International Trade Terms

International Trade Terms - INCOTERMS
• Globalization has given impetus of international trade which is increasing by the day.
International trade involves multiple agencies, transportation agents, carriers as well as
Customs and Banks etc of the two countries involved in trade.
• Export and Import transactions are essentially dependant upon documentation and
information to flow across all related agencies smoothly.
• In fact it is essential for information to flow to the agencies involved in each sector in advance
before the physical goods arrive or move. The advancement of technology has helped
smoothen the transactions internationally across all countries.
• Similarly in the case of international terms of trade too, things have been smoothened and
standardized across all countries with the introduction of INCOTERMS published by ICC or
International Chamber of Commerce in 1936.
Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
INCOTERMS are the standard terms of trade that define the rights and obligations of the parties
involved in trade. It specifies the responsibility of the buyer and the seller by defining the
transaction and the cost aspects concerning the transaction and especially related to carriage,
custom duties as well as Insurance, etc.
Each Incoterms rule specifies:
 the obligations of each party (e.g. who is responsible for services such as transport; import
and export clearance etc)
 the point in the journey where risk transfers from the seller to the buyer
Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
INCOTERMS are divided into 4 groups
namely E,F,C & D.
• Group E
 This group contains only one Incoterm
namely EXW - Ex. Works. This term
represents minimum liability on the
part of the Seller. Seller&s
responsibility ends with delivering
goods at his factory doc. The rest of the
risk and expenses involved are borne by
the Buyer and would have to be carried
out through his agent at Origin. Can be
used for any transport mode, or where
there is more than one transport mode
Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
• Group F: Consists of FCA, FAS & FOB terms. Under
this category the Seller pays for the pre carriage
expenses at the Origin and the main carriage as well
as Destination charges are borne by the Buyer
 FCA - Free Carrier - Seller arranges pre-carriage
from seller’s depot to the named place, which
can be a terminal or transport hub, forwarder’s
warehouse etc. Delivery and transfer of risk takes
place when the truck or other vehicle arrives at
this place, ready for unloading – in other words,
the carrier is responsible for unloading the
goods. Can be used for any transport mode, or
where there is more than one transport mode
 FAS - Free Alongside Ship - Seller completes
Export formalities and delivers cargo alongside
ship. From this point onwards the risk and costs
including transportation and Insurance pass on to
the Buyer. Use of this rule is restricted to goods
transported by sea or inland waterway. Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
• Group F:
 FOB - Free On Board - Seller responsible
for inland transportation, Export clearance
as well as delivery cargo onboard the Ship.
Once Onboard the Ship the risk and
responsibility shifts to the Buyer who pays
the transportation, Insurance and
Destination Charges. Use of this rule is
restricted to goods transported by sea or
inland waterway.
Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
• Group C: Under this group the Seller arranges
for and pays for transportation but does not
take on the risk.
 CFR - Cost and Freight - Seller pays
transportation cost up to Destination Port.
Insurance and Risk are with the Buyer from
the time the Seller delivers cargo on board.
Use of this rule is restricted to goods
transported by sea or inland waterway
 CPT - Carriage Paid To - The seller is
responsible for arranging carriage to the
named place, but not for insuring the goods
to the named place. However delivery of
the goods takes place, and risk transfers
from seller to buyer, at the point where the
goods are taken in charge by a carrier. Can
be used for any transport mode, or where
there is more than one transport mode.
Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
• Group C:
 CIF - Cost, Insurance & Freight - Seller
pays for transportation and Insurance but
the Risk passes to the buyer as soon as
the cargo is delivered on board the ship.
Use of this rule is restricted to goods
transported by sea or inland waterway.
 CIP - Carriage & Insurance Paid to - Seller
pays transportation and Insurance. The
risk passes to the buyer when Seller
delivers cargo to carrier. Can be used for
any transport mode, or where there is
more than one transport mode
Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
• Group D: Under this group the Seller assumes all or most
of the risk and takes responsibility of delivery at
Destination upto the agreed point of delivery.
 DAF - Delivered at Terminal - The seller is responsible
for arranging carriage and for delivering the goods,
unloaded from the arriving means of transport, at the
named place. Risk transfers from seller to buyer
when the goods have been unloaded. Can be used
for any transport mode, or where there is more than
one transport mode
 DAP – Delivered at Place - The seller is responsible for
arranging carriage and for delivering the goods, ready
for unloading from the arriving means of transport, at
the named place. (An important difference from
DAT, where the seller is responsible for unloading.)
Risk transfers from seller to buyer when the goods
are available for unloading; so unloading is at the
buyer’s risk. Can be used for any transport mode, or
where there is more than one transport mode. Source: Secondary Sources on Google

