2 HBS Note On International Trade Finance 211007-PDF-ENG

9-211-007
REV: OCTOBER 7, 2010
C. FRITZ FOLEY
MATTHEW JOHNSON
DAVID LANE
No
ote on Internattional Trade
T F
Finance
e
Intternational trrade finance encompasses
e a set of finan
ncing arrangeements and payment
p term
ms that
suppo ort nearly $16 6 trillion in an
nnual world trade.
t 1 The ce
entral dilemmma facing tradde counterparrties is
pithilyy summarizeed by the U.S S. Commerce Departmentt’s Internation nal Trade Ad dministration:: “For
exporrters, any salee is a gift un ntil payment is received… ….For importeers, any paym ment is a don nation
t goods aree received.”2 Exporters
until the E woorry about wh hether they will
w be paid in n a timely maanner;
imporrters worry about receivin ng their orderr to the correcct specificatio
ons at the app
propriate timee. The
instru
uments of tra ade finance help
h manage and
a mitigate these concerrns. While so ome such riskks are
relevaant to domesstic commerccial transactions as well, the greater distance and d longer durration
betweeen order placement and delivery
d amplify many of those risks fo or cross-bordeer trading parties,3
particcularly when cross-borderr legal, busin ness, and culttural factors generate
g unccertainty abou
ut the
ability
y of trading partners
p to en
nforce their rig
ghts. This notte outlines thee principal in
nstruments of trade
financce, the limiteed evidence on o their relattive use, and d the internattional trade dispute resollution
mechaanisms that fo orm the backd drop against which traderrs select financing terms.
Trad
de Finance
e Instrumeents: Term
ms, Costs, and
a Mechaanisms4
Prepaayment
Too avoid nonpa ayment for go oods shipped
d, exporters prrefer prepaym ment—cash reeceived in adv vance
of sh
hipment—typically via in nternational wire
w transferr. Prepaymen nt terms typpically requirre the
imporrter to pay th he exporter before
b goodss ship, but caan also requiire payment before the goods’
g
produuction or proccurement. As such, prepay yment is the leeast attractivee payment op
ption for impoorters,
who fear
f that a pro
oducer mightt simply keep p their money y and ship su ub standard gooods or nothiing in
return
n. In additio on, importerss must find a way to fund f the wo orking capital requiremen nts of
prepaayment transsactions. Thu us, prepaymeent is usually uncompettitive for ex xporters wheenever
substiitute produceers exist that can
c offer moree generous teerms.
Letter of Credit
ne way to elliminate risk for importeer and exporter alike is to
On t use a letteer of credit (L/C,
somettimes called a “documentaary credit”), a commitmentt by an imporrter’s bank that payment will
w be
madee to the expo orter once th
he L/C’s term ms and cond
ditions have been met, as a verified by
b the
______________________
__________________________________________________________________________________________________
Professo
or C. Fritz Foley, Research
R Associate Matthew Johnson and Global Researrch Group Senior Researcher
R David Lane
L prepared thiss note as
the basiss for class discussio
on.
Copyrigght © 2010 Presiden nt and Fellows of Harvard

