documents used in foreign trade

Foreign Trade Contracts and Documents

Foreign Trade

Foreign trade is nothing but trade between the different countries of the world.

It is also called as International trade, External trade or Inter-Regional trade. It

consists of imports, exports and entrepot. The inflow of goods in a country is called

import trade whereas outflow of goods from a country is called export trade. Many

times goods are imported for the purpose of re-export after some processing

operations. This is called entrepot trade. Foreign trade basically takes place for mutual

satisfaction of wants and utilities of resources. This happens under what in economic

terms is called the law of comparative cost or advantage. Further, the price at which

goods are traded between two countries depends on the extent and sufficiency of

demands for the goods to be imported and exported; this is expressed in economic

terms as the law of reciprocal demand.

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Types of Foreign Trade

Foreign Trade can be divided into following three groups:-

1. Import Trade

Import trade refers to purchase of goods by one country from another

country or inflow of goods and services from foreign country to home country.

2. Export Trade

Export trade refers to the sale of goods by one country to another

country or outflow of goods from home country to foreign country.

3. Entrepot Trade

Entrepot trade is also known as Re-export. It refers to purchase of

goods from one country and then selling them to another country after some

processing operations.

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Need and Importance of Foreign Trade

Following points explain the need and importance of foreign trade to a nation.

1. Division of Labour and Specialisation

Foreign trade leads to division of labour and specialisation at the world

level. Some countries have abundant natural resources. They should export

raw materials and import finished goods from countries which are advanced in

skilled manpower. This gives benefits to all the countries and thereby leading

to division of labour and specialisation.

2. Optimum Allocation and Utilisation of Resources

Due to specialisation, unproductive lines can be eliminated and

wastage of resources avoided. In other words, resources are channelised for

the production of only those goods which would give highest returns. Thus

there is rational allocation and utilization of resources at the international level

due to foreign trade.

3. Equality of Prices

Prices can be stabilised by foreign trade. It helps to keep the demand

and supply position stable, which in turn stabilises the prices, making

allowances for transport and other marketing expenses.

4. Availability of Multiple Choices

Foreign trade helps in providing a better choice to the consumers. It

helps in making available new varieties to consumers all over the world.

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5. Ensures Quality and Standard Goods

Foreign trade is highly competitive. To maintain and increase the

demand for goods, the exporting countries have to keep up the quality of

goods. Thus quality and standardised goods are produced.

6. Raises Standard of Living of the People

Imports can facilitate standard of living of the people. This is because

people can have a choice of new and better varieties of goods and services. By

consuming new and better varieties of goods, people can improve their

standard of living.

7. Generate Employment Opportunities

Foreign trade helps in generating employment opportunities, by

increasing the mobility of labour and resources. It generates direct

employment in import sector and indirect employment in other sector of the

economy. Such as Industry, Service Sector (insurance, banking, transport,

communication), etc.

8. Facilitate Economic Development

Imports facilitate economic development of a nation. This is because

with the import of capital goods and technology, a country can generate

growth in all sectors of the economy, i.e. agriculture, industry and service

sector.

9. Assistance during Natural Calamities

During natural calamities such as earthquakes, floods, famines, etc.,

the affected countries face the problem of shortage of essential goods. Foreign

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trade enables a country to import food grains and medicines from other

countries to help the affected people.

10. Maintains Balance of Payment Position

Every country has to maintain its balance of payment position. Since,

every country has to import, which results in outflow of foreign exchange, it

also deals in export for the inflow of foreign exchange.

11. Brings reputation and helps earn Goodwill

A country which is involved in exports earns goodwill in the

international market. For e.g. Japan has earned a lot of goodwill in foreign

markets due to its exports of quality electronic goods.

12. Promotes World Peace

Foreign trade brings countries closer. It facilitates transfer of

technology and other assistance from developed countries to developing

countries. It brings different countries closer due to economic relations arising

out of trade agreements. Thus, foreign trade creates a friendly atmosphere for

avoiding wars and conflicts. It promotes world peace as such countries try to

maintain friendly relations among themselves.

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Letter of Credit

Letter of Credit is an important document in international trade. It is for safety

and security of the exporter as regards payment for the goods to be exported.

Letter of Credit can be defined as "an undertaking by importer's bank stating

that payment will be made to the exporter if the required documents are presented to

the bank".

Before executing an export order, the exporter of goods desires to have

adequate proof regarding the credit worthiness of the importer. It is issued by the bank

(in the importer's country) in favour of the foreign supplier, it contains a guarantee or

an undertaking by one bank that the bill of exchange drawn on the importer will be

honoured on presentation to the extent of the amount specified in the letter. Letter of

Credit may also be issued on the strength of the business of the importer with the

bank.

