CHAPTER – II

LITERATURE REVIEW

2.1 AN ABSTRACT OF THE LITERATURE REVIEWED

2.2 OBSERVATIONS BASED ON ABSTRACT OF LITERATURE
REVIWED
2.3 INFERENCES
2.4 STATEMENT OF HYPOTHESES
 A Critical Study of International Trade Settlement Methods in Post Globalization Era

CHAPTER II: LITERATURE REVIEW

The research undertaken revolves around addressing and finding solution to
the research problem stated in the preceding chapter. In order to delve deeper into the
problem of research the researcher considered it necessary to make extensive review
of the literature pertaining to the cross border trade settlement related issues referred
in the problem statement.

The literature reviewed covers the publications of Foreign Exchange Dealers

Association of India(FEDAI), the Guidelines published by International Chamber of
Commerce (ICC), particularly a) Uniform Customs and Practices for Documentary
Credit (UCPDC) – ICC 500 and, b) Uniform Rules for collection-ICC 400,Study
Materials in the form of Text Books on international business, Various circulars
issued by RBI from time to time on their website, Instructions manual of nationalized
bank, economic survey reports, WTO trade statistics reports, International cases of
arbitration, statutory base of cross border trade and Review of research Papers.

It is expected that the contents of literature reviewed would throw light upon
Macro as well as Micro aspects of trade transactions, which further would expose the
research gap and justifies the novelty of topic.

In view of this the very purpose of this chapter is:

a) To Identify the Research Gap

b) To prove novelty of the topic of research
c) To Crystalize the Problem of Research

Against this background the organization of the chapter is as follows:

I. Abstract
II. Observations
III. Inferences
IV. Statements of Hypotheses

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2. 1 An Abstract of the Literature Reviewed:

2. 1. I. Publications:

A) Publications of Foreign Exchange Dealers Association of India

(FEDAI):
Foreign exchange dealers association of India has brought out various
publications in the form of study materials covering various areas in the Forex
management, the one such publication relates to Documentary Credit mechanism
which focuses right from Opening of Letter of Credit (L.C.), steps in Letter of Credit
(L.C.) advantages and disadvantages of Letter of credit. The study material helps in
understanding clearly mechanism of documentary credit vis a vis other trade methods
of settlement. The study material also refers relevant UCP clauses in the flow chart of
LC mechanism.

B) Guidelines published by International Chamber of Commerce

(ICC):

International Chamber of Commerce is a body represented by members of all

countries involved in cross border trade transactions. The members that constitute
board of ICC are Economists, Chartered Accountants, Bankers, International Business
Consultants and academicians.

The very motto of ICC is “Self-regulation by business” in conformity to the

above motto ICC has come out with various publications, spelling out guidelines for
cross border trade. All above publications are important, but the most important one is
Uniform Custom Documents for Credit, ICC publication 600 year 2002.

The above publication is currently been used and contains 46 clauses. Each of
the clauses relates to various issues involved when parties enter into cross border
trade. It means the settlement of the cross border trade is governed /controlled through
all above clauses.

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Since the title of the research is about understanding and critically examining
cross border trade transaction mainly through Documentary Credit. It was thought
necessary to make review of the literature in the form of publication ICC No. 600
UCPDC 2002.

a) Uniform Customs and Practices for Documentary Credit (UCPDC)– ICC 500
b) Uniform rules for Collection – ICC 400.

2.1. II The text books on International Business emphasizes more on

theoretical aspects of cross border trading like:

a. Evolution of trade
b. Reasons of International Trade
c. Attributes of Trade
d. Gains from the trade
e. Strategies of International Trade
f. HR aspects of International Trade
g. The role played by IMF, IBRD, WTO in international Trade
h. Exchange Rate Mechanism
i. Derivatives, hedging techniques etc.
j. Trade settlement methods in general and documentary credits in particular
k. INCO terms
l. Future of International Business

Thus macro environment of cross border trade is elaborately covered, in most of the
text books on international business.