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photocoopied, or otherwise reproduced, posteed, or transmitted, without
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usiness School.
This document is authorized for use only in MELO-VEGA OSCAR's TRADE FINANCE I/ 2020-2 at Universidad de Lima from Aug 2020 to Feb 2021.
211-007 Note on International Trade Finance
presentation of shipping or delivery documents. Exporters are protected from the risk of importer
nonpayment; the risk to exporters instead becomes the credit risk associated with the importer’s
bank. Importers are protected by making payment only after the goods ship or are delivered.
Although the cost of the L/C is typically paid by the importer, there is little evidence of who bears
the incidence of these costs.
Exhibit 1 describes details of an L/C transaction that incorporates a banker’s acceptance (B/A) as
an instrument of payment.5 A banker’s acceptance is a draft from one party to another that the bank
accepts or agrees to pay out. First, an importer and exporter negotiate the terms of their merchandise
order and agree to finance the transaction with an L/C that guarantees payment once the exporter
demonstrates that those terms have been met. The importer then applies for an L/C from its bank
(Bank IMP). Naming the exporter as beneficiary, Bank IMP writes the L/C and sends it to the
exporter’s bank (Bank EXP). Bank EXP informs the exporter of the L/C’s arrival. If requested by the
exporter, Bank EXP “confirms” the L/C for a fee, adding its guarantee to Bank IMP’s guarantee. As a
result, the exporter has now transformed the risk of importer nonpayment first into the credit risk
associated with Bank IMP, and then into the credit risk associated with Bank EXP.
As specified in the L/C, after shipping goods to the importer, the exporter presents Bank EXP
with the order’s bill of lading (effective title to the goods), together with a time draft drawn on Bank
IMP with, say, 90 days’ maturity. Bank EXP endorses the bill of lading “in blank” so that title to the
goods passes to the holder of the endorsed bill of lading. Bank EXP then presents, and Bank IMP
accepts, both the endorsed bill of lading and the time draft, thereby creating with the draft a banker’s
acceptance. The B/A thus becomes an obligation of Bank IMP. Bank IMP either returns the B/A or
its discounted cash value to Bank EXP. If Bank EXP receives the B/A, Bank EXP can either give the
B/A to the exporter or hold on to it and pay the exporter the discounted value of the B/A. To fund
repayment of any working capital loan secured against an L/C, or simply to be paid soon after
shipping goods, exporters frequently sell B/As for cash at a discount determined by their bank.6
Banks like B/As because, unlike working capital loans, they do not require use of the bank’s funds—
they can be sold in the open market. In addition, B/As are self-liquidated by the trade transaction
underlying them. B/As can therefore be more transparent to banks than loan financing because they
specify both the source of repayment and the use of funds.7
Separately, Bank IMP informs the importer that the shipping documents have arrived and releases
them to the importer in exchange for payment, often in the form of a promissory note with a maturity
that matches that of the B/A. The importer presents the bill of lading to the shipper to collect the
goods when they arrive. The importer pays Bank IMP when its promissory note matures unless other
arrangements have been made. Bank IMP pays the holder of the B/A at maturity.
L/C terms are specific and detailed, and banks can refuse to accept an L/C for even the most
minor of discrepancies. Because of the administrative burdens they create for banks, there are
substantial fixed costs associated with the use of L/Cs. Exhibit 2 lists estimates of these costs. B/As
are costly too, involving some flat and minimum fees as well as bank commissions of between 0.75%
and 2% of the draft’s face value.8 L/Cs also tie up financial liquidity of the importer as Bank IMP
often requires the importer to illustrate an ability to pay its promissory note. Exporters also have
significant working capital needs in L/C transactions, especially if they do not sell their B/As for
cash. The transaction costs associated with L/Cs make them suitable primarily for new or less
established trading relationships. Because L/Cs have fixed costs, they are more frequently used
when traded goods have higher values or are traded in large quantities.
However, the security generated by the institutional commitments that underlie an L/C can
provide important benefits: the exporter’s bank may lend export working capital against the value of
Note on International Trade Finance 211-007
an export contract supported by an L/C. L/Cs remain common in developing countries, with 50%-
60% of China’s merchandise trade, for example, supported by L/Cs.9
Documentary Collections
A documentary collection (D/C) is a way for exporters to reduce nonpayment risk by entrusting
