INTERNATIONAL TRADE

PAYMENT

INTRODUCTION –
international trade, economic transactions that are made
between countries. Among the items commonly traded are
consumer goods, such as television sets and clothing; capital
goods, such as machinery; and raw materials and food. Other
transactions involve services, such as travel services and
payments for foreign patents (service industry). International
trade transactions are facilitated by international financial
payments, in which the private banking system and the central
banks of the trading nations play important roles.

International trade and the accompanying financial transactions

are generally conducted for the purpose of providing a nation
with commodities it lacks in exchange for those that it produces
in abundance; such transactions, functioning with other
economic policies, tend to improve a nation’s standard of living.
Much of the modern history of international relations concerns
efforts to promote freer trade between nations. This article
provides a historical overview of the structure of international
trade and of the leading institutions that were developed to
promote such trade.
International trade drives a country’s growth. Import-export
figures are one of the top contributors to a country’s gross

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domestic product. Thus, every country tries to strengthen its
global trade relationships with world leaders.
In the 18th century, Adam Smith brought the international trade
theory of comparative advantage analysis into the limelight. It
was founded on the the mercantilist thoughts of the British
School of Classical Economics. In Wealth of Nations, the author
instigated the need for specialized goods production amidst
extensive demand and scarce supply of resources. Later, the
classical economist David Ricardo proposed the principles of
comparative advantage.

INTERNATIONAL TRADE PAYMENT METHOD –

1-DRAFT
Commonly used in international trade, a draft is an
unconditional order in writing –  usually signed by the
exporter (seller) and addressed to the importer (buyer) or
the importer’s  agent – ordering the importer to pay on
demand, or at a fixed or determinable future date, the
amount specified on its face. Such an instrument, also
known as a bill of exchange, serves three  important
functions:
1. To provide written evidence, in clear and simple terms, of
financial obligation.
2. To enable both parties to potentially reduce their costs of
financing.
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3. To provide a negotiable and unconditional instrument
(that is, payment must be made  to any holder in due
course despite any disputes over the
underlying commercial  transaction.)
Using a draft also enables an exporter to employ its bank
as a collection agent. The bank  forwards the draft or bill of
exchange to the foreign buyer (either directly or through a
branch  or correspondent bank), collects on the drafts, and
then remits the proceeds to the exporters.  The bank has
all the necessary documents for control of the
merchandise and turns them over  to the importer only
when the draft has been paid or accepted in accordance
with the  exporter’s instructions. The conditions for a draft
to be negotiable are that it must be:
 In writing
 Signed by the issuer (drawer)
 An unconditional order to pay
 A certain sum of money
 Payable on demand or at a definite future time
 Payable to order of bearer
There are usually three parties to draft. The party who
signs and sends the draft to the  second party is called the
drawer; payment is made to the third party, the payee.
Normally, the  drawer and payee are the same person. The
party to whom the draft is addressed is the drawee,  who

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may be either the buyer or if a letter of credit was used,
the buyer’s bank. In case of  confirmed L/C, the drawee
would be the confirming bank.
Drafts may be either sight or time drafts. Sights drafts
must be paid on presentation or  else dishonored. Time
drafts are payable at some specified future date and as
such become a  useful financing device. The maturity of a
time draft is known as its usance or tenor. As  mentioned
earlier to qualify as a negotiable instrument, the date of
payment must be  determinable.  A time draft becomes an
acceptance after being accepted by the drawee. Accepting
a  draft means writing accepted across its face, followed by
an authorized person’s signature and  the date. The party
accepting a draft incurs the obligation to pay it at maturity.
A draft accepted  by a bank become a banker’s
acceptance; one drawn on and accepted by a commercial
enterprise is termed a trade acceptance. The exporter can
hold the acceptance or sell it at  discount from face value
to its bank, to some other bank, or to an acceptance
dealer.
Draft can be clean or documentary. A clean draft, one
unaccompanied by any other  papers, is normally used
only for non-trade remittances .Its primary purpose is to
put pressure  on a recalcitrant debtor that must pay or
accept the draft or else face damage to its credit

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reputation. Most drafts used in international trade are
documentary. A documentary draft,  which can be either
sight or time, is accompanied by documents that are to be
delivered to the  drawee on payment or acceptance of the
draft. Typically these documents include the bill of
lading in negotiable form, the commercial invoice, the
consular invoice where required, and an  insurance
certificate.  There are two significant aspects to shipment
goods under documentary time drafts  for acceptance.
First, the exporter is extending credit to the importer for
the usance of the draft. Second, the exporter is
relinquishing control of the goods in returns for a
signature on the  acceptance to assure it of payment.
It is important to bear in mind that sight drafts are not
always paid at presentation, nor  are time drafts always
paid at maturity. Firms can get bank statistics on the
promptness of sight  and time draft payments, by country,
from different bank publications. Unless a bank has
accepted a draft, the exporter must  ultimately look to the
importer for payment. Thus, use of a sight or accepted
time draft is  warranted only when the exporter has faith
in the importer’s financial strength and integrity.