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2. 1. III Various Circulars issued by RBI

RBI has comes out every year with various circulars. These circulars are
nothing but amendment to exchange control manual and enables reader to update his
knowledge. The handbook of Import and Export Procedure discusses procedural
aspects like obtaining IC code number or in opening general transactions etc. The
exchange control manual volume one covers rules and regulations framed by RBI for
cross border trade transactions originating from India and volume two is nothing but
compendium of forms.

2. 1. IV Instructions Manual of Nationalized Bank

The manual discusses operational aspects of the transactions carried out
pertaining to general banking as well as specialized areas of operations like forex. The
manual spells out procedural aspects of export-import transactions, documentation
carried out by the customs and internal guidelines of concern banks. However there
are no specific instructions or procedures to address or solve the problems related to
delay in settlement procedure.

2. 1.V Economic Survey Reports: of GOI from the year 2009 to 2014

The Economic Survey Reports are presented every year by Government of

India Ministry of Finance Department of Economic Affairs Economic Division. The
7th Chapter in Economic Survey Report is about International Trade. The researcher
has reviewed this particular chapter titled as International Trade for last six years i.e.
2009-2010 to 2014-2015 from the Economic Survey Report. With reference to global
events occurred during the year and its impact on the world trade.

The snapshot of impact of economic events on world trade is presented below:

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 A Critical Study of International Trade Settlement Methods in Post Globalization Era

2009-2010 2010-2011 2011-12 2012-13 2013-14

2008 2009 2009 2010 2010 2011 2011 2012 2012 2013

World Trade
Volume
2.8 (-)12.3 –10.7 12.0 12.7 6.9 5.9 2.8 2.8 3.0
(Goods and
Services

Imports Advanced
0.5 (-)12.2 –12.4 11.1 11.5 4.8 4.6 1.2 1.1 1.4
Economies

Emerging and
Developing 8.9 (-)13.5 –8.0 13.8 15.0 11.3 8.4 6.1 5.8 5.6
Economies

Exports Advanced
1.8 (-)12.1 –11.9 11.4 12.2 5.5 5.6 2.1 2.1 2.3
Economies

Emerging and
Developing 4.4 (-)11.7 –7.5 12.8 13.8 9.0 6.6 3.6 4.2 4.3
Economies

(Source: Economic Survey reports from 2009 to 2013 and International Monetary Fund (IMF), World Economic Outlook)

Thus, survey reports throw light on upheavals in the volume of world trade on
account of various economic events that occurred.

Apart from statistics regarding volume of world trade, the report of 2009-10
specifically relates to enhanced cost of the credit and the challenges faced by the
exporters and other parties to the credit.

The Contents of some of the reports clearly state conflicts between parties to
the cross border trade resulting into issues pertaining to settlement.

Apart from above the every successive survey report in general discusses
about trends structure, pattern and composition (commodity and currency wise) of
India’s foreign trade with that of world trade. Off late survey reports discusses
proposed policy measures for attracting foreign investments on the capital account
side of Balance of Payment.

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2.1. VI WTO Reports: International Trade Statistics 2015:

The report presents developments in the cross border trade with reference to
merchandise or non-merchandise transactions highlighting most significant trends in
last two decades. The statistical tables provides a source of secondary data for the
researchers carrying out research in international business.

2.1. VII International Cases of Arbitration

The literature regarding to Arbitration cases of London Court of Arbitration
(LCIA), Dubai International Arbitration Centre and the cases filed with ECC
(European Consumer Centers Network) elaborately discusses disputes that arise in
trade settlement process and only comments how, with increase in volume of cross
border trade, disputes cases are on rise without any regard to main causes of disputes

2.1. VIII WTO Dispute Settlement:

The contents cover dispute cases in a chronological order. The disputes pertain
to country agreement and the subject. The agreements means violation of WTO
agreements and dispute under subject means issues related to IPRs.