to their own banks the collection of an importer’s payment. Importantly, a D/C allows the exporter to
retain control of the goods until payment or assurance of payment is received. Under a D/C, the
exporter ships the goods and then assembles the invoice and bill of lading and turns them over, along
with a sight (for payment upon presentation) or time (for payment on a certain future date) draft, to
the exporter’s bank. The exporter’s bank releases the bill of lading to the importer if the importer pays
the draft or accepts the obligation to do so.10 See Exhibit 3 for illustration of the flow of a D/C
transaction. Unlike L/Cs, D/Cs do not oblige the importer to pay for goods before shipment, and
they offer limited recourse in the event of nonpayment. D/Cs do not guarantee payment from the
importer’s bank, for example. The primary risk to the importer is that the goods shipped are not to
specification.11 Because the banks take no risks in documentary collections, bank fees for D/Cs are
significantly less than for L/Cs; in 2000, typical charges were $75 for sight drafts and $95 for time
drafts.12 Exporters typically pay these costs, but they might not actually bear them. Because exporters
are usually paid no sooner than the time the goods arrive at their destination, D/Cs entail significant
working capital requirements for exporters. For importers, the working capital requirements
associated with D/Cs are often lower than they are for L/Cs because the importer’s bank does not
guarantee payment and hence requires less security from importers. D/Cs are suited to established
trading relationships with importers in stable markets who do not wish to open an L/C.
Open Account
Under open account terms, exporters ship and deliver goods before payment, which is typically
30 to 90 days after delivery. By creating the opportunity for the importer to resell goods before
having to pay for them, open account terms are the most attractive option for importers. For
exporters, however, open account terms generate working capital needs and are the highest-risk
option available. They are prevalent because of the highly competitive global market for exports. The
fact that some export producers are willing generate sales by extending credit to potential imports at
reasonable terms hampers the competitiveness of exporters who are not able to do so.
Exporters rely on additional financing arrangements, including export credit insurance, factoring,
and export working capital financing to limit exposure to nonpayment risk when trading on open
account terms.
Export credit insurance Available on either a single- or multi-buyer basis (the latter often at a
cost of less than 1% of the value of the goods insured), export credit insurance protects exporters’
receivables from a variety of risks that can result in nonpayment by foreign buyers. These include
commercial risks such as buyer insolvency, bankruptcy, or slow payment, as well as political risks
including war, terrorism, riot, and revolution. Credit insurance also covers the possibility of currency
inconvertibility, expropriation, and changes in import and export regulations. Short-term coverage
provides 90% to 95% coverage of consumer goods and services for up to 180 days, and of capital
goods, consumer durables, and commodities for up to 360 days. Medium-term insurance covers 85%
of the contract value of large capital equipment for up to five years.
Factoringa Factoring involves the sale of an exporter’s invoices or accounts receivables for cash
at a discount to face value, normally without recourse. As such, factoring gives exporters total
protection against the failure of foreign buyers to pay, with no risk-sharing or deductible. By
assuming the risk of nonpayment and the responsibility of collecting receivables, factoring houses
allow exporters to offer open account terms and improve the exporter’s liquidity position, both by
generating cash and by obviating the need for borrowing placed on the balance sheet as debt. These
benefits come at the cost of the discount exporters incur, which typically makes factoring twice as
expensive as export credit insurance.
Export working capital Export working capital is available from commercial banks in the
form of either short-term loans (usually to support a single transaction over a tenor of up to one year)
or a revolving line of credit (for multiple export transactions, usually over three years). This form of
financing allows firms that lack sufficient internal liquidity a means to acquire and process goods and
services to fulfill export orders on open account terms. Export working capital loans are often secured
by assets, high value accounts receivable, and personal guarantees. Government guarantees are
available in some countries to induce banks to lend for this purpose or reduce the rates charged to
smaller firms that can especially benefit from export working capital loans.
Trade Finance Instruments: Use and Providers

