services, etc. are fundamental to implement good international trade practices, and must exist for exporters to be successful.

Methods of Payment: Traditional Methods:

Cash in Advance, Open Account, Letter of Credit, Documentary Collection

(Railroad Infrastructure): Land Bridges:

Containers are shipped from Asia to Europe through the U.S. railroad network; they arrive in a port on the west coast, and are transported to an east-coast port by rail.

Cost, Insurance, and Freight (CIF): Scope:

Cost Insurance and Freight can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.

Cost, Insurance, and Freight (CIF): Modality:

Cost Insurance and Freight can only be used for ocean transportation.

Cost and Freight (CFR): Modality:

Cost and Freight can only be used for ocean transportation.

Standards Infrastructure:

Countries have different standards for products and services offered for sale; these standards are specific and must be followed.

Delivered At Place (DAP): Syntax:

DAP [Address in the City of Destination where goods are delivered], Incoterms ® 2010. DAP · 97 Brisbane Street, Sydenham 8023, New Zealand, Incoterms® 2010.

Delivered at Terminal (DAT): Syntax:

DAT [Address of the Terminal where goods are delivered], Incoterms ® 2010. DAT · Paranaguá Container Terminal, Avenida Portuária, Paranaguá, Parana 83206-410, Brazil, Incoterms® 2010.

Delivered Duty Paid (DDP): Syntax:

DDP [Address in the City of Destination where goods are delivered], Incoterms ® 2010. DDP · Kopparbergsgatan 226, Malmö 214 44, Sverige/Sweden, Incoterms® 2010.

Delivered At Place (DAP): Modality:

Delivered At Place can be used for any mode of transportation.

Delivered At Place (DAP): Scope:

Delivered At Place can be used for any type of product.

Delivered at Terminal (DAT): Modality:

Delivered At Terminal can be used for any mode of transportation.

Delivered at Terminal (DAT): Scope:

Delivered At Terminal can be used for any type of product, but it is designed for containerized cargo.

Delivered Duty Paid (DDP): Modality:

Delivered Duty Paid can be used for any mode of transportation.

Delivered Duty Paid (DDP): Scope:

Delivered Duty Paid can be used for any type of product.

Risks in International Trade: Country Risk:

Different issues affect the risk that a country represents. It includes the possibility of not being paid because a customer's country does not have the foreign currency to pay the debt, or the customer is not allowed to pay. Political unrest, chances of a strike, and variations in interest and exchange rates should also be taken into account.

Coordinating Direct Export Strategies:

Difficulties arise when a firm decides to change strategies in a particular market. These long-term relationships are very important and ending any one of them can be difficult and costly.

Court Infrastructure: Mediation:

Disputes can also be resolved through mediation, and therefore a group of mediators is often useful to resolve disputes.

Court Infrastructure: Arbitration:

Disputes can be resolved faster through arbitration. The existence of experienced arbitrators is important to the conduct of business.

Documentary Collection is less:

Documentary collection is less cumbersome and cheaper than a letter of credit. The exporter keeps control of the documents (and therefore title) until the importer accepts the draft or makes payment.

Characteristics of International Payments: Lack of Personal Contact:

Due to the different physical locations, communication is typically not done face-to-face. This can make it hard to get to know a person, which is particularly important is certain cultures.

Characteristics of International Payments: No Easy Legal Recourse:

Due to the nature of international transactions, there is no single court that has direct jurisprudence over an international trade dispute between an exporter and an importer.

Any mode of transportation:

EXW -- Ex-works FCA -- Free Carrier CPT -- Carriage Paid To CIP -- Carriage and Insurance Paid To DAT -- Delivered At Terminal DAP -- Delivered At Place DDP -- Delivered Duty Paid

Ex-Works (EXW): Syntax:

EXW [Address in the City of Departure where goods are made available], Incoterms 2010. EXW · 2400 Progress Drive, Poughkeepsie, New York 12601, USA, Incoterms® 2010.

There are 11 different Incoterms® rules, all abbreviated with a 3-letter acronym, such as:

EXW, DAP, FOB, and so on.

Distribution Channel Infrastructure: Retail Distribution:

Efficient access to consumers is important to a manufacturer of consumer goods, and is not available in all countries.

Ocean Transportation:

FAS -- Free Alongside Ship FOB -- Free On Board CFR -- Cost and Freight CIF -- Cost, Insurance, and Freight

Free Alongside Ship (FAS): Syntax:

FAS [Address of the dock in the Port of Departure where the goods are delivered], Incoterms ® 2010. FAS · Waalhaven Noordzijde 2089, Rotterdam, 3089KM, The Netherlands, Incoterms® 2010.

