Global Trade Operations - Assignment Example

Global Trade Operations Question Payment methods A payment is made in exchange for the provision of goods and/or services or for the fulfillment of a legal obligation (Bishop, 2004: 78). Legally the payer is ‘the party that makes a payment’ while the payee receives the payment. This also applicable to goods in international trade that can be facilitated through the following four ways that are recognized by banks: - Cash with order/cash in advance: - where the buyer provides funds for the goods to be bought plus the transportation costs in advance before the seller allows for the goods to be transported. The country or buyer risk is thus avoidable. It is thus the most suitable mode of payment. Open account: - is also free from the risks since it also entails the depositing of funds to an account (seller’s) by the buyer before the goods are released. This form of payment guarantees the seller in receiving the funds for the goods he provides regardless of the presence of both risks. Documentary credit: - here the bank(s) provides a Letter(s) of Credit (L/C); this letter of credit is driven by the buyer’s agreement to the seller’s requirement for this method of payment. The buyer asks his bank to open a documentary credit that is in favor of the seller. The seller required to study this document thoroughly to ensure everything matches. The L/C is only suitable if both parties fulfill their parts in the agreement and therefore the presence of both risks is reduced. Documentary collection: - this pertains to the Bill of Exchange (B/E) an unconditional demand for the payment of a specific amount of money by the buyer to the seller. The collecting bank uses this method of payment to collect from the buyer especially if a credit period is provided. The lack of detailed scrutiny here as with the Documentary Credit brings about the presence of both country and buyer risks that can lead to the buyer withdrawing from the transaction without payment when the goods have arrived at the destination. The lack of ‘guarantee’ from the banks increases the seller’s chances of loss making in case the buyer defaults (Grath, 2005: 56). In conclusion, payment methods allow business people to do business transactions using a method that fits them. The best modes of payment would be the Cash with order followed by Open account both of which guarantee payment, risks being present or not. Question 2. The Shipping Container Port facilities are critical in the smooth running of international trade as they facilitate the transfer of the containers from one mode of transportation to another. This has been eased by the ability of the modes of transport to carry the same container because of ‘standardization’ measure; standard lengths of 20ft (6m) by 40ft (12m).The container has several advantages that add to its efficiency and reliability this adding to the promotion of international trade (Grath, 2005: 67). It allows for consolidation of small packages into one unit load; enabling the wider distribution of goods/products to different regions. It also permits the door-to-door concept of delivery; where the presence of different goods is guaranteed even if the products are not manufactured locally. The reduction for time – unloading and reloading the cargo thus reducing the time spent of delivery. This has enabled the provision of goods to import countries within the required timeframe without the tampering of the products. Packaging costs may be reduced due to the mass freight of the products. Less pilferage, due to the seals and other security measures, means lower insurance rates that translate to easier terms for the transportation of the goods from one region to the other. Simplified documentation: - the One Bill of Lading that combines the overall transport costs helps in reducing expenses incurred by the supplies; translating to cheaper products. The presence of the CTO –Combined Transport Operator, who takes the overall responsibility for any loss or damage that may be incurred in the journey aids in assuring both the supplier and buyer of the goods safety and qualifications. In conclusion, the shipping container has eased the en masse transportation of goods across international borders reducing the cost of these goods radically. This has been done through the provision of quality port equipments and standardization principles. Question 3. Transportation and warehousing Goods/ products in transit often require storage due to distances covered or other factors necessitating this storage including - if the products are finished or in parts, the JIT (Just in Time) policies of manufacturers, assembly plants amongst others. Transportation is critical for the smooth distribution of goods. Warehousing on its part is the commercial storage of goods/ products, in all their different forms from finished products to parts for assembly/ mixing, which cannot be received on time. They are usually located on transit routes at ports or inland such as at airports or railway stations. Due to advances in technology, different forms of warehousing exist i.e. –systems such as; Pallet rack, Mezzanine, Vertical Lift Modules, Horizontal Carousels to Vertical Carousels (Grath, 2005: 57). Due to automation, the efficiency in terms of time, cost and security of the products is guaranteed. Temperature control can be enabled due to automation as some products require special treatment especially if they are raw materials or perishables. The supply chain that starts from the supplier to the buyer/consumers is at times quite spaced out thus the need for storage facilities. In instances such as the assembly or manufacture of goods, there is a dual process involved in which both the transportation and warehousing of the goods is facilitated, in the first instance when the goods are in assembly parts or in the form of raw materials and when they are assembled or in their finished product form. Assembly or manufacturing plants are critical in the international trade industry and the lack of one material can mean a delay in the overall production of the goods. This in essence requires places of storage of the available goods to await the availability of the others. The storage of these materials enables a well-coordinated and effective transportation system, global in nature; timeframe factored in (Grath, 2005: 56). Question 4. Freight forwarder A freight forwarder is an agent; a third party (who being non-asset-based) provides the necessary logistics by dispatching shipments and books/arranges space allocation for these shipments. The manufacturer is usually driven by core interests that are mainly found in the manufacturing and marketing aspects of their goods. The cost of storage and the timeframe available for the freshness or wellbeing of the goods is thus critical to the manufacturer. The necessity for distribution is therefore critical and at most, times usually outsourced from intermediaries that specialize in global physical distribution. Such intermediaries are known as freight forwarders or forwarding agents. These are either companies or individuals that specialize