International Trade Terms - INCOTERMS
• Group D:
 DDP - Delivered Duty Paid - The seller is
responsible for arranging carriage and
delivering the goods at the named place,
cleared for import and all applicable taxes
and duties paid (e.g. VAT, GST) Risk transfers
from seller to buyer when the goods are
made available to the buyer, ready for
unloading from the arriving means of
transport. This rule places the maximum
obligation on the seller, and is the only rule
that requires the seller to take responsibility
for import clearance and payment of taxes
and/or import duty. Can be used for any
transport mode, or where there is more
than one transport mode.
Source: Secondary Sources on Google

Credit Risk
• Risks are inherent in credit transactions; more so in international business. International
business is invariably riskier than the domestic trade. Credit risk. is not the same whether one
sells the goods in domestic market or in foreign market
• Export business has become highly risky as selling on credit has become very common.
Importers are sought after so it is but natural they dictate terms as there are many exporters
competing for the cake of international trade. Insolvency rate is on the increase. Balance of
payment difficulties has severely affected the capacity of many countries to pay the import
price. However, offering credit has become unavoidable to the exporters to face competition
• Two issues stand before the exporters:
 The exporter must have sufficient funds to offer credit to the buyers abroad and
 The exporter should be prepared to take credit risks
Source: Secondary Sources on Google

Credit Risk
Meaning of Credit Risk:
Once goods are sold on credit risks arising in realizing the sale proceeds are referred as credit
risks. Risk may arise due to inability of the buyers to pay on the due date. Alternatively, even if the
buyer makes the payment, situations may change in the buyer's country that the funds of 'buyer
do not reach the exporter.
An outbreak of war, civil war, coup or an insurrection may block or delay the payment for goods
exported. Whatever the reason may be, if funds are not received, sufferer is, finally, exporter.
Credit risk has assumed an alarming proportion on account of large volumes in international
business and sweeping changes in political and economic conditions, globally. In such a high risky
situation, credit risk insurance is of immense help to the exporters as well as banks that finance
the exporters.
Source: Secondary Sources on Google

Credit Risk
Organization covering Credit Risk:
There are more than 40 organizations covering the credit risk, all the world over. In India, we have
Export Credit Guarantee Corporation of India Limited to cover export credit risks. This is a
Government of India enterprise, with its Head office located in Mumbai, under the administrative
control of the Ministry of Commerce. Board of Directors representing Government, Banking,
Insurance, Trade and Industry manages this organization.
Types of Cover issued by ECGC:
They are broadly divided into four groups:
 Standard Policies: They are ideally suitable to exporters to cover payment risks involved in
exports on short-term credit basis
 Specific Policies: These policies are specifically designed to protect Indian exporters from the
risks involved in Exports on deferred payment contracts, Services rendered to foreign
parties, construction works and turnkey projects undertaken abroad.
 Financial Guarantee: In order to provide financial assistance to the exporters through
commercial banks and other financial institutions, ECGC guarantees various loans provided
by these financial intermediaries to the exporters. Due to the guarantees given by the ECGC,
commercial banks can liberally lend money to the exporters Source: Secondary Sources on Google

Credit Risk
Types of Cover issued by ECGC:
 Special Schemes: Special schemes consist of bundle of covers addressing the needs of banks
and Investors in foreign venture. These schemes are targeted at specific audiences such as
banks, investors in foreign countries and exporters taking up long term projects abroad,
covering distinct risks faced by them. Types of special schemes offered by ECGC include
transfer guarantee scheme (provided to safeguard banks in India against losses arising out of
confirmation of letter of credit*), overseas investment insurance (investment made by way
of equity capital or untied loan for the purpose of setting up or expansion of overseas
projects will be eligible for cover under investment insurance) and exchange fluctuation risk
(covers exchange fluctuation risk of exporters of capital goods, civil engineering contractors
and consultants)
*Letter of Credit: Explained on next slides
Source: Secondary Sources on Google