Free Carrier (FCA): Syntax:

FCA [Address in the City of Departure where goods are delivered to carrier], Incoterms ® 2010. FCA · Bâtiment B, 46 Allée Corbière, F-81000 Castres, France, Incoterms® 2010

Free On Board (FOB): Syntax:

FOB [dock (or ship) in the Port of Departure where the goods are delivered], Incoterms ® 2010. FOB · Breakbulk Terminal, 660 Duncan Road, Cape Town, South Africa, Incoterms® 2010.

Communication Infrastructure (Mail): Competition:

Firms such as FedEx, UPS, and DHL are very reliable, but they are generally much more expensive than the public postal services.

Distribution Channel Infrastructure: Trade Shows:

For most industries, trade shows present an unequaled opportunity to reach potential customers and trade partners.

Electronic Data Interchange (EDI):

For several Incoterms® rules, there is no transport document that is issued at the point where the responsibility shifts from the exporter to the importer (for example, a Bill of Lading). --This has attempted to solve this problem. --Whenever there is no transport document possible, the exporter can still send an EDI "notice" to the importer, which acts as a proof of delivery for both parties. The exporter has a record of the notification sent, and the importer knows unambiguously when the goods were delivered to the quay or when they arrived in port.

Free Carrier (FCA): Modality:

Free Carrier can be used for any mode of transportation.

Free Carrier (FCA): Scope:

Free Carrier can be used for any type of goods.

Business Services Infrastructure: Freight Forwarders:

Freight forwarders provide significant assistance to firms engaged in international trade by helping determine the best shipping alternatives.

If products sold well, then the DRP program reordered the goods and had them delivered just-in-time to the appropriate warehouse or retail store. If a product did not sell well, none were re-ordered. This strategy forced logistics managers to focus on transit times and adapt to frequent changes in their work. This became known as:

"agile logistics"

Supply Chain Management:

"encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies."

Logistics:

"is the part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements."

Reverse Logistics:

"process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal."

Arithmetike:

"the art of calculating using abstract concepts"

Logistike:

"the art of calculating"

Foreign Trade Zones:

(or free trade zones [FTZ]) are areas of a country that have a special Customs status deeming them "outside" of the country. This means goods can be shipped to FTZs without paying duties or being subject to quotas. --It is only when the goods leave the FTZ and enter the country that they are subject to duty. --FTZs were created to encourage exporting and foreign investments.

Subsidiary:

(or wholly owned foreign enterprise [WOFE]) is an independent company established in a foreign country but owned entirely by the exporting company. --A subsidiary allows the foreign firm to retain complete control of its foreign investment. --This strategy is normally followed by a well-established large company, as the costs associated with creating a subsidiary are very high.

(Cost Drivers): Automobile companies were among the first to seek sales abroad:

- Automobile production is dominated by 19 companies (89 percent of all automobiles worldwide) -Automobile production is concentrated in 15 countries (88 percent of worldwide production) -Automobiles are sold in 143 countries.

Franchising:

---It is similar to licensing but involves a "bundle" of intellectual property items. A firm (franchisor) will allow an entire business model to be used by another firm (franchisee) in exchange for royalties. The intellectual property includes a large number of related trademarks, copyrights, patents and know-how, training, and methods of operation. ---It works best for retail establishments requiring a uniform appearance for consumers, and is most popular with fast-food restaurants, such as McDonald's or KFC, or small-business services such as UPS stores.

A firm can use two strategies in entering foreign markets through exports, and both are appropriate:

--A standardized approach, where it uses a single method of entry in all markets: agents, distributors, or sales subsidiaries. This uniformity simplifies the management of international sales. --A tailored approach, where an agent is used in some countries, a distributor in others, and a marketing subsidiary in the remainder. The decision depends on the characteristics of the market and resources.

To manage the complexity of international trade, companies have adopted Global Trade Management software that allows them to ensure:

--Compliance with export rules, import rules, multilateral agreements and other requirements of international trade --Visibility of the supply chain: determining where goods and documents are at any point in time --Optimization of the supply chain: determining where problems exist and the means to resolve them

International Logistics management has become a strategic advantage for the firms that are capable of:

--Containing the costs of shipping, in view of increased fuel costs --Providing "visibility" in the supply chain, or the ability to determine where a particular shipment is located, at any time --Providing reliable, dependable deliveries --Ensuring the security of the goods while they are in transit --Engaging in sustainable practices

Hedging Strategy: There are two possible strategies for a firm with transaction exposures:

--Determine what its decision should be on an invoice-by-invoice basis, depending on the currency at stake, the amount of the invoice, and its forecast of currency's exchange rate. --Set a policy that the firm follows for all of its foreign currency receivables and payables.

