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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Guillermo C. Jimenez
The international trade sector has entered a challenging phase marked by low growth, increasing competition, and a search for greater efficiencies through digital technologies.
Export merchandise trade growth peaked in 2011-2012 and since then has remained stagnant, stopping a trend of steady growth that had continued for half a century. This slowdown was not limited to export merchandise trade, as international services markets also became increasingly competitive. In particular, the global shipping industry underwent contraction and consolidation.
While trade has slowed, e-commerce has become an engine of economic growth and digital technologies have rendered international supply chains more efficient. As old export paradigms based on trade in goods give way to a new landscape, an increasing percentage of total world trade is made up of services and intellectual property.
Global consumers have become more demanding as regards environmental and labour standards, forcing exporters and importers to assure compliance with globally recognized norms.
In this increasingly complex environment, professional knowledge is at a premium. Profitable exporters and importers know how to scan these changing global markets for opportunities and how to use professional trading practices to minimize and manage the risks of trade.
This book is based on the premise that a solid foundation in export transactions provides the best platform for understanding and mastering today’s new and emerging market sectors.
The first principle of export practice is effective risk management. International transactions comprise greater transport, customs and legal risks than domestic transactions. Professional exporters and importers manage these risks by relying on a number of globally recognized procedures, documents and standard rules. It is the principal focus of this book to provide a solid grounding in these globally standard practices and procedures.
In recent years the international trade sector has changed substantially:
> Merchandise trade growth has stagnated
For the first time in decades, international trade growth reached a plateau. From 1985 to 2007 world trade grew at roughly twice the pace of global GDP. Since 2012, however, trade has not only stagnated, but declined.1 Trade in services has been slightly more resilient, with the notable exception of shipping, which contracted[Page12:]sharply in 2016.2 The global trade marketplace has been subject to a series of unexpectedly large shocks, as in the global recession of 2008-2009, or in the 45% decline in energy prices in 2015.3
> Digital technologies are transforming and disrupting the export marketplace
After many years of development and experimentation, electronic letters of credit and bills of lading finally became available, as through the Bolero system for electronic transactions, and as facilitated by a number of new rules and standards (such as ICC’s eUCP rules for electronic messages in letter of credit transactions). The Chinese firm Alibaba attained global prominence via its web-based platform which provided access to the world’s largest network of factories. Another Chinese firm, Li & Fung, became the world’s leading sourcing intermediary by using its web-based system to help large buyers optimize their purchases from supplier factories.
> E-commerce continues to grow
Worldwide retail e-commerce sales reached US$ 1.9 trillion in 2016, accounting for nearly 9% of total retail spending. By 2020, worldwide e-commerce sales will reach US$ 4 trillion, or 15% of total sales. Asia-Pacific remains the world’s largest e-commerce market, with China alone representing nearly half of all global retail e-commerce sales in 2016.
While cross-border e-commerce has been much slower to take off than domestic e-commerce (for reasons we explore further in this book), it is now accelerating. A 2016 survey in 24 countries showed that more than half of respondents had shopped from an overseas site in the previous six months.
> Sustainability standards have become imperative
The signing of the Paris Climate Agreement in 2016 underscored the importance which global governmental, scientific and business are giving to the problem of climate change. As one example of the international trade response, the world’s leading shipping company, Maersk, pioneered the practice of “slow steaming”, under which its vessels move at a slower speed so as to utilize less fuel and reduce greenhouse emissions.
Consumer demand for products that can be certified as organic or sustainably produced has led to great interest and growth in certifications (e.g. Fairtrade, Rainforest Alliance). At the same time, government and import regulations have forced companies to monitor their supply chains to ensure that their products are free of “conflict minerals” or “conflict resources” (resources produced in an area of civil conflict, the sale of which is used to support parties in the conflict; a prominent example is found in the conflict minerals mined in the eastern provinces of the Democratic Republic of Congo. A number of private certification systems, such as the bluesign™ system, provide a way for companies to audit the environmental impact of their supply chain.
