Welcome to

International Trade
Linda Curtis
Manager International
Banking
Objectives

„ Develop a better understanding of the trade environment and

some of the barriers to international trade

„ Understand the associated risks for the exporter, the importer

and the banks

„ Review the basic trade payment methods and customer needs

& solutions
International Trade Defined

„ “International Trade” is the movement of goods and services

that develop from a business transaction between a buyer in
one country and a seller in another country

„ Role of the bank: To facilitate cross-border transactions of their

customers
Customer Needs – Cross Border Trade

Risk Mitigation

Information CUSTOMER Financing

Settlement
What makes International Trade more
complex?

„ Foreign Country Environment

„ Foreign Business Environment
„ Foreign Regulatory Environment
Barriers and Risks with Trade
Barriers
Regulatory
„ Legal issues Commercial
„ Tariffs „ Business issues
„ Quotas „ Social issues
„ Sanctions „ Boycotts
Risks
„ Commercial Risk
„ Foreign Exchange Risk
„ Country Risk „ Identify Risks
„ Specific Risk „ Measure Exposure
„ Understand options to
mitigate risk
Country Risks

„Political/Sovereign

„Zimbabwe

„Convertibility

„Argentina during run on banks

„Transfer

„Thailand
Citi Global Trade Network

Western Europe Central & Eastern Europe Asia Pacific

• Austria • Italy • Czech Republic • Russia • Australia
• Belgium • The Netherlands • Hungary • Slovakia • Brunei
• France • Portugal • Kazakhstan • Turkey • China
• Germany • Spain • Poland • Ukraine • Guam
North America
• Greece • Switzerland • Romania • Hong Kong
• Canada
• Ireland • United Kingdom • Indonesia
• Mexico
• Japan
• United States Indian Sub-continent
• Korea
• Bangladesh
Latin America • Malaysia
Middle East & Africa • India
• Argentina • Haiti • New Zealand
• Algeria • Lebanon • Pakistan
• Bolivia • Honduras • Philippines
• Bahrain • Morocco • Sri Lanka
• Brazil • Jamaica • Singapore
• Chile • Panama • Cameroon • Nigeria • Taiwan
• Colombia • Paraguay • Cote d’Ivoire • Senegal • Thailand
• Costa Rica • Peru • Democratic Republic • South Africa • Vietnam
of the Congo
• Dominican Republic • Puerto Rico • Tanzania
• Egypt
• Ecuador • Trinidad & Tobago • Tunisia
• Gabon
• El Salvador • Uruguay • United Arab Emirates
• Jordan
• Guatemala • Venezuela • Zambia
• Kenya
Foreign Currency Risks
The latest carry trade fall-out - Last week saw another significant carry trade sell-off
driven by increased fear in the equity market on subprime contagion, short term liquidity and
economic growth. This carry trade event sell off can be seen in the currency movements
shown in chart 3 below. However, the low-yielding Swiss franc (CHF), carry traders' second
favourite funding currency, showed little reaction to the yen's move and the CHF has
underperformed the JPY by a large margin in recent weeks, possibly because the CHF
carry trade involves longerterm loans and mortgages that take longer to undo. So the carry-
trade unwind gained both breadth and impetus among high-yielding G10 and EM currencies
last week and we saw widespread market disruptions and measures of risk aversion spike
higher as risk reduction gained momentum.
Chart 3 : Major Carr y Trade Currency Movements
Foreign Currency Risks
Exporter Risks

„ Commercial Risks
- Non-payment
- Non-acceptance of goods

„ Political (Sovereign Risk)

- Political turmoil in importing country

„ Transfer Risk
- Foreign exchange controls

„ Convertibility Risk
- Not enough foreign currency available

„ Legal Risk
- Non-compliance with local regulations

„ FX Risk
- Currency fluctuations
Importer Risks

„ Commercial Risks
- Dealing with unknown suppliers
- Delayed shipments
- Inability to fulfill obligations due to lack of foreign currency or legal transfer restrictions

„ Documentation Risk
- Documents do not conform with goods received
- Documents differ significantly from one country to another

„ Legal Risk
- Violation of local import regulations

„ FX Risk
- Currency fluctuations
Mutual Objectives

„ The exporter wants to deliver goods and receive payment as

quickly as possible, eliminating, if possible the credit or payment
risk.

„ The importer wants to ensure the receipt and quality of the

goods, eliminating delivery risk, and structure a favorable
payment schedule.
Incoterms –what are they ?

„ ICC official rules for the interpretation of trade terms

„ Deal with relationship between sellers and buyers under the contract of
sale only ,and not under the contract of carriage, insurance or financing

„ Relate to obligations imposed on the parties to a contract (such as

seller’s obligations to place the goods at the disposal of the buyer,or
deliver the goods for carriage or deliver them at destination) but also
with distribution of risk between those parties

„ Focused on seller’s delivery obligation

INCOTERMS - Groups

„ Group E - Departure
EXW – Ex Works (named place of departure)

„ Group F - Main Carriage Unpaid

FOB , FAS , FCA

„ Group C - Main Carriage Paid

CFR , CIF , CPT , CIP

„ Group D - Arrival
DAF, DES , DEQ, DDU, DDP
 How Incoterms effect contracts
Exporter Loading Port of Importer
Port Discharge
Ex works

F.O.B

CFR

CIP

DDP

Freight Exporter Importer

Insurance Exporter Importer
Methods of Payment in International Trade

„ Cash in Advance - payment method in which the seller receives cash from the buyer
prior to the goods being shipped (usually by telegraphic transfer or bank draft)

„ Open Account - payment method in which the seller receives cash from the buyer
after the goods are shipped (usually by telegraphic transfer or bank draft)

„ Documentary Collections - payment method in which the seller presents the

documentation (including shipping documents) to their bank who on forwards to the buyers
bank. Documents are held by the buyer’s bank against either acceptance or payment as per
instructed by the seller’s bank.

„ Documentary Letter of Credit - An advice issued by a bank authorising the

payment of funds to a named party (the beneficiary) against delivery by the beneficiary of
specified documents evidencing shipment of the described goods. The advice sets out the
strict terms and conditions that must be met.
 Commercial Risk
EXPORTER RISK IMPORTER RISK

HIGH LOW

OPEN
ACCOUNT

RISK OF NON DELIVERY

RISK OF NON PAYMENT

DOCUMENTARY
COLLECTION

LETTER OF CREDIT

CASH IN ADVANCE
Useful risk mitigation

ƒ To perform due diligence

• Know your supplier / seek reference

ƒ Not to rely on the Letter of Credit to form the basis of contract

• Letter of Credit does not replace the contract

ƒ To understand the transit process

• Shipping agents involved
• Transhipment / Multi-modal / Partial Shipment implications

ƒ To maintain appropriate insurance cover

Why maintain insurance cover ?!

Scavengers grab cargo from stricken ship in

England
Scores of people flocked to the site of a shipwreck on the
southern English coast to scavenge among beached containers
for cargo including a BMW motorcycle, shoes and wine.
Useful risk mitigation

ƒ To be aware of local import custom requirements

• Dangerous goods requirements
• Fumigation

ƒ To request the following phrase during the process of contract

negotiation :
“All charges outside New Zealand are for the account of the
Beneficiary”
and,
to address confirmation and discount interest charges &
acceptance if any, separately
Want to know more?

„ Contact Brian Davies, Senior Business Manager

Brian.davies@kiwibank.co.nz
Ph 04 802 5464