International Trade Intermediaries

Commercial Intermediaries

• They act as commercial intermediaries, focusing on long-term development of trade in goods and services provided by other parties.
• Their core activities include exporting, importing, and third-country trading.

Cargo Insurance

• Cargo insurance protects against major financial losses due to damage or loss of goods during loading, unloading, or storage between transport stages.
• It is typically provided under ocean marine policies, which cover goods transported by air, rail, road, or sea.
• To obtain cargo insurance, a company must demonstrate insurable interest, meaning it faces the risk of loss and has a financial interest in the goods' safety without potential profit from the insurance.

Third-Party Logistics Providers

• Third-party logistics (3PL) involves outsourcing logistics functions such as inbound freight, customs, order fulfillment, distribution, warehousing, and freight management to another company.
• 3PL providers leverage their established international networks and expertise to enhance customer service.
• This practice is particularly beneficial for medium-sized companies, helping them stay competitive and cost-effective.

Risk Elements and Related Costs

• International trade involves higher risks compared to domestic trade, including commercial, country, and foreign exchange risks, which can be costly to manage.
• Failure to address these risks adequately can eliminate all profit.
• Discussions with banks, insurers, and export credit agencies (ECAs) are necessary to assess and manage financial exposure.
• Volatility in international transactions can lead to unforeseen costs, such as dispute resolution, demurrage charges, transit delays, documentation errors, legal fees, delays in fund transfers, and unanticipated travel or other expenses.

Risk Management

• Engaging in international trade inherently involves risk, which can be managed but not eliminated.
• Companies must balance the cost of risk mitigation with expected returns, recognizing that some risks are unavoidable and necessary for potential higher returns.
• Understanding risk as an indicator of potential returns and a barrier to competitors is crucial.
• Trade finance instruments help manage commercial and foreign exchange risks, making international trade more feasible.

Commercial Risk

• Refers to the risk of non-payment by an importer or non-performance by an exporter.
• For importers, it involves the risk that a foreign supplier may not fulfill a contract's terms.
• For exporters, the concern is the importer's ability to pay on time.
• Assessing this risk is challenging, especially when dealing with private companies with non-public financial information.

Negoating International Contracts

• Creating a precise and clear international contract is essential to allocate financial risk appropriately and determine the necessary trade finance products to mitigate that risk.
• To avoid disputes and costly litigation, companies should:
  • Identify all parties involved, including affiliated companies, agents, or representatives.
  • Specify the governing law, clearly stating which country's laws will apply to the agreement.
  • Draft a comprehensive contract, ensuring all essential terms are included.
  • Use clear, unambiguous language to prevent misunderstandings and disagreements.

Incoterms Rules

• Using Incoterms rules in contracts helps avoid ambiguity and disagreements by clearly defining responsibilities in international trade.
• These rules cover obligations, costs, and risks, and determine who bears the risk of loss or damage during transit.
• Incorporating Incoterms ensures clarity and can influence payment terms and associated trade finance products to mitigate risks.

Basic Contract Clauses and Terms

• International contracts should include essential elements like language and legal system specifications to address potential disputes.
• They should also outline required documents and procedures throughout the contract's duration, such as technical and delivery documentation.
• It's crucial to consider whether the company can execute the terms effectively, especially in terms of logistics.

Verbal Agreements

• While verbal commitments can be legally binding, they often lack clarity, especially in complex international contracts.
• It's advisable to formalize agreements in writing to mitigate potential ambiguities.

Due Diligence

• Before negotiating a contract, conducting due diligence is essential.
• This involves assessing a potential customer's creditworthiness, financial health, management quality, business history, and reputation.
• Legal, consulting, and credit reporting firms can assist in this process, but obtaining comprehensive information in foreign markets can be challenging.

Method of Payment and Payment Terms

• The method of payment and payment terms are crucial aspects of contract negotiation in international trade.
• Factors such as the location of the importer and supplier, as well as previous business relationships, influence these terms.
• Both parties must assess the risks involved, balancing the importer's risk of non-receipt with the exporter's risk of non-payment.

Schedule of Payments

• When negotiating a contract spanning a period of time, exporters and importers often establish a schedule of payments outlining when payments will be made.
• For long-term contracts, typically lasting 12 months or more, payments are based on milestones achieved during the contract.
• Milestone-based contracts offer better control and payments are tied to specific results.
• Defining milestones requires justification to both parties to accurately assess completed contract percentages and determine due payments.

Payment Schedules

• There are two types of payment schedules: parameterized and customized.
• Parameterized schedules are generated based on a set of rules and market conventions to define the frequencies of the payments.
• Customized schedules consist of a series of dates that define exactly when payments will be made and are tailored to the expected progress of the contract over its duration.

Pricing Strategies

• Are crucial for optimizing returns in international business.