Because firms are not required to report detailed information to any supervisory or reporting
agency on the financing terms they use when engaging in trade, there is a dearth of data on the
relative use of different arrangements. Most available information is from surveys, and wide
discrepancies exist in estimates. According to a consulting firm specializing in international supply
chain management, open account terms represent 78% of international trade, whereas L/Cs and
D/Cs represent another 15% and 7%, respectively.13 Few other estimates are as comprehensive, and
many are based on surveys of banks that often do not observe prepayment and open account
transactions. For example, a 2008 survey of banks estimates that prepaid transactions comprise 20%
of global trade financing,14 whereas industry sources estimate that open account terms cover as much
as 80% of global trade finance,15 suggesting that no other instruments apply.
The 2008 survey of banks, however, also claims that open account terms comprise approximately
45% of global trade finance and that approximately 35% of global trade is financed by bank-
intermediated transactions such as L/Cs and D/Cs.16 Yet another source asserts that L/Cs make up
about 40% of all trade finance contracts.17 Whatever the precise figure, L/Cs remain central to trade
with firms in emerging markets and in countries with exchange controls.18
Exhibit 4 provides the Dealogic Trade Finance league table that ranks the world’s top 10
mandated arrangers of trade finance loans exceeding $1 million for 2009, including both syndicated
and unsyndicated loans and all loans guaranteed by an export credit agency (ECA), such as the U.S.
Export-Import Bank. Many of the world’s largest commercial banks appear on this list, but the data
are hardly comprehensive as the aggregate value of deals represents less than 1% of estimated 2008
global trade. Bank of America, JP Morgan, Standard Chartered, and other multinational banks also
have significant trade finance practices.
a Forfaiting is a practice similar to factoring that allows exporters of capital goods, commodities, or large projects to exchange
medium-term receivables (of 180 days to seven years) for cash at a discounted rate. For receivables guaranteed by the
importer’s bank, the exporter can take the forfaiting transaction off the balance sheet. In the U.S. the minimum transaction size
for forfaiting in 2009 is $100,000.
Dispute Resolution
The financial claims associated with distinct payment terms are challenged when commercial
disputes arise between trading partners. Importers and exporters therefore select terms against the
backdrop of alternative dispute resolution mechanisms, which include litigation and arbitration.
Because local laws and procedures affect contract enforcement in important ways, the choice of
arrangements to finance international trade must take different institutional environments into
account.
Litigation
No international court exists to resolve commercial disputes. At present, international commercial
litigation occurs in national courts, sometimes in the courts of multiple countries at once. As a result,
there is no certainty—often there is conflict—around issues including the jurisdiction to resolve
commercial litigation and the conduct of procedure. Aside from the added expense of hiring local
counsel, few companies prefer litigating on their opponent’s home turf. Procedurally too, civil law, as
developed in continental Europe and practiced worldwide, differs in important respects from
common law, as developed and practiced in Britain and former British colonies.19 Common law
countries tend to offer more protection to holders of financial claims and to have more efficient legal
systems.20
Efforts have been made to create a uniform commercial code to govern transactions between
different parties in different countries. One example is the United Nations’ Convention on Contracts
for the International Sale of Goods (CISG), passed in 1980 and ratified by 76 nations as of mid 2010.
CISG comprises uniform rules for drafting international sales contracts that set out the legal rights
and obligations of the seller and the buyer and are incorporated into and supplant local law.
Although the CISG aims to permit uniform resolution of trade disputes, the convention gives
signatory states flexibility not to be bound by all of its provisions, and significant differences in
interpretation remain.
Another effort to harmonize international trade practice is the International Chamber of