2.1. IX Statutory base of Cross Border Trade:

The statutory aspects of cross border trade is in the form of statutes governing
cross border trade transactions originating from India and international
statutes/guidelines which are in the form of ICC publications. These statutes are
FERA, FEMA, Custom and baggage rules Exchange Control Manuals etc. ICC
publications like UCPDC, Uniform Rules for Collection

a) FERA and FEMA

The exchange control regulation introduced in FERA in the year 3rd Sept
1939, at that time the purpose was to conserve foreign exchange required by British
Army to fight a world war. Later on exchange control provisions got a permanent
footing under FERA 73, under section 76, with an objective of conservation, optimum

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utilization and proper accounting of foreign exchange. The FERA was very stringent
till 1990, when Indian economy was not having foreign currency required to meet
even seven days imports with the introduction of LERMS and unified exchange rate
system as envisaged in the Rangrajan Committee report. The country started building
sufficient forex reserves. The earlier aspect of optimum utilization of foreign currency
(through regulation) under FERA was shifted to thrust on managing the foreign
currency resource and therefore for effective management FEMA 2000 came into
existence one of the significant feature of the FEMA is violation of FEMA today is
considered as civil offense unlike criminal offence under FERA.

b) UCPDC
The cross border trade transactions are governed by various sets of rules and
guidelines that provide statutory base for such transactions.

There are two set of rules: I: Statutes framed by the country from where
transactions has originated, II: guidelines framed by International Chamber of
Commerce

I: Statutes framed by the country from where transactions has originated: if

transaction is originated from India then following are various statutes that govern the
transactions:

a) FERA and FEMA

b) Handbook of import export procedure published by ministry of commerce

c) Foreign trade policy

d) Custom and baggage rules

e) Non-resident external rules 1971

f) Exchange control manual volume I and II

g) APDIR circulars and DBOD circulars brought out by RBI

Each of the above provides statutes so long as transaction is within the borders
of India.

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II: Guidelines framed by International Chamber of Commerce:

Once the transaction crosses the Indian border and waters then it is necessary
to evolve statutes commonly applicable for India and its trading partners however it
needs to be pointed out that every country participating in cross border trade has its
own traditions, values, taboos, culture custom and practises and therefore strictly
speaking there cannot be international law as such. In view of this all countries who
are members of ICC, Paris has come out with certain guidelines which are nothing but
are presented in the form of publications issued by International Chamber of
Commerce. One of such important publication is UCPDC. The latest version is UCP
600- ICC2007publication. When it comes to settlement of the transactions based on
Letter of Credit or Documentary Credit it is controlled by various provisions of UCP.
Though not mandatory the parties to the trade in their own interest have mutually
agreed to abide by these provisions. Any dispute arising out of trade transaction is
referred to ICC for their final verdict. The motto of ICC is self-regulation by business.
It means member countries have unanimously agreed to follow the provisions of
UCPDC towards early settlement of cross border trade. The latest provision i.e. UCP
600- ICC 2007 revision contains in all 39 clauses and verdict of the ICC is based on
adherence to the clauses and thus provides protective umbrella to the parties involved
in a trade. In all 175 countries are members of the ICC and such UCP provisions are
framed right from the year 1933 till today and are being revised after every ten years.
The revision is due in the year 2017.

As mentioned above due to heterogeneity of culture custom and practises

among the countries these provisions are called as guidelines instead of statutes.
There are in all twenty three such publications covering various cross border trade
transactions. One of such publication is Uniform Custom Practices for Documentary
Credits. In case of bills drawn on collection basis (Non LC transactions) ICC has
brought out publication known as U.R.C. i.e. Uniform rules for collection. Taking into
consideration the technological advancement the ICC has latest brought out
supplement to UCPDC–supplement for electronic presentation UCP Version 1.1.

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2. 1.X. Review of Research Papers:

The research papers reviewed have been presented below:

1. Alberto Behar and Anthony J. Venables (2010) [1] Transport Costs and
International Trade, Handbook of transport economics, 1-15.

The text of the above paper pertains to Transportation Cost i.e. logistic cost
along with insurance freight etc. and how cost escalation has a bearing on volume of
international trade.

The paper concludes with a comment that initiatives are required to be taken
so as to reduce the cost and boost the volume of trade.

It is observed that, the current research paper exclusively deals with logistic cost
related issues and volume of international trade however overlooks completely,
equally important aspect like selection of trade method and its impact on volume of
trade.

2. Liu Lan, Yue, Chengyan (2013), [2] Investigating the impacts of time delays
on trade, Food Policy, Elsevier, 108-114.

The text of the research paper pertains to the merchandise being transported.
The merchandise take different forms and broadly classified as perishable and
nonperishable commodities. The research paper focuses on perishable goods
particularly agro products. The paper concludes with a comment that as far as
perishable goods are concerned, simplification of custom procedure, would possibly
enhance trade flows of such goods.

It is observed that the research paper only considers custom as an attribute for
time delays. However overlooks mode of transport i.e. air shipment plays significant
role in fast movement of perishable commodities.

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Thus it is clear that the focus on time delays in trade settlement has aroused on
account of custom formalities on quality and price of the product rather than
inappropriate selection of the mode of transport as mentioned before.

3. Simeon Djankov, Caroline Freund, Cong S. Pham, (2006) [3] Trading on

Time, World Bank policy Research Working Paper.

The text of the research paper is based on World Bank data of 126 countries,
when cargo gets loaded at the workshop till On Board of the ship and cost
considerations with specific reference to its impact on export of perishable
commodities.

It is observed that the paper considers “cost” as important determinant in the

movement cargo from factory to the vessel. However the cost can be managed on
selection of appropriate INCOTERM viz Ex-Works (point of origin) when parties
enter into the trade contract.

The paper doses not comment about the cost effectiveness with reference to trade
method chosen e.g. settlement on account of Open Account Trading incurs relatively
less cost as compared to documentary credit and other methods. In fact inappropriate
selection of trade method has a direct bearing on settlements and subsequent delays
affecting volume of international trade.

4. Edgar Cudmore, John Whalley (2003) [4] Border delays and Trade
Liberalization, NBER (National Bureau of economic Research, Cambridge)
Working Paper Series. Takatoshi Ito and Andrew K. Rose, editors ,International
Trade in East Asia, NBER-East Asia Seminar on Economics, Volume 14, University
of Chicago Press

The text of the paper pertains to normative aspects of cross border trade and
harps upon how corruption affects welfare, the concept which implied in initiatives of
globalization. In support thereof the author has presented model based on Russian
data. The paper also considers delays due to complex issues in the custom clearance
formalities.

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It is observed that apart from logistical aspects and financial considerations

altogether different issue related to normative considerations is covered. However it is
felt that, it is very difficult firstly to obtain data and further to find yardstick to
measure normative aspects of cross border trade transactions irrespective of trade
settlement method mutually opted by the parties.

5. Xia Pan, Angappa Gunasekaran, Ronald Mcgaughey (2006) [5] Global e-

business: Firm size, credibility and desirable modes of payment, Article in
International Journal of Business Information Systems 1(4):426-438 · January
2006.

The text of the paper pertains to use of e-business in cross border trade
transactions. The contents of the paper consider size of the firm as an important
determinant in the choice of method of payment in today’s digital technology. The
paper predicts that for SME’s payment through e-business will be opted more in case
of Documentary Credit Method.

It is observed that use of digital is confined to flow of money and documents

only and not to the flow of goods. The aspect of payment and performance is the key
factor that has a bearing in trade settlement irrespective whether settlement is through
e- mode.

6. Roberto Bergami, 2009, [6] UCP 600 rules – changing letter of credit business
for international traders? Int. J. of Economics and Business Research, 2009
Vol.1, No.2, pp.191 – 203,

The text of the research paper is nothing but critical analysis of UCP 600 over
UCP 500 and discusses how UCP 600 is an improvement over earlier version to
facilitate trade settlement process.

It is observed that the article makes a comparative analysis of UCP 600

currently invoked with previous publications of ICC and highlights upon its impact on
traders in dispute settlement. It is pointed out here that LC is only one of the modes of
trade settlement, which is governed by UCP guidelines. Instead of comparing versions

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what traders are interested in knowing available methods and guidelines to select
appropriate method in a given situation.

7. Yan Hao, Ling Xiao Risk - Analysis of Letter of Credit - Based on Principles of
‘Independence’ and ‘Strict Compliance’ International Journal of Business and
Social Science Vol. 4 No. 9; August 2013

The text of the paper is really a case study analysis of the risks involved in LC
operations in spite the popularity of the mode.

It is observed that analysis of the risks really relates to possible discrepant documents
and assurance of payment and performance. The most crucial aspect of “Trust
Relation tells the Trade Method” is completely ignored.

8. Morris S. Rosenthal - Arbitration in the Settlement of International

Trade Disputes

The text of the paper pertains to really factors that differentiate international trade
from domestic trade that makes settlement relatively difficult due to complexities
dispute cases are referred to arbitration.

It is observed that, the text of the paper acknowledges growing arbitration and
simply states that understanding of techniques of arbitration by parties to the trade
would smoothen process of arbitration in general. The paper hardly comments upon
causes of arbitration and proactive measures to avoid cases of arbitration.

9. Cross-Border Dispute Resolution Mechanisms in Europe – Practical

Reflections on the Need and Availability European Consumer Centre Denmark
December 2009

The text of the paper pertains to procedural part in dealing with cross border trade
complaints and gives bifurcation of complaints in cross border trade of merchandise
and non-merchandise nature.

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 A Critical Study of International Trade Settlement Methods in Post Globalization Era

The paper acknowledges the significance of growing volume of dispute cases

however ignores the fact that wrong selection of method could be possible attribute of
disputes.

10. Dispute Resolution in a Global Economy: FTI Journal:

The text of the paper pertains to statistical data displaying alarming rise in
disputes and arbitration cases and points out following as main attributes for disputes
I. Opening of the economy resulting into free flow of goods and investments and II.
International treaties as well as III. Altogether different procedures and practices
followed in Forex market towards settlement to which domestic corporates are less
conversant with as compared to such practices in domestic market.

It is observed that apart from above three factors the key factors leading to disputes
due to operational aspects i.e. noncompliance of UCP provisions and subsequent
discrepant documents resulting into non settlement and dispute is completely
overlooked and thus takes one sided approach i.e. views issue of disputes at Macro
level rather than Micro

11. Cross Border Payment Perspective, September 2011, Research

Conducted by Glenbrook Partners in conjunction with the institute of Financial
Operations, with sponsorship by Earth port

The paper pertains to, inferences drawn on the basis of surveys conducted to
analyze and to arrive at ideal solution to the cross border trade settlement from the
view point of parties to the trade.

The paper also discusses, how opening of the economy has enhanced the
volume of trade and comments upon cost-effectiveness of the flow of payments and
goods which in turn results into settlement.

It is observed that, the paper disregards cost-effectiveness of methods rather

than modes in settlement process.

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 A Critical Study of International Trade Settlement Methods in Post Globalization Era

2. 2 Observations based on the Abstract of literature reviewed:

The following are the observations drawn by the researcher based on abstracts
of extensive literature reviewed and presented above.

1. The available literature of FEDAI Publications discusses characteristic features of

trade settlement methods like Open account, Advance Payment, Documentary
Collection, Consignment trading as well as guarantees which special emphasis on
procedural aspects of Documentary Credits “without regard to comparative study
of these methods and complexities involved in execution of documentary
credits.”

2. The ICC publications on Documentary credits viz UCPDC merely states various
clauses and how adherence to these clauses would ensure smooth settlement without
any guidelines in case settlement is delayed due to non-adherence of clauses. Even
literature reviewed on arbitration cases is about the number of cases and the dispute
settlement mechanism etc. without any regard to analysis thereof.

3. The literature on international business is more about origin, history and growth
and theories related to international business but very remotely cover methods of
settlement without critical analysis thereof.

4. The WTO reports are compilation of the Volume of world trade data with
interpretation of trends however without any intuitive analysis of World trade
data.

5. The literature related to arbitration cases elaborately discusses disputes that arise in
trade settlement process and shows dispute cases are on rise without any regard to
root cause of disputes etc.

6. The statutory base that governs the cross border trade transactions pertains to
statutes framed by country from where transaction is originated and uniform statutes
in the form of guidelines of ICC. In either case i.e. FEMA, FEDAI, Custom Baggage
rules and the literature related to ICC publication in the form of UCPDC guidelines,

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is all without any reference what so ever, as regards how at times violation of rules
and regulations leads to subsequent delays in settlement process and eventual
disputes.

7. Some of the literature in the form of research papers is about the logistic aspects
involved in the movement of the goods and the role played by clearing and
forwarding agents with focus on International commercial terms, without offering
remedial measures that may cause in the flow of goods resulting delay and non-
settlement.

In the literature review process the researcher has come across case studies
describing complexities and problems faced by the parties however these are only
from the viewpoint of academic elements involved therein and none of the case
spells out measures to be initiated by parties to the trade towards early
settlement.

2. 3 Inferences:

The following are the inferences drawn by the researcher in the light of the
observations and abstract of literature reviewed.

The reviewed literature emphasizes more upon macro aspects of cross border trade
with less emphasis on micro aspects of trade settlement process

The macro aspects in the literature reviewed are summarized as under:

a) Impact of globalization process in the form of rise in volume of world trade

b) The rise in world trade and subsequent rise in International Trade Disputes

c) The various international trade settlement methods adopted by parties to the trade.

The macro aspects stated above discusses rise in the volume of international
trade and subsequent rise in disputes in absolute terms and thus throws open a gap
which is widening with the volume of international trade with successive years.

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Therefore a critical study of cross border trade settlement as envisaged by the

researcher would go long way in bridging the gap identified i.e.:-

“Gap exhibiting paradox between rise in the volume of world trade and
corresponding rise in disputes”

The research undertaken is an attempt to bridge the above gap by exploring

measures to resolve the above paradox.

Interestingly it is inferred that hardly any of the literature reviewed refers to

operational measures expected to be initiated and implemented by parties in executing
flow of goods and corresponding flow of money which is precisely the Micro aspect
of trade settlement process hitherto unattended and unexplored in the literature
reviewed.

The Micro aspect implied above is summarized as under

i) The perception of individual Traders and Bankers and Parties to the trade
towards specific Trade Transaction
ii) Differing Perception of parties to the trade towards selection of Trade Method
iii) The Interpretation of clauses by the parties to the trade including bankers

The research aims to explore upon these Micro aspects instrumental to the
paradox observed at the Macro level which itself is sufficient to prove novelty of the
topic

However in order to crystalize the research problem from all its perspectives the
research undertaken emphasizes upon Micro aspects hitherto ignored against the
backdrop of Macro aspects observed in the literature reviewed.

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2. 4 Statements of Hypotheses:

After having identified gap of research and establishing novelty of the topic, it
would not be out of place here to make following propositions as hypothesis for the
research work undertaken.

Hypothesis: I

 Ho: External Factors do not influence selection of Trade Method.

 H1: External Factors do influence selection of Trade Method.

Hypothesis: II

 Ho: Documentary Credit is not frequently used Cross Border Trade

Method amongst all available methods.

 H1: Documentary Credit is frequently used Cross Border Trade

Method amongst all available methods.

Hypothesis: III

 Ho: Discrepant Document is not only the, most significant attribute

for the resultant delay in settlement

 H1: Discrepant Document is most significant attribute for the resultant

delay in settlement

The further part of the Exploration, led researcher to test the hypotheses on the
basis of descriptive study analysis with the help of appropriate statistical tools which
is covered in the concluding part of the chapter on Presentation Classification and
Analysis of Data.

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To sum up the present chapter clearly identifies the Gap of the research
followed by justification of the novelty of the topic and crystallization of the research
problem. The chapter concludes with statement of hypotheses.

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