Active Exporting:

--Exporter actively participates in finding potential markets abroad. --Best option for large firms or firms with international experience.

Indirect Exporting:

--Exporter does not seek export sales. --Allows manufacturer to concentrate on domestic market and leave exporting to the experts.

Parallel Imports:

--For a variety of reasons firms will sell goods in different markets at different prices: different methods of entry, characteristics of the market, varying exchange rates. Entrepreneurs will often buy the goods in the country with the lowest price, and then sell them in the country with the highest price. In order to do that, they buy from the normal distribution channel, but sell through alternative channels of distribution that are not the ones that the exporter would normally use. --This phenomenon is called "parallel imports," or gray market. --It is difficult for companies to fight these parallel imports, as they are due to market characteristics rather than strategic choices.

Acceptance: The exporter can specify in the letter of instruction whether it wants trade acceptance or banker's acceptance:

--In requesting a trade acceptance (or trader's acceptance), the exporter expects the importer to accept (sign) the draft in a reasonable amount of time after being notified that the presenting bank has the documents in its possession. --In a banker's acceptance, the exporter asks the presenting bank to accept the draft "on behalf" of the importer. ---A presenting bank will only agree to a banker's acceptance if it can be sure that the importer will honor the bank's commitment. It will therefore only sign if it can aval the importer's commitment.

Elements of International Logistics:

--International insurance is much more complex. --International means of payment are more complicated. --Terms of trade are more challenging. --The crossing of borders represents specific challenges in documentation and requirements. --Warehousing decisions involve more variables. --Inventory management includes greater risks. --Quality management is more demanding.

For each international sale, it is important to determine, who — of the exporter or the importer — is responsible for:

--Pre-carriage, the domestic transportation in the exporting country --Main carriage, the international transportation between the exporting country and the importing country --On-carriage, the domestic transportation in the importing country --The risks involved in international transportation --Customs clearance in the importing country

The International Chamber of Commerce specifies that there are two groups of Incoterms rules:

--Seven Incoterms rules that can be used for any means of transportation (ocean, road, air, train). --Four Incoterms rules that can only be used for ocean transportation (these are the oldest terms of trade).

The determination of the appropriate method of entry in a new market depends on several factors:

--Size and growth of the market --Potential market share of the exporter --Type of product and marketing strategy of the exporter --Willingness of the exporter to get involved --Characteristics of the importing country --Time horizon considered

Elements of International Logistics (I):

--The environment in which international logisticians operate is quite different from the domestic environment. --The decisions regarding international transportation are much more complicated than those regarding domestic transportation. --The number of intermediaries involved in an international transaction is greater than in a domestic transaction. --The inherent risks and hazards of international transportation are much greater.

An exporter and an importer can agree on three possible alternatives when choosing the currency in which a sales contract will be paid:

--The exporter's country's currency --The importer's country's currency --A third country's currency

Each Incoterms rule defines:

--The responsibilities of the exporter --The responsibilities of the importer --A specific transfer point at which the responsibilities for the goods shifts from the exporter to the importer

Choosing the correct Incoterms® rule depends on which export strategy a company is following. The following factors are particularly important:

--The type of product being sold (weight, volume, perishability, value, sensitivity to temperature changes, and so on) --The method of shipment --The ability and willingness of either of the exporter and importer to perform the tasks involved --The amount of trust placed by either of the parties in the other party

Incoterms® rules formally define the following aspects of an international sale:

--Which tasks will be performed by the exporter --Which tasks will be performed by the importer --Which activities will be paid by the exporter --Which activities will be paid by the importer --The exact point at which the responsibility for the goods transfers from the exporter to the importer

Legal Issues:

--are typically very small, sometimes even one person, and therefore fall under the protection of labor law in many countries. This puts certain limits on the way contracts between agents and exporters can be worded and enforced (see Chapter 5). --Distributors are typically much larger than agents and therefore fall under contract law. --Finally, certain countries have strict laws regarding the use of agents, sometimes even barring them altogether.