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2-LETTER OF CREDIT
A Letter of Credit can be defined as “an undertaking by
importer’s bank stating that payment will be made to the
exporter if the required documents are presented to the
bank within the validity of the L/C”.
A commercial letter of credit is a contractual agreement
between a bank (issuing bank), on behalf of one of its
customers (buyer), authorizing another bank (advising or
confirming bank), to make payment to the beneficiary
(seller). The issuing bank, on the application of its
customer (buyer), opens the letter of credit, and makes a
commitment with the buyer to honor the credit on the
presentation of the documents, conforming to the terms
and conditions of the credit, by the beneficiary. Thus, the
issuing bank replaces the bank’s customer as the payee.

Parties Involved in Letter of Credit-

1. Applicant: The buyer or importer of goods.

2. Issuing bank:  The issuing bank’s duty to pay and to be
reimbursed from its customer becomes absolute upon the
completion of the terms and conditions of the letter of
credit. Under the law provisions the bank is entitled to
have a reasonable time after receipt of the documents to
honor the draft. The issuing bank’s duty is to provide a
guarantee to the seller that if complying documents are

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 presented by the seller, then the bank will make the
payment to the seller, and will only pay if these documents
comply with the terms and conditions set out in the letter
of credit. Typically the documents requested include a
commercial invoice, bill of lading or airway bill and an
insurance document; but there are many others. Letters of
credit only concerns with the documents, not with the
goods.
3. Beneficiary:  Beneficiary is normally the provider of the
goods or services and is entitled to payment as long as he
can provide the conforming documents required by the
letter of credit. The letter of credit is a distinct and
separate transaction from the underlying contract
(contract between seller and buyer). All parties deal in
documents and not in goods. The issuing bank is not liable
for performance of the underlying contract between the
buyer and seller. The issuing bank’s obligation to the
buyer-applicant is to examine all documents to insure that
they are in compliance with the terms and conditions of
the credit. To get the payment it is for the beneficiary to
provide all the required documents. If the seller-
beneficiary conforms to the letter of credit, the seller must
be paid by the bank.
4. Advising bank:  An advising bank is usually a foreign
correspondent bank of the issuing bank which advises the

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 seller-beneficiary. Generally, the beneficiary wants to use
a local bank to insure that the letter of credit is valid. In
addition, the advising bank is responsible for sending the
documents to the issuing bank. The advising bank has no
other obligation under the letter of credit. Therefore, if the
issuing bank does not pay the beneficiary, the advising
bank is not obligated to pay.
5. Confirming bank:  At the request of the issuing bank, the
correspondent bank may confirm the letter of credit for
the seller-beneficiary and obligates itself to insure
payment under the letter of credit. The confirming bank is
usually the advising bank.
6. Negotiating bank: The bank to whom the beneficiary
presents his documents for payment under L/C.

3-BILL OF LANDING
A bill of lading (BL or BoL) is a legal document issued by a
carrier (transportation company) to a shipper that details the
type, quantity, and destination of the goods being carried. A
bill of lading also serves as a shipment receipt when the
carrier delivers the goods at a predetermined destination.
This document must accompany the shipped products, no
matter the form of transportation, and must be signed by an
authorized representative from the carrier, shipper, and
receiver.

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 The bill of lading is a legally binding document that
provides the carrier and the shipper with all of the
necessary details to accurately process a shipment.1 It has
three main functions:
 It is a document of title to the goods described in the bill
of lading.
 It is a receipt for the shipped products.
 It represents the agreed terms and conditions for the
transportation of the goods.
Types of Bills of Lading
There are several types of bills of lading. Some of the most
common include:
 Inland bill of lading
 Ocean bill of lading
 Through bill of lading
 Negotiable bill of lading
 Nonnegotiable bill of lading
 Claused bill of lading
 Clean bill of lading
 Uniform bill of lading

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