The Letter of Credit also contains certain conditions such as date of bill, date

for shipment, shipment by approved vessels with approved flags packing, etc.

The advantages of the letter of credit to the exporters are many such as:-

1. Exporter gets safety and security of payment for the goods exported.

2. The exporter gets discounting facility from the bank.

3. It enables the exporter to take more initiative in promoting exports and earns

foreign exchange for his country.

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Meaning

Documentary Credit is an International trade procedure in which the credit

worthiness of an importer is substituted by the guarantee of a bank for specific

transaction. Under documentary credit arrangement (also called as letter of credit

arrangement) a bank (usually in the importer’s country) undertakes to pay for a

shipment, provided the exporter submits the required documents (such as clean bill of

lading, certificate of insurance, certificate of origin) within a specific period.

Definition

A Documentary Credit (DC), or Letter of Credit (LC), (they are one and the

same), is a legally binding undertaking given by a Bank on behalf of its customer, in

favor of a third party, to make payment to him (the third party), the stated sum of

money against submission of the required documents, as per the terms of the

Documentary Credit.

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Mechanism of Letter of Credit

Letter of Credit is usually subject to the Uniform Customs and Practice for

Documentary Credits, International Chamber of Commerce Publication No. 600

(UCP 600).The mechanism of letter of credit is as follows :

1. Availability of Letter of Credit

Under UCP 600, an LC can be made available with:

a. Payment

Payment at sight against compliant documents.

b. Negotiation

Payment with or without recourse to the beneficiary or bona

fide holder against compliant documents presented under the credit.

c. Acceptance by a Drawee Bank

Payment at a future determinable date against compliant

documents. A tenor draft is normally required for presentation under

an acceptance credit and is drawn on the acceptance bank rather than

the issuing bank.

d. Usance Credit

Payment at a future determinable date against compliant

documents. A tenor draft is normally required (but not mandatory) for

presentation under a usance credit and is drawn on the Issuing Bank.

Usance credit is available by Negotiation, Acceptance and Deferred

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Payment. A tenor draft is not required for presentation under a deferred

payment credit.

2. Parties in Letter of Credit Transaction

A. LC Applicant:

LC Applicant is normally the buyer under the sales contract and the

party that initiates the request to the Issuing Bank to issue an LC on its behalf.

The LC Applicant normally maintains banking facilities with the Issuing

Bank.

B. LC Beneficiary

LC Beneficiary is normally the seller under the sales contract and the

party who will receivepayment under the LC if it can fulfill all the terms and

conditions of the credit.

C. Issuing Bank

An Issuing Bank (or LC opening bank) is the bank that issues the LC

in favour of a seller at the request of the LC applicant. The Issuing Bank is

normally located in the applicant’s country with established banking

relationship with the applicant.

By issuing an LC, the Issuing Bank undertakes to pay the beneficiary

the value of the draft and/or other documents if all the terms and conditions of

the LC are complied with.

D. Advising Bank

An Advising Bank (or sometimes known as notifying bank) is the bank

that advises the LC beneficiary that there is an LC issued in his favour.

Advising Bank is normally located in the seller’s country and is either

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appointed by the Issuing Bank or LC applicant. Its primary responsibility is to

authenticate the LC to ensure that the LC comes from genuine source.

E. Confirming Bank

A Confirming Bank (normally also the Advising Bank) is the bank that

adds its own undertaking to pay the LC beneficiary if all terms and conditions

of the credit are complied with. Such undertaking is in addition to that given

by the Issuing Bank at the request of the Issuing Bank.

The Confirming Bank will only confirm an LC upon satisfactory

evaluation on the conditions of the Issuing Bank and its domicile country.

F. Nominated Bank

A Nominated Bank is a bank authorised by the Issuing bank in the

credit to pay, negotiate, issue a deferred payment undertaking or accept drafts

under the LC. If the LC does not specify a Nominated Bank, the LC is deemed

as freely negotiable and any banks that receive documents from the LC

beneficiary are qualified to be a Nominated Bank.

A Nominated Bank is not responsible to pay under the credit unless it

has added its confirmation to the credit. In such a case, it will become a

Confirming Bank.

G. Negotiating Bank

A Negotiating Bank is the bank that examines the drafts and/or

documents presented by the LC beneficiary and gives values to such drafts

and/or documents. Negotiation could be in the form of purchasing or agreeing

to purchase the drafts and/or documents presented.

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H. Reimbursing Bank

A Reimbursing Bank is the paying agent appointed by the Issuing

Bank to honour claims submitted by the nominated or negotiating bank.