India:

-Abundance: Educated Labor -Advantage: Call Centers

Argentina:

-Abundance: Grazing Land -Advantage: Beef

Under the FCA Incoterms® rule, there are two choices regarding the delivery of the goods. The exporter and importer can agree on:

-FCA Exporter's Premises -FCA Carrier's Premises

The exchange rate between two currencies can be quoted in a number of ways:

-Spot Exchange Rate -Forward Exchange Rate -Currency Futures -Currency Options

(Competition Drivers): Every move by one of the players is met with some retaliatory measure:

-When Benetton - an Italian company -, entered the U.S. market, the Gap - an American company - , retaliated by entering the Italian market -When Carrefour - a French retailer - enters a market, Walmart enters another. And when Walmart enters a market, Carrefour does as well

Documentary Collection: (Steps):

1. Exporter --> Importer (Goods) & Exporter's Bank - Remitting Bank (Documents) 2. Exporter's Bank - Remitting Bank --> Presenting Bank 3. Presenting Bank <---> Importer

Letter of Credit (Entire Process):

1. Exporter <---> Importer 2. Importer --> Importer's Bank - Issuing Bank 3. Importer's Bank - Issuing Bank --> Exporter's Bank Advising Bank 4. Exporter's Bank - Advising Bank --> Exporter 5. Exporter --> Importer & Exporter's Bank - Advising Bank 6. Exporter's Bank - Advising Bank --> Importer's Bank - Issuing Bank 7. Importer's Bank - Issuing Bank --> Importer 8. Importer --> Importer's Bank - Issuing Bank 9. Importer's Bank - Issuing Bank --> Exporter's Bank - Advising Bank 10. Exporter's Bank - Advising Bank --> Exporter

Letter of Credit (Issuance: Steps:

1. Exporter <--> Importer 2. Importer --> Importer's Bank - Issuing Bank 3. Importer's Bank --> Exporter's Bank - Advising Bank 4. Exporter's Bank - Advising Bank --> Exporter

Factors of Economic Production:

1. Land 2. Labor 3. Capital 4. Entrepreneurship

A study of Supply Chain officers conducted by the Aberdeen Group in 2013 identified the 3 greatest challenges faced by companies involved in international trade:

1. Rising supply chain management costs, including total landed costs, fuel costs, and labor costs 2. Escalating demand for service from customers, including deliver performance, information availability, and levels of service. 3. Growing complexity of global operations, including increasing number of suppliers, partners, carriers, customers, countries, and logistics channels.

Documentary Collection: Process:

1. The exporter and the importer agree to conduct business on a documentary collection basis. The exporter sends the goods to the importer, but sends the documents to the exporter's bank, which acts as the remitting bank. 2. The remitting bank sends the documents to a bank in the importing country, called the presenting bank. 3. Upon receipt of the documents, the presenting bank notifies the importer that the documents are available.

Letter of Credit (Issuance):

1. The exporter and the importer agree to conduct business on a letter of credit basis. The exporter sends a pro forma invoice to the importer. 2. The importer asks his bank, called the issuing bank, to provide him a letter of credit, naming the exporter as the beneficiary. 3. The importer's bank sends the letter of credit to the exporter's bank, called the advising bank. 4. The exporter's bank reviews ("advises") the letter of credit, making sure that it is conform to the terms to which the exporter agreed.

Letter of Credit (Shipment): Steps:

5. Exporter ---> Exporter's Bank - Advising Bank (Documents) & Importer (Goods) 6.Exporter's Bank - Advising Bank --> Importer's Bank - Issuing Bank 7. Importer's Bank - Issuing Bank --> Importer

Letter of Credit (Shipment):

5. The exporter ships the goods to the importer. By doing so, it collects some documents from the carrier (which documents depend on the Incoterm chosen), and sends all these documents (including invoice and so on) to the advising bank. 6. The advising bank checks the documents against the letter of credit, and then notifies the importer's bank that all documents are in order. The exporter's bank then sends the documents to the issuing bank. 7. The issuing bank sends the documents to the importer.

Letter of Credit (Payment):

8. After receiving the documents, the importer pays the importer's bank. 9. The importer's bank transfers the funds to the exporter's bank. 10. The exporter's bank pays the exporter.

Letter of Credit (Payment): Steps:

8. Importer --> Importer's Bank - Issuing Bank 9. Importer's Bank - Issuing Bank --> Exporter's Bank -Advising Bank 10. Exporter's Bank - Advising Bank --> Exporter

Bretton-Woods:

A 1944 conference at which many of the international institutions were created.

Maquiladoras:

A _______ is a company in Mexico with a Customs status similar to that of an FTZ. ---Goods from the USA can be imported duty free into the _______, transformed, and re-exported to the U.S. Duty is only charged on the value added, not on the goods themselves. ---________ are now obsolete because of the North American Free-Trade Agreement, which eliminated duty between Mexico, Canada, and the United States.