Commerce’s Uniform Customs and Practice for Documentary Credits (UCP), which applies
specifically to trade finance. The UCP is a set of rules that banks apply to the L/Cs that they issue and
honor. First formulated in 1929, revisions broadened UCP applicability and led to their acceptance by
175 countries as of 2007, in some instances with the force of law. Strictly speaking, however, the UCP
is not binding law, but rather a set of rules that banks voluntarily incorporate into the contracts upon
which their L/Cs are based.21
In 1997, the International Chamber of Commerce launched DOCDEX (Documentary Credit

Dispute Expertise), a set of rules to help banks resolve L/C and documentary credit disputes. While
not binding without the banks’ consent, DOCDEX aimed to enable banks to resolve refusals of
irrevocable L/Cs that are made on grounds of document discrepancies. Under DOCDEX rules, three
anonymous experts deliberate each dispute, supervised by the technical adviser of the ICC’s Banking
Commission. The process requires about two months to complete.22
Given the remaining uncertainties of international trade, however, trading partners are advised to
negotiate contracts carefully and explicitly. In particular, trade contracts should specify the national
law and jurisdiction that would apply in the event of litigation. The two are not the same: jurisdiction
addresses what national court will decide the dispute, whereas the adjudicator need not apply his
own nation’s law in his decision. In practice, “The courts chosen by the parties will apply the law
chosen by the parties (which may or may not be their law) and, if no such choice has been made, [the
courts] will determine the applicable law according to their conflict of law rules which may (or may
not) entail the application of their law.”23 Enforcing claims, however, typically requires the support of
the legal system of a country where an obligator has assets.
Arbitration
Rooted in the binding deliberations of senior guild members in medieval England, arbitration has
long been a central means to resolve commercial disputes more quickly, simply, and cheaply than
legal adjudication.24 Arbitration offers additional advantages as well: arbitrators can be recognized
experts rather than a judge and/or jury unfamiliar with the business matter under dispute. To help
assure impartiality, arbitrators are selected by both parties. Both parties also typically agree to
challenge arbitration awards only in limited circumstances. Proceedings are not open to the public,
assuring privacy and reducing posturing. Finally, arbitration can be less adversarial than legal
proceedings, allowing the commercial relationship to survive.25
Although many disputes are arbitrated on an ad hoc basis by private parties selected by the
disputants, international organizations provide arbitration services as well. The London Court of
International Arbitration (established in 1892) provides arbitration services regionally on a
worldwide basis. The ICC’s Court of Arbitration (established in 1923) monitors and supervisors
arbitrators in over 40 countries. Other notable arbitration associations were located in Austria,
Belgium, China, Cote D’Ivoire, Germany, Egypt, Hong Kong, Hungary, Italy, Malaysia, Mexico,
Russia, Sweden, and the United States.26 Each has developed and applied its own rules, however,
which can limit the willingness of international trading parties to subject themselves to one or
another forum.
In 1958, the United Nations created the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (the New York Convention) that as of 2008 had been ratified by over 130
states.27 The New York Convention is the main instrument with which to resolve cross-border
disputes via arbitration. Any state ratifying the New York Convention recognizes and enforces either
(a) all foreign arbitration awards or (b) those awarded in states that have also ratified the Convention.
(The United States in 1970 limited its recognition of arbitration awards to the latter category.)28
As with formal legal awards, awards that arise from arbitration typically require the support of
local legal systems in order to be enforced.
Alternatives
Mediation and conciliation are informal alternatives to arbitration and legal proceedings that are
most often used by parties with an established trading relationship that each wishes to preserve.29
Both involve facilitation by a neutral, independent third party who attempts to resolve the parties’
differences. In mediation, this individual meets with each party separately, transmitting and
interpreting their respective positions to the other. In conciliation, this individual in addition writes a
formal report of the issues, articulating their successful or failed resolution.30 Both the International
Chamber of Commerce and the London Court of International Arbitration offer conciliation processes
and services, the latter relying on rules articulated by the United Nations Commission on
International Trade Law (UNCITRAL).31
211-007 -7-
Exhibit 1 Flow Chart of a Letter of Credit
Importer 1. Importer orders Exporter

goods
2.
12. Importer presents 5. Exporter 6. Exporter
Importer
order bill of lading and ships presents draf t
applies
receives goods goods and documents
f or L/C
Common
carrier 4. Bank EXP
13. At maturity, notif ies
10. Bank
importer pays exporter of
EXP pays
Bank IMP L/C
3. Bank IMP exporter
delivers L/C to
11. Bank
Bank EXP
IMP gives 7. Bank EXP delivers
shipping documents to Bank
documents Bank IMP IMP Bank EXP
to importer (importer’s (exporter’s
8. Bank IMP accepts
bank) draf t: sends B/A to
bank)
Bank EXP
14. At maturity, investors

