QUESTIONS 1. Explain these terms of countertrade: barter, counterpurchase, buyback, offsets, clearing agreement, and switch trading. Barter is a one-time direct and simultaneous exchange of products of equal value (i.e., one product for another). Counterpurchase occurs when there are two contracts or a set of parallel cash sales agreements, each paid in cash. Unlike barter, a counterpurchase involves two separate transactions-- each with its own cash value. A buyback requires a company to provide machinery, factories, or technology and to buy products made from this machinery over an agreed-on period. In an offset, a foreign supplier is required to manufacture/assemble the product locally and/or purchase local components as an exchange or the right to sell its products locally. A clearing agreement is a clearing account barter with no currency transaction required. With a line of credit being established in the central banks of the two countries, the trade in this case is continuous, and the exchange of products between two governments is designed to achieve an agreed-on value or volume of trade tabulated or calculated in nonconvertible "clearing account units." Switch trading involves a triangular rather than bilateral trade agreement. A third party is necessary to dispose of the merchandise, and this party pays hard currency for the unwanted merchandise at a considerable discount. 2. Explain these terms of sale: ex works, FAS, FOB, CFR, CIF, EXQ, and DDP. Ex works means that the price quoted applies to the point of origin, and the goods are made available to a buyer at a specific place, usually at a seller's place of business or warehouse. FAS stands for Free Alongside Ship, and the price includes delivery of goods along side the vessel but not the cost of loading. FOB stands for Free on Board. Usually, the point used or quotation is the port of export, and the price includes local delivery and loading. CFR stands for Cost and Freight. The price generally includes the cost of transportation to the named point of debarkation. Insurance, however, is not included. CIF stands for Cost, Insurance, and Freight. The price includes the cost of goods, insurance, and all transportation charges to the point of destination. EXQ means from the dock at the import point. The term goes one step beyond CIF to include the seller's responsibility for placing goods on the dock at the named overseas port with the appropriate duty paid. DDP (Delivered Duty Paid) is used when the seller undertakes the delivery of goods to the place named in the country of import, most likely the buyer's warehouse, with all costs and duties paid. 3. Explain: (a) bill of exchange and (b) bankers' acceptance.
A bill of exchange is a written request for payment from one person (drawer) requiring the person to whom it is addressed (drawee) to pay the payee or bearer on demand or at a fixed or determinable time. It is used as a means of financing international transactions. A bankers' acceptance is a time draft whose maturity is usually less than six months. The draft becomes a bankers' acceptance when the bank accepts it; that is, the bank upon which the draft is drawn stamps and endorses it as "accepted." 4. Explain these types of letter of credit: revocable, irrevocable, confirmed, unconfirmed, back-to-back, and transferable. With a revocable L/C, the issuing bank has the right to revoke its commitment to honor the draft drawn upon it without prior warning. An irrevocable L/C is much preferred to the revocable L/C because, once the irrevocable L/C is accepted by the seller, it cannot be amended in any way or cancelled by the buyer or the buyer's bank without all parties' approval. A confirmed L/C is confirmed through a bank in the exporter's country, giving the exporter an additional guarantee of payment from a second bank (i.e., confirming bank) in addition to the guarantee of the buyer's foreign bank. An unconfirmed L/C, on the other hand, is not confirmed by a bank in the seller's country, resulting in less certainty and slower payment. In the case of a back-to-back L/C, an intermediary uses the commitment of the customer's issuing bank (i.e., the customer's L/C) to collateralize issuance of the second and separate L/C by the intermediary's bank in favor of, say, the supplier. A transferable L/C, in comparison, allows the intermediary (beneficiary) to transfer once rights in part or in full to another party. The intermediary as the first beneficiary requests the issuing or advising bank to transfer the L/C to its supplier (second beneficiary).
DISCUSSION ASSIGNMENTS AND MINICASES 1. Given that countertrade is a fact of life which is not going to go away, is there any valid argument from a theoretical standpoint for this method of doing business? From a theoretical standpoint, there is probably no valid argument for countertrade. This method is cumbersome and costly, making additional and unnecessary costs inevitable. As explained by Bruce Fitzgerald ("Countertrade Reconsidered," Finance & Development (June 1987): 46-49), "countertrade requirements, like any trade restrictions, increase the cost of doing business. These costs cannot be passed into the international market but must be borne within the country imposing the requirements." 2. Assume that you are a U.S. manufacturer being asked to submit a quotation to a potential buyer. How are you going to prepare your quotation in terms of (a) terms of sale and (b) terms of payment? To prepare a quotation for a potential buyer, a U.S. manufacturer should use CIF as the terms of sale. This quote is meaningful, making it easy for the buyer to know the cost, insurance, and freight. Since the buyer can compare this quote with other suppliers' quotes, the quote should receive serious consideration from the buyer. The terms of payment which offer maximum protection to both the buyer and the seller should involve a letter of credit. If possible, it should be irrevocable and confirmed. This is
critical when the buyer is far away and unknown and an order is large. It is too risky to offer an open account and the like until the buyer becomes known and its credit references are sound.