Licensing:

A company (the licensor) allows another firm (the licensee) to use its intellectual property in exchange for a fee (royalty). --The license can allow the use of a patented technology, trademark, brand name or trade secret. The licensor retains ownership of the intellectual property and the licensee must pay the licensor a fee every time it is used. --All intellectual property is at risk of being copied or "stolen" in countries where intellectual property is not well protected. --Having a licensing agreement does not increase that risk: companies intent on violating intellectual property do it without access to the licensor.

Contract Manufacturing:

A company enters into an agreement with a foreign company to manufacture its goods abroad. For example: ---An American publisher may hire a British publisher to print books in Britain, instead of shipping them from the United States. ---A French cement company may contract a Chinese cement manufacturer to sell cement under the French company's name in China. --It is a way for a firm to get its products in a foreign country, either when there are barriers to entry (quotas, for example), or when transportation costs are high.

Convertible Currency:

A currency that can be converted to another currency

Hard Currency:

A currency that can easily be converted to another currency

Inconvertible Currency:

A currency that cannot be converted into another currency

Soft Currency:

A currency that cannot be easily converted into another currency

Types of Currencies: Artificial Currency:

A currency that is not in circulation. As of 2013, there is only one artificial currency, the Special Drawing Rights of the International Monetary Fund.

Distributor:

A distributor is typically located in the importing country. The distributor will purchase the goods from the exporter and therefore take title of them. It will then resell the goods for a profit. --In this relationship, there are two sets of invoices. One set of international invoices between the exporter and the distributor. The distributor is therefore the importer. The second set of invoices is between the distributor and its customer. The customer sees this as a domestic transaction. --A distributor may carry products from competitors in the same field. Oftentimes, it will also service products and carry replacement parts.

Letter of Credit:

A letter of credit is a document in which the importer's bank essentially promises to pay the exporter if the importer does not pay. The credit worthiness of the bank is substituted for that of the importer, and the exporter is protected. --Letters of credit are not paid until the exporter supplies the importer with a specified set of documents, agreed in advance. The importer is therefore also protected. --Therefore letters of credit are also called "documentary credit."

Letter of Credit (Other Issues): Back-to-Back Letter of Credit:

A letter of credit issued by the exporter, naming its supplier as beneficiary, and that uses the letter of credit issued by the importer's bank as evidence of credit worthiness.

Letter of Credit (Other Issues): Transferable Letter of Credit:

A letter of credit that the beneficiary uses to secure its own payment to others. A transferable letter of credit is used when the exporter needs to purchase raw materials before it can produce what it sold to the importer.

Documentary Collection:

A process by which an exporter asks a bank located in the importing country to safeguard its interests by not releasing the documents until the importer satisfies certain requirements. --The exporter gives the foreign bank very specific directions on the way it wants the transaction handled, by supplying the foreign bank with a "letter of instruction."

Risk of Currency Convertibility:

A pure risk: a payment received in a foreign currency cannot be converted into the exporter's currency.

Risk of Currency Fluctuation:

A speculative risk: the risk could result in positive or negative outcomes, depending on which way the exchange rate fluctuates.

Letter of Credit (Other Issues): Stand-By Letter of Credit:

A stand-by letter of credit is similar to an ordinary letter of credit, but it is valid for multiple shipments and allows for bills of lading issued on multiple dates. Under such a system, the exporter will make shipments on an open-account basis and will "call" on the letter of credit only if the importer is not meeting its obligations.

Incoterms® Rules as a Strategic Advantage:

A strategic advantage can be gained by an exporter willing to facilitate the sale of its products by assisting a novice importer in the handling of a shipment. --On the other hand, an experienced importer may be intent on performing all or most of the tasks involved in the shipment. --Most exporters would gain by being flexible, offering a quote where they list several possible Incoterms: FCA, 123 Main Street, Cleveland, Ohio, USA $ 245,000 FOB, M/V APL Florence, Miami, Florida, USA $ 258,000 DAT, Tecon Terminal, Santos, Brazil $ 285,000 and let the importer decide which Incoterms rule it would rather use.

Distribution Channel Infrastructure: Agents and Distributors:

A strong network of agents and distributors allows an exporter to enter new markets and expand abroad.

Tariff:

A tax collected by an importing country on the value of imported goods.

Characteristics of International Payments: Collections are difficult and expensive:

If a customer fails to pay it is difficult and expensive to collect on the past due account.

Characteristics of International Payments: Higher Litigation Costs:

If legal proceedings are required, there are much more expensive and complicated than for a domestic case.

