Module 1: Globalization, Trade & Finance

Meaning of international trade finance

The institutions or transactions involved in the financing of international trade. Trade finance looks at banks, credit agencies, insurers, forfeiters, and any other person or institution who enables importers and exporters to trade across borders.

Features International Trade Finance

Examine key FTA and Incoterms Foreign currency exchange rates Foreign exchange market Factors determining foreign exchange rates Role of banks and financial institutions Managing foreign currency fluctuation risks Foreign currency payment methods Managing foreign currency payment risks

COMPLEXITIES
Understand foreign currency exchange rates Identify the factors that determine foreign exchange rates Appreciate the full impact of foreign currency rate fluctuations on the business Understand and evaluate options available to manage foreign currency fluctuation risks Accurately evaluate quotations in foreign currency Recognize and understand the international trade finance services available Effectively manage receipt of payments from international clients Effectively handle foreign currency payments Understand and appraise options available to manage foreign currency payment risks

What Is International Trade?

International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments.

Exporter:
This term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer". In International Trade, "exports" refers to selling goods and services produced in the home country to other markets. Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import. The advent of small trades over the internet such as through Amazon and eBay have largely bypassed the involvement of Customs in many countries because of the low individual values of these trades. Nonetheless, these small exports are still subject to legal restrictions applied by the country of export. An export's counterpart is an import.

Importer:
The term import is derived from the conceptual meaning as the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import where the overseas based seller is referred to as an "exporter" Thus an import is any good (e.g. a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale imported goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country. Imports, along with exports, form the basics of international trade. Import of goods normally requires involvement of the customs authorities in both the country of import and the country of export and are often subject to import quotas, tariffs and trade agreements. When the "imports" are the set of goods and services imported, "Imports" also means the economic value of all goods and services that are imported. The macroeconomic variable I usually stands for the value of these imports over a given period of time, usually one year

Merchant:
A merchant is a businessperson who trades in commodities that were produced by others, in order to earn a profit. Merchants can be one of two types: 1. A wholesale merchant operates in the chain between producer and retail merchant. Some wholesale merchants only organize the movement of goods rather than move the goods themselves. 2. A retail merchant or retailer, sells commodities to consumers (including businesses). A shop owner is a retail merchant. A merchant class characterizes many pre-modern societies. Its status can range from high (the members even eventually achieving titles such as that of Merchant Prince or Nabob) to low, as in Chinese culture, owing to the presumed distastefulness of profiting from "mere" trade rather than from labor or the labor of others as in agriculture and craftsmanship.

Overseas Representative (Foreign representative):

The term "foreign representative" means a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding

Trader:
1. One who buys and sells securities for his/her personal account, not on behalf of clients. 2. An investor who holds stocks and securities for a short period of time (a few minutes, hours or days). The goal is to profit from short-term gains in the market. The stock selection is generally based on technical analysis or charting which relate only to the stock price rather than a fundamental evaluation of the company as a business. The IRS offers some tax benefits to traders: they can deduct their interest expense without itemizing, and seminar costs can be deducted as well as home office expenses in connection with investing.

BANKS:
Bank's representation in emerging markets globally and strong relationships with international correspondent banks in all major markets positions us well to provide superior trade services to meet our clients' cross-border trade requirements. Our skilled professionals have diverse industry expertise, and leverage the group's geographic strength to deliver timeous and effective solutions to both established and new traders. We offer integrated solutions customized to our clients' specific requirements, and ensure that we develop the most suitable solutions by collaborating with other specialist business units within the bank. These include: Commodity and currency hedging Foreign exchange Structured trade finance They also offer a range of value-added services like Airway Release, Bank Drafts, Clean Bills Of

exchange, Customer foreign currency accounts, Documentary collection ,Documentary Credits, Escrow Accounts

Logistics:
Logistics is the management of the flow of resources between the point of origin and the point of destination in order to meet some requirements, for example of customers or corporations. The resources managed in logistics can include physical items such as food, materials, equipment, liquids, and staff as well as abstract items such as information, particles, and energy. The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security Inbound logistics is one of the primary processes and it concentrates on purchasing and arranging inbound movement of materials, parts and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses or retail stores. Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user. Procurement Logistics consists of activities such as market research, requirements planning, make or buy decisions, supplier management, ordering, and order controlling. The targets in procurement logistics might be contradictory - maximize the efficiency by concentrating on core competences, outsourcing while maintaining the autonomy of the company, and minimization of procurement costs while maximizing the security within the supply process.

Production Logistics connects procurement to distribution logistics. The main function of production logistics is to use the available production capacities to produce the products needed in distribution logistics. Production logistics activities are related to organizational concepts, layout planning, production planning, and control. Distribution Logistics has, as main tasks, the delivery of the finished products to the customer. It consists of order processing, warehousing, and transportation. Distribution logistics is necessary because the time, place, and quantity of production differs with the time, place, and quantity of consumption. Disposal Logistics' main function is to reduce logistics cost(s), enhance service(s), related to the disposal of waste produced during the operation of a business. Reverse logistics stands for all operations related to the reuse of products and materials.The reverse logistics process includes the management and the sale of surplus as well as returned items of products.

Forwarder:
A freight forwarder, forwarder, or forwarding agent, is a person or company that organizes shipments for individuals or corporations to get large orders from the manufacturer or producer to market or final point of distribution. Forwarders will contract with a carrier to facilitate the movement of goods. A forwarder is not typically a carrier but is an expert in supply chain management. In other words, a freight forwarder is a "travel agent," for the cargo industry, or a third-party (non-asset-based) logistics provider. A forwarder will contract with asset-based carriers to move cargo ranging from raw agricultural products to manufactured goods. BENEFITS: Organization The organization of shipping freight is difficult. While freight forwarding companies do not actually move the freight themselves (though in some cases they do), they help organize the freight with other companies. These companies will also help develop a plan to get all your items to their destination with time to spare, and take care of all the invoicing. Handles Any Load In the shipping world there is LTL (Light Truck Load), FTL (Full Truck Load), and Heavy Duty trucking. Regardless of the type you need it is available. Freight forwarders do have the ability to arrange any type of shipping often at the lowest price available. As a company that is huge saving money on all your shipping needs. Handle Cost Organization Billing is one thing but you want to be billed the correct amounts for what it is you are shipping and billed for the necessary items not extraneous things that do not make sense. do a good job of keeping track of all aspects of costs from weight to mileage.

Incoterms:
The Incoterms rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods. The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries .First published in 1936, the Incoterms rules have been periodically updated, with the eighth versionIncoterms 2010having been published on January 1, 2011. "Incoterms" is a registered trademark of the ICC.

INCOTERMS 2012
INCOTERMS are a set of three-letter standard trade terms most commonly used in international contracts for the sale of Goods. It is essential that you are aware of your terms of trade prior to shipment. EXW EX WORKS ( named place of delivery) The Sellers only responsibility is to make the goods available at the Sellers premises. The Buyer bears full costs and Risk of moving the goods from there to destination. FCA FREE CARRIER ( named place of delivery) The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer. The Seller loads the goods if the Carrier pickup is at the Sellers premises. From that point, the Buyer bears the costs and risks of moving the goods to destination.
CPT CARRIAGE PAID TO ( named place of destination) The Seller pays for moving the goods to destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage. CIP CARRIAGE AND INSURANCE PAID TO ( named place of destination) The Seller pays for moving the goods to destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage. The Seller, however, purchases the cargo insurance. DAT DELIVERED AT TERMINAL ( named terminal at port or place of destination) The Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the Buyers disposal at a named terminal at the named port or place of destination. Terminal includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The Seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. DAP DELIVERED AT PLACE ( named place of destination) The Seller delivers when the goods are placed at the Buyers disposal on the arriving means of transport ready for unloading at the names place of destination. The Seller bears all risks involved in bringing the goods to the named place.
DDP

DELIVERED DUTY PAID ( named place)

The Seller delivers the goods -cleared for import to the Buyer at destination. The Seller bears all costs and risks of moving the goods to destination, including the payment of Customs duties and taxes

What is Political Risk and what can a multinational company do to minimize exposure?
For multinational companies, political risk refers to the risk that a host country will make political decisions that will prove to have adverse effects on the multinational's profits and/or goals. Adverse political actions can range from very detrimental, such as widespread destruction due to revolution, to those of a more financial nature, such as the creation of laws that prevent the movement of capital. In general, there are two types of political risk, macro risk and micro risk. Macro risk refers to adverse actions that will affect all foreign firms, such as expropriation or insurrection, whereas micro risk refers to adverse actions that will only affect a certain industrial sector or business, such as corruption and prejudicial actions against companies from foreign countries. All in all, regardless of the type of political risk that a multinational corporation faces, companies usually will end up losing a lot of money if they are unprepared for these adverse situations. For example, after Fidel Castro's government took control of Cuba in 1959, hundreds of millions of dollars worth of American-owned assets and companies were expropriated. Unfortunately, most, if not all, of these American companies had no recourse for getting any of that money back. So how can multinational companies minimize political risk? There are a couple of measures that can be taken even before an investment is made. The simplest solution is to conduct a little research on the riskiness of a country, either by paying for reports from consultants that specialize in making these assessments or doing a little bit of research yourself, using the many free sources available on the internet (such as the U.S. Department of State's background notes ). Then you will have the informed option to not set up operations in countries that are considered to be political risk hot spots. While that strategy can be effective for some companies, sometimes the prospect of entering a riskier country is so lucrative that it is worth taking a calculated risk. In those cases, companies can sometimes negotiate terms of compensation with the host country, so that there would be a legal basis for recourse in the event that something happens to disrupt the company's operations. However, the problem with this solution is that the legal system in the host country may not be as developed and foreigners rarely win cases against a host country. Even worse, a revolution could spawn a new government that does not honor the actions of the previous government. If you do go ahead and enter a country that is considered at risk, one of the better solutions is to purchase political risk insurance. Multinational companies can go to one of the many organizations that specialize in selling political risk insurance and purchase a policy that would compensate them if an adverse event occurred. Because premium rates depend on the country, the industry, the number of risks insured and other factors, the cost of doing business in one country may vary considerably compared to another. However, be warned: buying political risk insurance does not guarantee that a company will receive compensation immediately after an adverse event. Certain conditions, such as trying other channels for recourse and the degree to which the business was affected, must be met. Ultimately, a company may have to wait months before any compensation is received.

Meaning and definition of Economic Risk

Generally speaking, economic risk can be described as the likelihood that an investment will be affected by macroeconomic conditions such as government regulation, exchange rates, or political stability, most commonly one in a foreign country. In other words, while financing a project, the risk that the output of the project will not produce adequate revenues for covering operating costs and repaying the debt obligations. Economic risk is, however, a nebulous term with various definitions. In a nutshell, economic risk refers to the risk that a venture will be economically unsustainable, due to various reasons vitiating from an alteration in economic trends to fraudulent activities which ruin a projects outcome. Before starting with the projects, it is important to consider economic risk for determining the likelihood of potential risks being outweighed by the benefits.

Portfolio Risk The political climate of foreign countries creates portfolio risks because governments and political systems are constantly in flux. This typically has a very direct impact on economic and business sectors. Political risk is considered a type of unsystematic risk associated with specific countries, which can be diversified away

by investing in a broad range of countries, effectively accomplished with broad-based foreign mutual funds or exchange-traded funds (ETFs). Taxation Foreign taxation poses another complication. Just as foreign investors with U.S. securities are subject to U.S. government taxes, foreign investors are also taxed on foreign-based securities. Taxes on foreign investments are typically withheld at the source country before an investor can realize any gains. Profits are then taxed again when the investor repatriates the funds. Currency Risk Finally, there's currency risk. Fluctuations in the value of currencies can directly impact foreign investments, and these fluctuations affect the risks of investing in non-U.S. assets. Sometimes these risks work in your favor, other times they do not. For example, let's say your foreign investment portfolio generated a 12% rate of return last year, but your home currency lost 10% of its value. In this case, your net return will be enhanced when you convert your profits to U.S. dollars, since a declining dollar makes international investments more attractive. But the reverse is also true; if a foreign stock declines but the value of the home currency strengthens sufficiently, it further dampens the returns of the foreign position..

Transit Risks - Implementation and Management :

Where a party to an export-import transaction seeks a guarantee to support a series or an individual transaction and ensure the protection of his assets, trade risk management solutions should be used to cover the perils involved in the transit of the goods. If a prudent trader did not have the opportunity to ensure the protection of his assets he would need to set aside a considerable sum of money as a contingency against risks and losses .There is no law to make insurance of property in transit compulsory but while property is in transit it is at risk and there are several ways to manage the risk involved in the physical movement of goods you trade across international borders: You can minimize the impact of such incidents on your business by being properly insured. In order for insurance cover to be valid, you have to be able to show that you have an "insurable interest" in the insured goods, that the goods are yours and that you bear the risks associated with them. Do nothing and carry the risk yourself. If an incident occurs resulting in damage or loss to the goods you could take action against the carrier. In such a case you will need the expertise and perseverance to sustain a successful claim. Also you should remember that shipping companies liability for the cargo they carry is set by various internationally ratified conventions, is strictly limited and does not always equate to the full value of the goods. This could have an impact on your business. Let your customer or supplier insure the goods