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Types of Letter of Credit

1. Import/export Letter of Credit

It is said to the credit which buyer assigns i so that he imports a

product to his own country and in general this credit is in another country and

its value is export value.

2. Revocable Letter of Credit

In this type of credit buyer and the bank which has established the LC,

are able to manipulate the letter of credits or make any kinds of corrections

without informing the seller and getting permissions from him. This type of

LC is not used a lot.

3. Irrevocable LC

This type of LC, any kinds of change and manipulations from the

buyer part and the establisher bank require the permission and satisfaction of

seller part. According to the last rules of international business room, return

ability or none return ability, the credit will be none returnable.

4. Confirmed LC

They are the guaranties that buyer will be given so that, the buyer will

give the guaranty from his own bank to any other valid bank that the seller

will desire it.

5. Unconfirmed LC

This type of letter of credit, does not acquire the other bank's

confirmation.

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6. Transferrable LC

It is said to the credit that the seller can give a part or parts of credit

(Completely) to the person or persons he decides. This type of credit is a

benefit for seller.

7. Untransferable LC

It is said to the credit that seller cannot give a part or completely right

of assigned credit to somebody or to the persons he wants. In international

commerce, it is required that the credit will be untransferable.

8. Usance LC

It is kind of credit that won't be paid and assigned immediately after

checking the valid documents but paying and assigning it requires an indicated

duration which is accepted by both of the buyer and seller. In reality, buyer

will give an opportunity to the seller to pay the required money after taking the

related goods and selling them.

9. At Sight LC

It is a kind of credit that the announcer bank after observing the

carriage documents from the seller and checking all the documents

immediately pays the required money.

10. Red Clause LC

In this kind of credit assignment seller before sending the products can

take the pre-paid and parts of the money from the bank. The first part of the

credit is to attract the attention acceptor bank. The reason why it named so, is

that the first time this credit is established by the assigner bank, to take the

attention of the offered bank, the terms and conditions were written by red ink,

from that time it became famous with that name.

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11. Back to Back LC

In this type of LC consisted of two separated and different types of LC.

First one is established in the benefit of the seller that is not able to provide the

corresponding goods for any reasons. Because of that reason according to the

credit which is opened for him, neither credit will be opened for another seller

to provide the desired goods and sends it.

Back-to-back L/C is a type of L/C issued in case of intermediary trade.

Intermediate companies such as trading houses are sometimes required to open

L/Cs by supplier and receive Export L/Cs from buyer. SMBC will issue a L/C

for the intermediary company which is secured by the Export L/C (Master

L/C). This L/C is called "Back-to-back L/C".

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Documents Used in Foreign Trade

1. Indent

Indent is an order placed by the importers to the exports. It contains the

essential information regarding the goods to be imported i.e. quality, quantity,

packing, packaging, mode of payment, insurance, price of good, etc. When the

price at which the goods are to be purchased by the importer is clearly stated

in an order (Indent), with no options to the exporter, then it called "Closed

Indent". If the prices are not mentioned by the importer and it is left to the

discretion of the exporter, then it is known as "Open Indent".

Indent can be sent by the importer directly to the exporter or it may be

sent through the indent agencies.

2. Mate's Receipt

Mate's Receipt is a receipt issued by Captain / Master / Mate of the

ship. The Mate of the ship after receiving the goods on the board and after

inspection of the goods issues this receipt.

The loading of the goods on the ship is possible only after presentation

of 'shipping order'. Mate's receipt contains details regarding name of ship, date

on which the goods are loaded, description of goods, numbers and marks on

the packages, conditions of cargo, etc. This receipt is issued to the exporter

who has to present the mate's receipt in the office of shipping company by

which he will get bill of lading. Mate Receipt may be clean or qualified. It is

qualified if there is some defect in the cargo loaded on the ship, in such case

the captain makes adverse remark on the receipt. In case of clean receipt, the

cargo in good condition and the adverse remark is not mentioned. The bill of

lading is always prepared on the basis of mate's receipt. In short mate's receipt

is an acknowledgement of the receipt of goods on board of the ship.

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3. Bill of Landing

Bill of lading is one important shipping document necessary and useful

in export-import trade transactions. It is a document issued by the shipping

company after the shipment of goods. In simple, Bill of lading is a contract

between the exporter or the shipper and the shipping company for the carriage

of gods from the port of loading to the port of destination.

Bill of lading is a document to title of goods and is transferable by

endorsement and delivery. Hence, it is a semi-negotiable instrument. The bill

of lading is prepared on the basis of mate's receipt. The importer has to

produce this receipt for securing the deliver of goods.