Hedging Techniques: Money-Market Hedging:

A technique that utilizes the banking system in the foreign country to manage a firm's transaction exposure.

Hedging Techniques: Forward-Market Hedging:

A technique that utilizes the forward market for currencies to manage a firm's transaction exposure.

Hedging Techniques: Options-Market Hedging:

A technique that utilizes the options market for currencies to manage a firm's transaction exposure.

Utilities Infrastructure: Water and Sewer:

Access to clean water (and sewer) is fundamentally important for many manufacturing processes.

Communication Infrastructure (Telecommunications): Internet:

Access to the internet is still limited or cost prohibitive in some areas. In others, internet access is fast and inexpensive.

Distribution Channel Infrastructure: Advertising and Promotion:

Advertising agencies and media allow promotional activities critical to the success of many products and services.

(Airport Infrastructure): Hours of Operation:

Airports need to be located away from of major cities if they are going to operate at night. Many airports do not meet this requirement.

General Agreement on Tariffs and Trade:

An agreement between countries to lower tariffs and trade barriers (Geneva, 1948) -Multiple reductions on tariffs: GATT's Kennedy Round (1964-67), Tokyo Round (1973-79), and Uruguay Round (1986-94). Currently in the Doha Round (started in 1998, stalled).

Risks in International Trade: Commercial Risk:

An individual firm may not be able (or willing) to pay for a number of reasons. It is difficult to find reliable credit information on international firms.

Common Errors in Incoterms® Rules Usage (I): Confusion with Domestic Terms of Trade:

An inexperienced exporter will use "FOB factory" rather than the correct corresponding Free Carrier Seller's Premises (FCA) Incoterms® rule.

Warehouse Space:

Availability of reliable storage space for goods in transit.

Banking Infrastructure: Document Exchanges:

Banks play a fundamental role in the exchange of trade documents between an exporter and an importer.

Characteristics of International Payments:

Because of all of these issues, a climate of mistrust is often created.

Other key waterways include the __________ in Turkey which connects the Black Sea with the Mediterranean and the __________ in North America which connect the Great Lakes with the Atlantic Ocean. Other canals are less frequently used, such as the ________ in Greece.

Bosporus Strait & Saint Lawrence Seaway & Corinth Canal

Air Draft:

Bridge clearances also determine which ships can call.

Business Services Infrastructure: Customs Brokers:

Brokers provide assistance to importers when clearing Customs.

Intellectual Property Infrastructure: Protection:

Businesses with intellectual property (patents, copyrights, trade secrets) want to make sure that the countries in which they operate will protect intellectual property. In some countries, competitors, police, and courts do not respect nor protect intellectual property, often considering that intellectual property laws favor big foreign corporations over the local entrepreneur trying to earn a living.

Letter of Credit (Other Issues): Confirming Bank:

On occasion, the exporter may be unsure about the credit worthiness of the bank that issued the letter of credit. It can then ask a bank (often the advising bank) to confirm the letter of credit; should the issuing bank renege on the payment, the confirming bank will pay the exporter. --Although routinely used by some exporters, confirmed letters of credit are a reflection of an excessively cautious mindset. Almost no letter of credit ever goes unpaid.

Letter of Credit (Other Issues): Advising Bank:

On occasion, the exporter's bank does not have the ability (or is not willing) to advise a letter of credit issued by a bank with which the exporter's bank is not familiar. --In that case, the exporter's bank asks an additional bank to advise the letter of credit. --In those cases, the exporter's bank and the advising bank are two separate entities.

Letter of Credit (Other Issues): Correspondent Bank:

On occasion, there is a bank in the importer's country with which the exporter's bank has an established relationship. Such a bank is called a correspondent bank. --It is also possible that there is a bank in the exporter's country with which the importer's bank has a prior relationship. This is the correspondent bank for the importer's bank. --It is therefore possible to have as many as two correspondent banks involved in a letter of credit transaction, one for the exporter's bank, and one for the importer's bank.

(Types of Drafts): Date Draft:

Once the importer accepts the draft by signing it, the importer has to pay the exporter a certain number of days (30, 60, 90, or 180) after the date of shipment for the goods.

(Types of Drafts): Time Draft:

Once the importer accepts the draft by signing it, the importer has to pay the exporter a certain number of days (30, 60, 90, or 180) after the date of acceptance.

(Types of Drafts): Sight Drafts:

Once the importer accepts the draft by signing it, the importer has to pay the exporter immediately. The draft is payable "at sight."

Business Services Infrastructure: Packing: Services:

Packing services allow exporters to rely on professionals to pack goods destined for export.