in the organization of shipments for either an individual or company clients and may act as carriers (who are involved in the whole process thus provide the shipping, off-loading and on-loading facilities and even documentation) (Bishop, 2004: 30). They facilitate cargo movement to international destinations since they have the expertise that aids them in the preparation and processing of documents and other related activities. They review documents such as - the Shipper’s Export Declaration, the Commercial Invoice and the Bill of Lading amongst other documents required. Some forwarders specialize in ‘niche’ areas such as collection and delivery of goods around big ports (international trade) while others concentrate on domestic products only (internal trade) (Bishop, 2004: 34). Among their chief duties, include -talking with clients, making sure the cargo gains entry into its place of arrival; facilitated by proper and procedural documentation and also the final journey of the cargo to its destination. There is need for the contracting of trucking companies to carry the goods to the consignee’s business premises. In conclusion, the presence of the freight forwarder is critical especially in this age of mass production and transportation with the myriad of routes and destinations ever changing and growing. They ease the process for both seller and buyer parties. Question 5. The Bill of Exchange It is a facility that enables the seller to use banks in the overseeing of payment from the buyer for the provision of the goods in international trade especially if the buyer has been given a credit period. It is thus legally binding until expiry of the credit period. It entails the bank’s involvement in the facilitation of safeguarding measures of the seller’s interests in the case of credit period being provided and in assisting, the seller receives payments. It is found in Documentary collection that oversees the interaction of the two banks acting as agents of the seller and buyer, and who merely act in the seller’s interest in their endeavor to collection of the money from the buyer; this through the exchange of documents involved in the transaction for the total money required from the buyer. The documents for the goods are held as proof of ownership by the seller’s banks until the buyer clears all his costs. Because of the buyer and country risks, the Documentary Collection cannot stop the buyer if he withdraws from the transaction with no payments. The Letter of Credit, found in Documentary Credit, as a conditional guarantee of payment from a bank, protects the seller from both country and buyer risks when it is a confirmed, irrevocable documentary credit. To use the Bill of Exchange, there is therefore the need of some form of protection being obtained through Credit insurance/factoring. When the period of credit expires, the Bill of Exchange becomes invalid, meaning that the seller cannot claim the money from the seller for both the goods and the transportation costs since the banks do not check the Documentary Collection as closely as they would with the Documentary Credit. Only through insuring the goods does a seller ensure his/her payment regardless of the risks involved (Grath, 2005; 133). In conclusion, the bill of exchange helps sellers to use banks when carrying out international business transactions especially n cases where the buyer has a credit period. It is a legally binding principle. Question 6. International Commercial Terms (Inco term) Inco-terms are rules/ a series of predefine terminology as published by the International Chamber of Commerce (ICC). They are used widely in international trade; a series of three-letter trade terms, they are primarily intended to communicate the tasks, risks and costs associated with the transportation and delivery process clearly. Acceptable globally; they are intended for the overall removal of uncertainties. They are divided into two including those involving the seas and inland waterways and general ones (Inco terms, 2010:4). The four where transportation is entirely in water are: - FAS – Free Alongside Ship: for heavy lift or bulk cargo, where seller must place the goods alongside the ship at the named port after clearing them. It is unsuitable for multimodal containers in sea transport. FOB – Free on Board: buyer nominates vessel for loading of goods by seller (who clears them) with the risk and cost being divided when goods are onboard. It is applicable for inland and maritime waterway transport. No use of forwarder/carrier thus seller instructs buyer on vessel details and port of destination. CFR – Cost and Freight: the seller pays for costs and freight for delivery of goods at destination port. The risk is transferrable to buyer once goods are loaded onto vessel with no insurance cover present. Suitable for maritime transportation CIF – Cost, Insurance and freight: almost like the above with the exception of the seller having to also procure and pay for the insurance cover of the goods. The following are generally applicable to all transportation: - EXW – Ex Works: where seller avails goods with the term placing maximum obligation on buyer. Used in initial quotation for sale of goods, costs excluded. Seller avails good on date agreed upon; the buyer paying all costs and even bears risks in transportation process. Seller not involved in loading and clearance of goods (Inco terms, 2010:4). FCA – Free Carrier: seller hands goods to first carrier, named by the buyer, at specified place. The seller pays carriage costs incurred towards delivery point and the risk passing to the buyer upon the handing over. CPT – Carriage Paid To: the seller pays for transportation with the risk transferring to buyer upon handing goods to first carrier. CIP – Carriage and Insurance Paid to: equivalent to CIF in terms of the containerized transport with the seller paying transport and insurance to the named destination, but risks pass to buyer upon the transfer of goods to the first carrier. DAT – Delivered at Terminal: except for costs of import clearance, the seller pays for transport to destination and assumes risks up to unloading point. DAP – Delivered at Place: the seller pays transport costs to named place, assuming all risks up to the time of unloading. DDP – Delivered Duty Paid: the seller’s responsibility includes goods delivery to named place, paying all costs in delivery of goods to named destination including import duties and taxes. Maximum obligations are placed on the seller (Inco terms, 2010:4). In conclusion, from the above the seller’s responsibilities and risk bearing increases from the choice of Inco term used with it increasing from the EXW through out to DDP (with the E’s first, followed by the F’s then the C’s to finally the D’s.) References Bishop, E., 2004. Finance of international trade. New York: Butterworth-Heinemann. Grath, A., 2005. International trade finance: the complete guide to risk management, international payments, guarantees, credit insurance and trade finance. London: Nordia Publishing Limited. Incoterms 2010: ICC rules for the use of domestic and International Trade Terms Read More