A series of unfortunate factory catastrophes, most notably the factory collapse at Rana Plaza in Bangladesh in 2013 which claimed over 1100 lives, has focused renewed attention on labour standards and factory safety. In addition to country-specific initiatives in Bangladesh, the UN-led BetterWork Programme, a forum for training, advocacy and research, provides an example of a multilateral effort to raise global standards on worker protection and safety.
This book provides a comprehensive introduction to export-import management and international business. Our initial focus is on international merchandise transactions. Once the reader has a firm grasp of the structure of an export transaction, one can more easily understand other important international business transactions. In later[Page13:]chapters we will review the principal forms of international distribution, including agency, distributorship and franchising (and other common international business contracts), as well as the international aspects of e-commerce and intellectual property.
The first unit introduces the basic structure of international transactions, with a focus on export and import procedures and documentation. In subsequent chapters we explore the legal, payment and transport aspects of international trade in tangible goods. In our final unit we broaden our scope to include international marketing, international e-commerce, cross-cultural marketing and management, and the emerging field of fair trade.
Our initial focus is on international commercial sales of tangible goods between merchants, sometimes also referred to as “wholesale” or “B2B” transactions. Commercial sales are to be distinguished from sales to consumers (which we will return to when we discuss global e-commerce). Consumers in virtually all countries are protected by special laws governing sales to consumers.
Commercial sales, in contrast, are covered by other specific systems of law and legal codes. The definition of commercial sales also excludes sales of services, financial instruments, real estate or intellectual property. International commercial transactions are similar to domestic commercial transactions in that they make use of standard forms such as pro forma invoices and purchase orders, bills of lading, etc. When the transaction is a purely domestic one, domestic commercial law will apply. With international transactions it is common to apply the UN Convention on Contracts for the International Sale of Goods (CISG).
Business people who are familiar with domestic commercial transactions will find it easy to learn the basics of export-import. However, there are important differences between domestic and international commercial practices. In international transactions, the additional distances, currencies and other variables compel us to use terms and devices (such as the ICC Incoterms® 2010 rules or letters of credit) that are not commonly used in domestic trade.
Case Example“Black Swan” Risks in International Trade: Hanjin Shipping Bankruptcy of 2016
On 31 August 2016, one of the world’s largest container shipping lines, Hanjin Shipping of South Korea, declared bankruptcy, throwing international trade markets into confusion and uncertainty.
Over US$ 13 billion of merchandise were trapped at sea — Hanjin’s bankrupt vessels could not afford to berth and unload in their ports of destination. Panicked importers, among them Apple, sought extreme measures to obtain their goods. Apple went so far as to hire vessels to recover their merchandise from the stranded Hanjin vessels. Importers of seasonal goods faced disastrous consequences if their goods could not be recovered promptly.
Exporters, meanwhile, scrambled to find alternative shipping. The sea freight from China to the west coast of the USA jumped over 100% in a matter of days.
While such “black swan” events are by definition rare, international traders have developed a number of mechanisms and strategies that can help manage or avoid the consequences of such contingencies. Unfortunately, inexperienced or poorly-trained export-import managers may fail to make use of such safeguards.
Let us examine how knowledge of some of the topics covered in this book (such as the Incoterms®rules, documentary credits, international arbitration, etc.) allows exporters to anticipate and plan for the possible repercussions of events such as Hanjin’s bankruptcy:
While risk is a factor in all business transactions, international trade involves additional risks: goods must travel over longer distances, pass through customs barriers, and payment must often be made in a foreign currency. Contracts must be negotiated despite language and cultural barriers, and they must often be enforced in unfamiliar legal environments.
It is crucial that international trade professionals be aware of the key solutions available for anticipating and managing international business risk.
International transport involves greater distances, with cargo more often changing hands or undergoing prolonged storage, so that there is a greater risk of damage, loss or theft than in domestic trade. Consequently, exporters and importers must understand their legal rights vis-a-vis carriers. If the goods have been damaged through the carrier’s fault or negligence, the carrier’s liability may depend on the contractual provisions and shipping information contained in the bill of lading (a document which evidences the terms of the contract of carriage, examined at length in Chapter 16). Similarly, the importer needs to understand the extent of coverage provided by the insurance policy, because it may need to claim under its provisions if the goods are damaged during transport.
Solutions:
> Provide sufficient insurance coverage against all likely contingencies and attention to stipulations in the bill of lading.[Page15:]
> Conduct proper review of conditions in the contract of carriage — proper packaging and shipment instructions.
Since it can be difficult for exporters to verify the creditworthiness of foreign buyers, there is an increased risk of non-payment, late payment or outright fraud. Consequently, wary exporters frequently insist on payment by irrevocable documentary credit (examined in detail in Chapter 12), or make use of other security devices (see Chapter 14).
> Use suitable payment securities, such as documentary credits issued under UCP 600.
> Alternative: use open account terms backed by a standby credit or demand guarantee.
Importers may find it difficult to physically check the quality of the goods before shipment, and it may happen that they do not receive goods of the quality they had expected. One way of avoiding this is for the importer to insist on provision of an inspection certificate. Inspection certificates can also reduce the incidence of international trade fraud.
Solution:
> Pre-shipment inspection (PSI) is very important in international trade and is frequently a documentary condition of letters of credit. Inspection certificates may be provided by highly specialized, independent inspection companies.
If a price has been set in a particular currency in an international contract, subsequent exchange rate fluctuations (between the contract currency and the accounting currencies of the parties) will inevitably benefit one party at the cost of the other. The easiest solution for a party wishing to avoid uncertainty is to denominate the contract price in one’s own currency. This is useful for small firms, because it standardizes the currency of payment, which can facilitate accounting and cash-flow projections. However, in many cases it is commercially necessary to make quotes in various foreign currencies.
> Exporters with exchange rate exposure will seek to protect themselves from exchange rate fluctuations by entering into foreign exchange forward or option contracts, sometimes referred to as hedge contracts.
Sometimes an exporter or importer is compelled to agree to a contract that is made subject to the jurisdiction of foreign courts. In such cases, it can be virtually impossible — or at a minimum, quite expensive — to resolve disputes legally. This is why both exporters and importers would like to impose their own choice of law and choice of forum clauses, requiring disputes to be settled in their home courts. One way out of the resulting negotiating impasse is to contractually stipulate that dispute resolution will be by international commercial arbitration, such as that supervised by the ICC International Court of Arbitration (see Chapter 8 — International Dispute Resolution).
> Engage in substantial credit checking of counterparties; demand references.
> Negotiate firmly for minimum legal protection, or refuse the deal.
> Use well-drafted contracts and general terms and conditions, including provisions for choice of law/forum, arbitration.
> Specify the Incoterms® 2010 rule.
[Page16:]
A strike, natural disaster or war may render delivery impossible. Unexpected events may also dramatically alter the cost of transport by raising the price of shipping fuel or by closing off the most economical routes.
> Well-drafted contractual force majeure provisions can help protect the parties (such as found in the ICC Model Force Majeure Clause); these are dealt with further in our chapter on export sales transactions.
The normal commercial risks involved in marketing any product become magnified in the export context because of the additional investments required by an export programme. Sometimes this is referred to as economic risk or country risk. For example, a market which has been steadily growing for several years may suddenly decline (e.g. due to exchange rate instability) before an exporter can amortize investments in local distribution.
Companies should begin by seriously considering whether or not to export at all. Some firms are not quite ready to export, and some may never be able to compete internationally and should concentrate on domestic niches. To launch a proper export effort requires the commitment of resources that can be irretrievably lost in the event of failure. Even leading companies have suffered financially after investing heavily and overoptimistically in export operations that subsequently foundered.
> Conduct proper market research and market screening.
> Prepare for downside contingencies.
Misunderstandings in international transactions can arise because the parties come from different cultures and express themselves with differing vocabularies.
Case ExampleCross-Cultural MiscommunicationsAn Australian importer of clothing ordered a shipment of rugby shirts from a foreign supplier.
The importer requested a sample shirt to test for cotton content in the fabric. When the sample arrived, the importer cut off one of the sleeves of the shirt at the elbow, extracted a few fibres and tested them.
Satisfied, the importer returned the shirt with the notation: “OK — send shipment as agreed.”
Several months later he received an irate call from a major clothing distributor, to whom the shipment had been sent directly. The client had received 5,000 rugby shirts — each missing one sleeve!
Not only do cultural and business practices differ across national borders, there are also differing tax systems, regulations, accounting methods, currency controls and customs systems. The same legal term, such as “agent”, may have different legal connotations in different jurisdictions. Technical and product standards may differ, as well as consumer tastes. Providing after-sales service to remote markets may be prohibitively expensive, with the result that foreign products can acquire a bad reputation. Also, translating marketing brochures and technical manuals into foreign languages can be unexpectedly time-consuming and costly, especially when the documents must be frequently revised or updated.
> Research and understand the cultural characteristics of your foreign counterparties.
> Check communications to make sure that both sides are in agreement on the meaning of terms.
[Page17:]
Key facts to note:
> International trade grew steadily from 1960 through 2008-2009;
> Since 2008-2009 the total value of trade has dropped, resumed course, then fallen again.
While international trade grew at about twice the pace of domestic GDP over the period from 1950 to 2008, since then it has grown at about the same pace as domestic GDP. This suggests that the economic benefits to be derived from international trade may have peaked and that the international trade sector has entered into a mature phase.
> This infographic makes clear the demographic dominance of Asia: 6 out of the 10 most populous countries in the world are located in East Asia or South Asia (China, India, Indonesia, Pakistan, Bangladesh and Japan), accounting for approximately 3.4 billion out of the world’s 7.4 billion population.[Page18:]
> The very large populations of Indonesia (250 million), Pakistan (182 million), Nigeria (174 million) and Bangladesh (156 million) should especially be noted as all have birth rates higher than the world average (which is 1.18% per year).
> In order to yield a useful comparison on GDP, gross GDP figures are corrected for “purchasing power parity”, or PPP;
> When corrected for PPP, China is the world’s largest economy;
> Note the presence of Brazil (6th) and Indonesia (7th) in the world’s top 10 economies.
Although GDP growth in the USA and EU has slowed over the past two decades, there are a number of countries experiencing rapid growth and these will play a greater role in world trade in coming years. — Source: World Bank
[Page19:]
Key facts to note for the future:
> Populations with over 50 million inhabitants and high growth rates:
It is well-known that the world’s export powers include China, USA, Germany and Japan. Less well-known is the powerful ranking of less-populous trading nations such as Netherlands and Singapore.— Source: CIA World Factbook
Some countries are unusual exporting powerhouses:
> Germany is close to overtaking the US as world’s 2nd leading exporter despite having a population of only 80 million as compared to 320 million in the US.
> Netherlands is the world’s 7th largest exporter with a population of only 17 million; this is due in part to its important ports and role as a trading hub where goods are imported only to be re-exported.
> Singapore is a similar case in that it is the world’s 14th leading exporter with a population of only 5.4 million.
[Page20:]
Although the USA remains the world’s leading importer, China’s the increasing diversification and development of the Chinese economy suggests that China may soon take the first position. Note the emergence of India as a leading global importer. — Source: CIA World Factbook
> US remains the world’s leading importer by a significant margin.
> Since Chinese imports are growing fast, the Chinese consumer market may soon make China the world’s leading importer.
True/False
Answers: 1. T 2. T 3. T 4. F 5. T
1 http://www.economist.com/blogs/economist-explains/2016/10/economist-explains-5
2 http://unctadstat.unctad.org/EN/Infographics.html#&gid=2016&pid=Trade%20in%20services%2C%20Q2%202016
3 https://www.wto.org/english/res_e/statis_e/wts2016_e/WTO_Chapter_02_e.pdf