Connection to land-based Transportation:

Ports need to have reliable access to roads and/or rail lines to keep cargo moving.

Cranes:

Post-Panamax ships need wider/taller cranes than Panamax ships.

Method of Payment: Letter of Credit:

Probability of Losing the Sale Because of the Choice of Method of Payment: Fairly high

Method of Payment: Cash in Advance:

Probability of Losing the Sale Because of the Choice of Method of Payment: High

Method of Payment: Purchasing Card:

Probability of Losing the Sale Because of the Choice of Method of Payment: Low

Method of Payment: TradeCard:

Probability of Losing the Sale Because of the Choice of Method of Payment: Low

Method of Payment: Open Account:

Probability of Losing the Sale Because of the Choice of Method of Payment: Nil (none)

Standards Infrastructure: Design:

Product designs are often dictated by local conventions (electrical supply and plugs, plumbing sizes and pressures, and telecommunication standards, for example).

Utilities Infrastructure: Energy:

Reliable pipelines have to be available to deliver natural gas or oil products to the locations where they can be used.

Two factors should be considered when choosing a currency for the sales contract:

Risk of Currency Fluctuation and Risk of Currency Convertibility

Standards Infrastructure: Performance:

Several countries have performance standards for products, dictating what can be called "natural," "organic," "premium," and so forth.

Common Errors in Incoterms® Rules Usage (II): Improper Use of a Correct Incoterms® rule:

Some Incoterms® rules are sometimes specific to certain modes of transportation and types of cargo, and cannot be used for others. --The most frequent misuse is when FOB is used with an air shipment: FOB is designed to be used only with an ocean shipment term. --The correct Incoterms® rule to use for an air shipment should be Free Carrier (FCA), to clearly outline the responsibilities of the exporter and of the importer.

Communication Infrastructure (Telecommunications): Cellular Phones:

Some countries built cellular phone networks quickly, often because they did not have a good landline network. They leapfrogged the landline technology, often offering better cellular access than developed countries with reliable landline networks.

Intellectual Property Infrastructure: International Agreements:

Some countries have not ratified international agreements on intellectual property and therefore do not recognize some aspects of foreign patents and copyrights.

Communication Infrastructure (Telecommunications): Leapfrogging:

Some countries never build infrastructure in one technology, and "leapfrog" into the next one. Gabon in the next tables.

Court Infrastructure: Speed:

Speedy resolution of lawsuits allows businesses to "move on." Some countries have slow and cumbersome court processes.

(Airport Infrastructure): Warehouse Space:

Storage facilities protect cargo from the elements.

The________ in North Africa and the ______ in Central America are particularly important. The current trend of building ships too large to fit through these canals is creating new challenges for the industry.

Suez Canal & Panama Canal

Incoterms® Rules in Domestic Trade:

The International Chamber of Commerce has intentionally designed the new (2010) Incoterms® rules to be used in domestic trade. --The main reason for this change is that domestic trade and international trade often use the same terminologies (for example, FOB is a frequently used domestic term of trade), but with different meanings. Consider a company doing business in several countries, all of which have a different understanding of FOB in addition to the ICC version. --In an attempt to simplify trade, the ICC would like domestic and international shipments to use ) Incoterms® rules.

Common Errors in Incoterms® Rules Usage (I): Confusion with older Incoterms® rules:

The International Chamber of Commerce modified the Incoterms® rules in 1980, 1990, 2000, and 2010. It eliminated some Incoterms® rules, modified others and created some new ones. For a number of reasons, several exporters have failed to adapt to these changes, and will use an obsolete Incoterms® rule.

Spot Exchange Rate:

The ______ is the exchange rate for a foreign currency for immediate delivery. This "immediate delivery" is somewhat subject to interpretations that vary from country to country and, within one country, from one currency to another; however, it is (roughly) the price of a foreign currency to be delivered within 48 hours. This is the most-commonly used exchange rate, and it can be found in just about any periodical (The Wall Street Journal, The New York Times, Financial Times) or financial website.

Forward Exchange Rate:

The ______ rate is the exchange rate for a foreign currency to be delivered any number of days in the future. --The party entering into a forward currency contract with a bank is committing to purchasing one currency with another at a certain price on a certain date. --The published forward exchange rate quotes are for 30 days, 90 days, 180 days, or one year in the future. --Forward rates are only published in financial newspapers like The Wall Street Journal or Financial Times.