9. Bank EXP sells
present B/A to Bank IMP International Investors
B/A to investors
f or payment
Document f lows
Goods f lows
Currency f lows
211-007 -8-
Exhibit 1 (continued)
Steps
1. Importer orders goods from exporter and exporter agrees to terms.
2. Importer applies for a L/C to its commercial bank (Bank IMP), which is issued with the exporter named as beneficiary.
3. Bank IMP issues the L/C and sends it to the exporter’s advisory bank (Bank EXP).
4. Bank EXP notifies the exporter it has received the L/C.
5. The exporter ships the goods to the importer via a common carrier.
6. Exporter presents a time draft, with a maturity of, say, 90 days, to Bank EXP, which is then drawn on Bank IMP. Exporter also presents the order bill of lading, which passes
the ownership of the goods to Bank EXP.
7. Bank EXP delivers draft and documents to Bank IMP. A banker’s acceptance (B/A) with a maturity of 90 days is created.
8. Bank IMP returns the accepted draft to Bank EXP. The interest rate in the B/A market is used to calculate the present value in the discounting process.
9. When Bank EXP receives the B/A from Bank IMP, it either gives the B/A to the exporter or pays the exporter directly. In the latter case, Bank EXP can either hold the B/A on
its portfolio or sell it to investors in international financial markets.
10. The exporter can either wait 90 days for cash payment or immediately take the discounted cash value of the B/A less any bank charge for a discounting fee.
11. Bank IMP informs the importer that the documents have arrived. The importer either signs a promissory note to pay or follows through with some mutually agreed-upon
plan for paying Bank IMP, at which point bank Bank IMP releases the documents to the importer, which includes the bill of lading that gives title of the goods to the
importer.
12. When the goods arrive, the importer presents the bill of lading and collects the goods from the common carrier.
13. At maturity of the promissory note, the importer pays Bank IMP.
14. At the maturity of the B/A, Bank IMP pays the holder of the matured B/A. The investors (or Bank EXP, if it has kept the B/A on its portfolio) receive the face value of the
B/A.
Source: Adapted by casewriters from Geert Bekaert and Robert J. Hodrick, International Financial Management (Upper Saddle River, New Jersey: Pearson Prentice Hall, 2009), p. 660.
Exhibit 2 Sample Letter of Credit Charges, 2000
Credit Type Typical Charges
Import and domestic • 1/8 of 1% of transaction, minimum $75–$100

• Amendments: 1/8 of 1%, minimum $70
• Payment fee: ¼ of 1%, minimum $90 per draft
• Acceptance fee: minimum $75 per draft
• Discrepancy fee: $40
Export • Advising: $60

• Confirmation: minimum $75, subject to country risk conditions
• Amendments: $55
• Assignment of proceeds: 1/8 of 1% of transaction, minimum $75
• Discrepancy fee: $45
• Payment/negotiation: 1/10 of 1%, minimum $85–$95
Standby • Issuance fee: minimum $250, an annual percentage based on credit risk
considerations
• Amendment: minimum $250, risk-related fee
• Payment fee: ¼ of 1%, minimum $90 per draft
Source: Adapted from Carl A. Nelson, Import/Export: How to Get Started in International Trade, third edition (New York:
McGraw-Hill, 2000), p. 92.
Exhibit 3 Flow Chart of a Documentary Collection
1. Contract of sale
2. Delivery of goods
Importer Exporter
(Drawee) (Drawer)
3. Shipping documents and

Instructions for payment
5. Presentation
7. Payment
of documents
and receipt of
payment
Collecting/ Remitting
6. Payment
Presenting Bank
Bank
4. Documents and collection order
Source: Adapted from David Hennah, “Basics of International Trade,” Powerpoint presentation, August 2010, p. 6.
Exhibit 4 Top Ten Mandated Arrangers of Global Trade Finance, 2009a
Rank Lead Arranger Deal Value ($ mn) No. Deals % Share
1 China Development Bank 35,850 7 23.2

2 BNP Paribas 17,683 127 11.4
3 Citigroup 14,492 80 9.4
4 Societe General 10,314 107 6.7
5 Credit Agricole 5,681 75 3.7
6 HSBC 4,967 69 3.2
7 BBVA 4,481 244 2.9
8 Santander 4,412 47 2.9
9 Deutsche Bank 4,354 84 2.8
10 RBS 3,653 45 2.4
Total 154,781 800 100.0
Source: “Global Trade Finance Review Full Year 2009,” Dealogic, January 11, 2010.
a Excludes L/C, export insurance, and export working capital loans.
10
Endnotes
1 The World Trade Organization estimated that global merchandise trade for 2008 amounted to $15.8 trillion.
See World Trade Organization, World Trade Report 2009: Trade Policy Commitments and Contingency Measures
(Geneva: World Trade Organization, 2009), available at www.wto.org/english/res_e/booksp_e/anrep_e/
world_trade_report09_e.pdf, accessed August 2010.
2 United States Department of Commerce, International Trade Administration, Trade Finance Guide: A Quick
Reference for U.S. Exporters, April 2008, p. 3, http://trade.gov/publications/pdfs/tfg2008.pdf, accessed August
2010.
3 In a sample of 180 countries published in 2006, the median amount of time required for goods ready to ship
to be loaded on a ship was 21 days. The median amount of time between the goods’ arrival in port to delivery to
the purchaser’s warehouse was 23 days. See Simeon Djankov, Caroline Freund, and Cong S. Pham, “Trading on
Time,” World Bank Policy Research Paper 3909 (Washington DC: World Bank, 2006).
4
Except as cited, this section draws heavily upon U.S. Department of Commerce, International Trade
Administration, “Trade Finance Guide: A Quick Reference for U.S. Exporters,” April 2008, http://trade.gov/media/
publications/pdf/tfg2008.pdf, accessed July 2010.
5
The following description is drawn from Geert Bekaert and Robert J. Hodrick, International Financial
Management (Upper Saddle River, NJ: Pearson Education, 2009), pp. 559–560.
6 Mary Amiti and David E. Weinstein, “Exports and Financial Shocks,” NBER Working Paper 15556,
December 2009, pp. 7–8, available at www.nber.org/papers/w15556, accessed August 2010.
7 Harry M. Venedikian and Gerald A. Warfield, Global Trade Financing (New York: John Wiley & Sons, 2000),
p. 297.
8 Geert Bekaert and Robert J. Hodrick, International Financial Management (Upper Saddle River, NJ: Pearson
Education, 2009), p. 664.
9
International Chamber of Commerce, “ICC Banking Commission Exports Speaking on the Current
Situation,” excerpts from DCInsight, April-June 2009, in International Chamber of Commerce, Rethinking Global
Trade Finance 2009: An ICC Global Survey, March 2009, p. 27, www.iccwbo.org/uploadedFiles/ ICC_Trade_
Finance_Report.pdf, accessed July 2010.
10 International Chamber of Commerce, Guide to Export-Import Basics: Vital Knowledge for Trading
Internationally (Paris: International Chamber of Commerce, 2008), p. 163.
11
International Chamber of Commerce, Guide to Export-Import Basics: Vital Knowledge for Trading
Internationally (Paris: International Chamber of Commerce, 2008), p. 164.
12Carl A. Nelson, Import/Export: How to Get Started in International Trade, third edition (New York: McGraw-
Hill, 2000), p. 92.
13 Global Business Intelligence estimates, referenced in International Chamber of Commerce, Rethinking
Global Trade Finance 2009: An ICC Global Survey, March 2009, p. 20, fn. 5, http://www.iccwbo.org/
uploadedFiles/ICC_Trade_Finance_Report.pdf, accessed July 2010.
14 Survey of 44 banks in 23 countries over the October 2007-October 2008 period. FIMetrix, “IMF-BAFT Trade
Finance Survey: A Survey among Banks Assessing the Current Trade Finance Environment,” March 2009, p. 10,
http://info.publicintelligence.net/IMFBAFTSurveyResults20090331.pdf, accessed July 2010.
15
Euromoney Institutional Investor, “What Is Trade Finance?” n.d., www.tradefinancemagazine.com/
AboutUs/Stub/WhatIsTradeFinance.html, accessed July 2010. The International Chamber of Commerce
concurred, stating that “It is generally accepted that 80%-85% of trade transactions are settled on an open
account basis…” See International Chamber of Commerce, Rethinking Global Trade Finance 2009: An ICC Global
Survey, March 2009, p. 28, www.iccwbo.org/uploadedFiles/ICC_Trade_Finance_Report.pdf, accessed July 2010.
11
16
Survey of 44 banks in 23 countries over the October 2007-October 2008 period. FIMetrix, “IMF-BAFT Trade
Finance Survey: A Survey among Banks Assessing the Current Trade Finance Environment,” March 2009, p. 10,
http://info.publicintelligence.net/IMFBAFTSurveyResults20090331.pdf, accessed July 2010.
17
Mary Amiti and David E. Weinstein, “Exports and Financial Shocks,” NBER Working Paper 15556,
December 2009, p. 7, available at www.nber.org/papers/w15556, accessed August 2010.
18
Euromoney Institutional Investor, “What Is Trade Finance?” n.d., www.tradefinancemagazine.com/
AboutUs/Stub/WhatIsTradeFinance.html, accessed July 2010.
19 Christian Buhring-Uhle, Arbitration and Mediation in International Business: Designing Procedures for
Effective Conflict Management (The Hague: Kluwer Law International, 1996), pp. 3–37.
20 For evidence of this point, see, for example, Simeon Djankov, Rafael La Porta, Florencio Lopez-De-Silanes,
and Andrei Shleifer, “Courts,” Quarterly Journal of Economics 118 (2), pp. 453-517.
21 International Chamber of Commerce, Guide to Export-Import Basics: Vital Knowledge for Trading
Internationally (Paris: International Chamber of Commerce, 2008), pp. 166-167; Charles Chatterjee, Legal Aspects of
Trade Finance (London: Routledge, 2006), p. 159.
22 International Trade Centre, Arbitration and Alternative Dispute Resolution: How to Settle International
Business Disputes (Geneva: International Trade Centre UNCTAD/WTO, 2001), p. 47.
23
Fabio Bortolotti, Drafting and Negotiating International Commercial Contracts: A Practical Guide (Paris:
International Chamber of Commerce, 2008), p. 30.
24
John H. Willes and John A. Willes, International Business Law: Environments and Transactions (New York:
McGraw Hill-Irwin, 2005), p. 571.
25 John H. Willes and John A. Willes, International Business Law: Environments and Transactions (New York:
26 For details on each, see International Trade Centre, Arbitration and Alternative Dispute Resolution: How to Settle
International Business Disputes (Geneva: International Trade Centre UNCTAD/WTO, 2001), chapters 4 and 16.
27
Fabio Bortolotti, Drafting and Negotiating International Commercial Contracts: A Practical Guide (Paris:
International Chamber of Commerce, 2008), p. 94.
28
John H. Willes and John A. Willes, International Business Law: Environments and Transactions (New York:
31
The ICC’s rules can be found at www.iccadr.org, accessed August 2010. UNCITRAL’s conciliation rules
can be found at www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1980Conciliation_rules.html, accessed
August 2010.
12

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Trade Finance Instruments: Use and Providers

Another effort to harmonize international trade practice is the International Chamber of

In 1997, the International Chamber of Commerce launched DOCDEX (Documentary Credit

Exhibit 1 Flow Chart of a Letter of Credit

Importer 1. Importer orders Exporter

14. At maturity, investors

Exhibit 2 Sample Letter of Credit Charges, 2000

Credit Type Typical Charges

Import and domestic • 1/8 of 1% of transaction, minimum $75–$100

Export • Advising: $60

Exhibit 3 Flow Chart of a Documentary Collection

3. Shipping documents and

Exhibit 4 Top Ten Mandated Arrangers of Global Trade Finance, 2009a

Rank Lead Arranger Deal Value ($ mn) No. Deals % Share

1 China Development Bank 35,850 7 23.2

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