The bill of landing contains following information:-

1. Name and address of the exporter and the shipper.

2. Name and address of shipping company.

3. Name and address of importer or agent.

4. Quantity, weight and value of goods sent.

5. Place of loading and port of destination.

6. Date of loading of goods on the ship.

7. Mark description and number of packages.

8. Port at which the goods are to be discharged.

9. Freight paid or to be paid.

10. Signature of the issuing authority with date.

11. Any other relevant details.

Important functions of bill of landing are as follows:-

1. It is useful to the importer for obtaining delivery of goods from the

shipping company and port authorities.

2. It is a document of title to goods. A possessor of the bill of lading is

entitled to take the delivery of goods.

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3. It is a semi negotiable document and it is transferable by endorsement and

delivery.

4. It is a legal document including the contract for carrying goods.

5. It is a proof of the fact that the goods are handed over to the shipping

company for transportation to the port of destination.

4. Certificate of Origin

Certificate of Origin is an important shipping document sent by the

exporter alongwith the other document to the importer. This document is

showing or giving the information of the fact that the goods which are

exported are manufactured in a particular country i.e. the document certifies

that certain goods are manufactured within a specific country only. It is a

proof about the origin of goods exported. This certificate is generally issued

by the "Chamber of Commerce" or "Export Promotion Council" or "Trade

Association" or "Such Other recognised body" on behalf of Government. It is

issued to the exporter. It is very useful document to save custom/import duties.

As a general rule the rate of import duty is not same for imports from all

countries. The goods imported from some other countries are subject to less

import duty. Thus, to get the benefit of saving import duty the importer can

use the Certificate of Origin, because the government of importing country

grants concession in import duty to the importer on the basis of certificate of

origin.

5. Consular Invoice

Consular Invoice is an important document used in foreign trade. It is

issued by the Trade consulate of the importing country stationed in the

exporters country. Consular is a government officer having office in other

countries. This document is also obtained by the exporter and is sent to the

importer along with other shipping documents. This invoice is also useful for

importer at the time of payment of importy duty. For obtaining document from

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the consular the exporter has to pay the prescribed fees. This document

contains information about goods and the value of goods.

Sometimes, the custom authorities desire to open the packages and

scrutinize the goods for the purpose of calculating custom duty. Due to which

there is delay in clearing the goods from dock or port. To avoid this, one copy

is sent to the custom authorities of the importing country, second copy is

retained by the consulate office for reference and the third copy is given to the

exporter which is forwarded by exporter to the importer with other documents.

6. Bill of Entry

Bill of entry is a document required in case of import of goods. It is

like shipping bill in case of exports. A Bill of Entry is the document testifying

the fact that goods of the stated value and description in specified quantity are

entering into the country from abroad. The customs office supplies this form

which is prepared in triplicate. Three different colours are used to prepare bill

of entry. One copy is retained by custom department, other is retained by port

trust and the third is kept by the importer.

The bill of entry is divided into three classes:-

1. Entry for duty free goods.

2. Entry of goods which are meant for consumption at home.

3. Entry for goods to be re-exported.

In India, all these entries are on the same form.

The contents of Bill of Entry are:-

1. Name and address of importer.

2. Import License number of importer.

3. Name and address of exporter.

4. Name of port where goods are to be cleared.

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5. Value of goods.

6. Description of goods.

7. Rate and amount of import duty payable.

8. Other relevant details.

7. Dock's Receipt

Dock authorities issue dock's receipt once the goods are stored in the

sheds at the docks. The Clearing and Forwarding agent clears the documents

from the customs authorities. Then he approaches the Port Trust authorities

and obtains the Carting Order. The Carting Order is the permission to cart the

goods inside the docks. The goods are then brought inside the docks. The

goods may be loaded immediately on the ship. Many-a-times immediate

loading on ship is not possible. The goods are then stored in sheds at the port

or docks. The dock authorities then issues the dock receipt as an

acknowledgement for goods received in sheds.

8. Commercial Invoice

Commercial invoice is a basic export document. It contains all the

information, which is required for preparation of all other documents. It is the

exporter's bill for goods which the importer has to pay.

Commercial invoice contains the following information:-

1. Name and address of exporter and importer.

2. Description of goods (weight, quality, quantity, rate, etc.)

3. Value of goods after discount, if any.

4. Net amount payable by the importer.

5. Terms and Conditions of sale

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Other details of shipment to be included are:-

1. Name of ship on which goods are loaded.

2. Letter of Credit Number.

3. License number of exporter.

4. Bill of lading number.

5. Packaging Specifications.

6. Shipping terms and Conditions, etc.

The accounting document claiming payment from the buyer. Normally an

export invoice would include:-

Seller’s name and address

Buyer’s name and address

Issue Date

Invoice Number

Shipping marks and numbers

Term of Sale: e.g. FOB, etc.

Shipping information

Info required by L/C

Country of Origin

L/C number

Merchandise description, P.O. number, unit price, and total price

Info required by L/C

9. Consular Invoice / Visaed Invoice

For exchange control and balance of payments reasons, some countries

do not allow the import of merchandise unless accompanied by a certificate

issued by one of its officials in the exporter’s country. These certificates

evidence that the shipment meets certain statutory or other regulations of the

importing country. A visaed invoice is an original or copy of an invoice,

which has been originally signed and/or stamped by a consulate official.

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10. Insurance Policy OR Certificate

Every export sale should be covered by insurance. Who provides the

coverage depends on the INCOTERM used. Insurance coverage on exports is

a complicated issue that we cannot fully cover on this site. For more

information on export insurance, we suggest that you contact your business

insurance agent or freight forwarder as to who can provide insurance on an as

needed basis” or “by blanket policy” on an annual basis.

11. Certificates

When a letter of credit calls for a document to be issued as a

“certificate”, that document must be signed. Certificates come in a many

different forms depending on the product and the country of destination.

L/C’s often require that certificates be issued by reputable third party

inspection surveyors such as the Societe Generale de Surveillance (SGS)

or the US Department of Agriculture. It is important to remember that

each certificate required by an L/C will increase the cost of goods sold.

Some of the most common certificates are discussed below.

Certificates should always be issued before the goods are shipped.

Certificates issued after the goods arrived in the country of import defeat the

purpose of the letter of credit.

A. Certificate of Origin

A signed statement certifying the country of origin of the goods

being sold is sometimes required by regulation in the buyer’s country.

This document may be as simple as a certificate signed by the seller.

Certain countries may require it to be issued by a third party such a

Chamber of Commerce, or be notarized, legalized, or visaed by their

Embassy or Consulate.

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B. Inspection Certificate

An independent firm would usually conduct the inspection to

ensure that the merchandise conforms to the buyer’s criteria.

Inspection certificates should be based on quantifiable criteria. When

an L/C is the method of payment, the criteria should be specifically

spelled out in the letter of credit.

C. Weight List OR Certificate

Not synonymous to a packing list. This document breaks down

the shipment by weight. This is generally needed only if a “certificate”

is required.

D. USDA Inspection Certificate

This certificate is issued by the US Department of Agriculture

and covers grade and condition for agricultural products. It provides

evidence that the produce was in good condition at the date and

time of inspection and can be useful in the event of a damage claim.

E. Phytosanitary Certificate

Numerous foreign governments and buyers require a “phyto”

for fresh plants and plant products. This certificate states that the

product has been inspected and is free of harmful pests and plant

diseases. They are issued by the USDA Animal and Plant Health

Inspection Service.

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12. Packing List

A mirror of the merchandise covered by the invoice, the packing list

omit prices, but itemizes the merchandise by number of cartons, packages,

etc., and the contents of each. It generally does not have to be signed unless

called for in the L/C.

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Conclusion

Banks, as facilitators of international trade and commerce have been served

well by the mechanism of the Documentary Credit. The beauty of these credits is that

they provide appropriate protection, as required, by the seller, buyer, the seller's Bank,

and the buyer's Bank, while extracting their share of responsibility under the

transaction.

The DCs have acted as a sort of bridge between buyers and sellers of goods

and services, based in different countries, bringing them together, through the agency

of the Banks.

Since they came into being in 1933, DCs have no doubt played a significant role in

cross border trade, overcoming the barriers of language, customs and practices,

currencies, etc. And last, but not the least, they are an important source of business

and revenues to the Commercial Banks, and are expected to grow even more in

importance, in the coming years.

It could be concluded that documentary credit is a reliable and convenient

instrument of international settlement. However, we have to agree with those views

expressed in legal literature that this type of payment is complicated and expensive.

The application of credit in export-import operations is complicated both in legal as

well as economic terms. If several banks participate in a settlement by credit,

ultimately the purchaser of the credit will have to reimburse the costs of all the

authorized banks. Usually, the cost for each operation, such as the opening of credit,

sending a letter of advice, confirmation, the examination of documents envisaged by

the credit to name but some of the procedures is determined in the form of a fixed

interest on the amount of credit for any operation.

It is also noteworthy that the advantage of credit is directly linked with the

relevant experience of the participating banks in this field and with the existence of a

wide network of correspondent banks. Under these circumstances operations are less

complicated.

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Bibliography

Personal Notes of SYJC.

Documentary Credit Operations Book.

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