Euro: (Background):

The ______ was first created as an artificial currency. In January 2002, it became a circulating currency. When new countries join the euro zone, their legacy currency's value is translated using a fixed currency exchange rate with the euro. --The stated goal of the European Union is to eventually transform the euro into a challenger to the U.S. dollar as the preferred third-country currency. --Other currencies used as a third-country's currency are the Japanese yen, the Swiss Franc, and the British pound.

Banking Infrastructure: Methods of Payment:

The ability of the banking partners to support alternative means of payment and to provide assistance to firms engaged in international trade is very important.

Banking Infrastructure: Foreign Currency Payments:

The ability to quickly purchase and sell foreign currencies, either through wire transfers or currency purchases, is important to firms engaged in international trade.

Euro:

The common currency of 19 of the 28 countries of the European Union.

Risks in International Trade: Exposure:

The consequence of a loss to a particular firm is the exposure. A small firm has more exposure in a $50,000 transaction than a large firm.

Sales Contract Elements: Currency:

The currency in which the transaction is undertaken: it can be the exporter's country's currency, the importer's country's currency, or a third country's currency.

Water Draft:

The depth of water determines the size of ships that can call.

Exporter's Currency:

The exporter and the importer agree that the currency of the transaction will be the currency of the exporter's country. --The exchange rate risk is nil for the exporter; all of the risks are borne by the importer, and it has to determine how it will handle its transaction risks. --In addition, the possible convertibility problems of the currency are to be resolved by the importer.

Importer's Currency:

The exporter and the importer agree that the currency of the transaction will be the currency of the importer's country. --The exchange rate risk is nil for the importer; all of the risks are borne by the exporter, and it has to determine how it will handle its transaction risks. --In addition, the possible convertibility problems of the currency are to be resolved by the exporter.

Third Country's Currency:

The exporter and the importer can agree that the currency of the transaction will be a third country's currency. --The exporter and the importer each bear the risks of currency fluctuation of their respective country's currency against the currency of the transaction. --In some cases, the exporter and the importer choose an artificial currency (a non-circulating currency) for the transaction, the Special Drawing Rights (SDRs) of the International Monetary Fund. International liability conventions are expressed in SDRs.

Open Account:

The exporter conducts international business in a manner similar to the way it conducts business domestically. The exporter sends an invoice to the customer and expects the customer to pay it promptly (or within a certain pre-arranged period). --This method presents many risks for the exporter. --This method should be used with well-established customers or with customers the exporter expects to have a long term relationship. The customer's credit should be checked before this method is used.

FCA Exporter's Premises:

The exporter loads the goods at its place of business on a truck (means of conveyance) provided by the importer.

FCA Carrier's Premises:

The exporter loads the goods on its own truck and delivers them to the carrier's place of business, still loaded on the truck. It is the responsibility of the carrier to unload them from the truck.

Ex-Works (EXW): Responsibilities of the Exporter:

The exporter must package the goods for the international voyage and provide the importer with the documents necessary to clear the goods for export in the exporting country and to clear customs in the importing country.

Delivered Duty Paid (DDP): Responsibilities of the Exporter:

The exporter must package the goods for the international voyage, arrange and pay for pre-carriage, main carriage and on-carriage to the city of destination, and clear Customs in the importing country.

Free On Board (FOB): Responsibilities of the Exporter:

The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, arrange and pay for pre-carriage to the port of departure and loading onto the ship.

Cost and Freight (CFR): Responsibilities of the Exporter:

The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage and main carriage to the port of destination.

Free Alongside Ship (FAS): Responsibility of the Exporter:

Cost, Insurance, and Freight (CIF): Responsibilities of the Exporter:

Carnage Paid To (CPT): Responsibilities of the Exporter:

Delivered At Place (DAP): Responsibilities of the Exporter:

Carriage and Insurance Paid To (CIP): Responsibilities of the Exporter:

Delivered At Terminal (DAT): Responsibilities of the Exporter:

The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for transportation to the terminal at which the goods are to be delivered.

Free Carrier (FCA): Responsibility of the Exporter:

The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear customs in the importing country, and deliver the goods on the truck either at its own place of business or the carrier's place of business.

Cash in Advance:

The exporter requests that the customer provide payment in advance, before shipment of the goods can take place. This method is totally "risk free" to the exporter—no collections worries, no foreign exchange fluctuations exposure, no cash-flow problem, and only nominal fees to pay to banks. --Only recommended for doing business in very few countries; those in which fraud is rampant, where there is political instability, where the currency is non-convertible or where there is the possibility of foreign exchange "freezes." --Not recommended for business conducted in developed countries and in countries in which there is some level of sophistication in international business.

Carriage Paid To (CPT): Responsibilities of the Importer: