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9.7 Trade documentation

Doing business as an exporter means there is an importer in some other country. If you do not know that importer well, you are unlikely to trust him or her in any business deal. Even if you do know that importer well, you will still be hesitant about fully trusting him or her because of the physical distance separating you and the difficulty of seeking redress for non-payment of goods. The importer will of course have similar concerns about you, bearing in mind the difficulties of communication and control which we discussed in earlier topics.

To counteract these problems, business people and financial institutions have evolved an elaborate system of documentation which protects the interests of both exporter and importer. In this section we deal with three of the most important documents, but you should realise that there are many others which cover the passage of goods from the place of manufacture to their arrival at the foreign destination. There is also a range of documents concerning insurance of the goods. You might appreciate the old joke that exports float on a sea of paperwork!

Let's examine the sequence of events for a hypothetical transaction in which a Malaysian importer buys a quantity of bandsaw blades from an Australian exporter. The sequence of events listed here is similar to that on pages 545-546 of Hill (2005).

Step 1
The Malaysian importer Lim Wing Farms Berhad places an order with the Australian exporter E J Holden and asks the Australian company to supply bandsaw blades under a letter of credit.

Step 2
E J Holden agrees to ship under a letter of credit and specifies price and delivery terms.

Step 3
Lim Wing applies to the Bank of Malaysia for a letter of credit in favour of E J Holden under the specified terms.

Step 4
The Bank of Malaysia issues a letter of credit in Lim Wing's favour and sends it to E J Holden's bank, the Commonwealth Bank of Australia .

Step 5
The Commonwealth Bank of Australia advises E J Holden of the opening of a letter of credit (see the next reading).

Step 6
E J Holden ships the bandsaw blades to Malaysia via the vessel Anro Temaset. An official of the ship's owner gives E J Holden a bill of lading (see the next reading).

Step 7
E J Holden presents a 90 day (or 60 or 30 day) draft (also referred to as a bill of exchange) drawn on the Bank of Malaysia in accordance with its letter of credit and the bill of lading to the Commonwealth Bank of Australia.

E J Holden endorses the bill of lading so title to the goods is transferred to the Commonwealth Bank of Australia .

Step 8
The Commonwealth Bank of Australia sends the draft and the bill of lading to the Bank of Malaysia. The Bank of Malaysia accepts the draft and the bill of lading, and promises to pay the accepted draft in 90 days (or 60 or 30 days).

Step 9
The Bank of Malaysia returns the accepted draft to the Commonwealth Bank of Australia .

Step 10
The Commonwealth Bank of Australia tells E J Holden that it has received the draft.

Step 11
E J Holden sells the draft to the Commonwealth Bank of Australia and receives payment by transferring ownership of the draft to the bank; that is, the firm effectively sells the draft at a discount. The discount pays the bank for its role in the transaction.

Step 12
The Bank of Malaysia notifies Lim Wing of the arrival of the documentation and Lim Wing agrees to pay the Bank of Malaysia in 90 days. The Bank of Malaysia releases the documents, including the bill of lading, which enables the importer to take possession of the shipment.

Note: The bill of lading is a two-sided document with the legalities of possession of the goods printed on the reverse. The bill of lading entitles the holder to possession of the goods.

Step 13
In 90 days (or less if the draft says so) Lim Wing pays the Bank of Malaysia.

Step 14
The Bank of Malaysia pays the Commonwealth Bank of Australia .

Note : There were four players in this transaction - the exporter, the importer and the two banks. This is the usual number of players but there is no reason why a third (or even a fourth) financial institution should not become involved. For example, this might apply where Lim Wing did not have ready access to a branch of the Bank of Malaysia.

Now complete this detailed story by reading the Hill (2005) version and viewing examples of the documentation discussed in the next reading

In your text

Hill 2005, Chapter 15, pp. 541-546.

Reading 9.4

Sample of documentation - letter of credit and bill of lading.

Activity 9.4

For further information on exporting, visit the following websites and make a list of useful resources they provide.

Make sure you take the opportunity to work through the international trade tutorial on the Tradeport website at http://www.tradeport.org/tutorial as this will be a very useful resource for rounding out your understanding of exporting and importing. For those who do not have immediate access to the web, the webmaster of this website has been kind enough to grant permission for some of the content to be reproduced in this Study Guide to give you a sample of what you can expect. This is available in the next reading. Please note that some of the detail in Reading 9.1 will be useful to return to when we discuss marketing in relation to pricing in the next chapter.

Reading 9.5

Tradeport 2004, 'Focusing on the details', Global Trade Tutorial , http://www.tradeport.org/tutorial/details/index.html, accessed 21 January 2005.

Reading 9.6

Tradeport 2004, 'Export finance', Global Trade Tutorial , http://www.tradeport.org/tutorial/financing/index.html, accessed 21 January 2005.

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