Letter of Credit – Meaning & Different Types
Letter of Credit is one of the safest mechanisms available for an Exporter to ensure he gets his
payment correctly and the importer is also assured of the Exporters adherence to his requirement
in terms of quality, quantity, shipping instructions as well as documentation etc.
Definition:
A letter of Credit is the Buyer’s Banker’s promise to the Bank of the Seller / Exporter that the bank
will honor the Invoice presented by the Exporter on due date and make payment, provided that
the Seller/Exporter has complied with all the requirements and conditions set by the Importer in
the said letter of credit or the Buyer’s Purchase Order and produced documentary evidence to
prove compliance, along with the necessary shipment related documentation.
Source: Secondary Sources on Google

Letter of Credit – Meaning & Different Types
Confirmed Letter of Credit:
A Letter of Credit is always sent by the Buyer’s bank to the Seller’s Bank or any bank that becomes
an advising bank. Normally the Seller’s bank becomes an advising bank when a normal LC is
received and it delivers or advises the buyer regarding the receipt of LC with no responsibility
towards it.
In case of a Confirmed LC, the Seller’s bank checks out the authentication of the LC from the
Buyer’s bank and confirms to stand responsible for negotiating, collecting payment from the
Buyer’s bank and making payment to the seller in line with the terms and conditions stipulated in
the LC. By adding confirmation to the LC, the Seller’s bank too becomes equally responsible to
make payment for the transaction under the LC.
Seller’s Bank in turn will charge and collect service charges from the Seller for the same.
Source: Secondary Sources on Google

Letter of Credit – Meaning & Different Types
Revocable and Irrevocable Letter of Credit:
Normally the Letter of Credits issued is irrevocable, which means that no single party can
unilaterally make any changes to the LC, unless it is mutually agreeable to both the parties
involved. However an LC is said to be revocable if the terms allow any one single party to be able
to make changes to the LC unilaterally. However it is in the interest of the buyer that he should
always insist on irrevocable Letter of Credit.
Sight LC:
When the LC is opened, stipulating the condition that, on presentation of the negotiable set of
shipping document by the seller as per the terms of the LC are made, the buyer’s bank will make
payment at sight meaning immediately to the seller’s bank subject to fulfillment of terms and
conditions of the LC being fulfilled, the LC is called Sight LC.
Source: Secondary Sources on Google

Letter of Credit – Meaning & Different Types
Future or Credit LC:
If the payment schedule under the said LC stipulates payment at certain future dates after
presentation of negotiable set of shipping documents by the Seller and fulfilling the LC terms and
conditions, such an LC is termed Future LC or Credit LC. It is quite normal for sellers to extend
credit of 30 days to 60 days under LCs. However the shipping documents would have to be
presented to the bank immediately so that they documents reach the buyer well ahead in time
before the consignment reaches the foreign shores and the buyer is able to clear the consignment
and take delivery.
Source: Secondary Sources on Google

UCPDC
• Uniform Customs and Practice for Documentary Credit (UCP -600) are the International
Chamber of Commerce`s Rules on Documentary Credits - that govern letter of credits
transactions worldwide.
• This code is maintained and published by the International Chamber of Commerce (ICC), and
consists of a set of rules agreed upon by the banking industry through the ICC Banking Council.
• All international banks providing documentary credit services subscribe to this code of
practice. As such, it is very important for sellers to understand these rules when receiving
payment by documentary credit.
Source: Secondary Sources on Google

UCPDC
• The following are important clauses of the Uniform Customs and Practice for Documentary
Credits (UCP 600) sellers should understand when receiving payment by documentary credit:
 Credits vs Contracts: A credit is a transaction that is separate from the sales contract. Banks
are in no way concerned with, or bound by, sales contracts between buyers and sellers.
Implication for sellers: Since they are separate transactions, the undertaking of a bank to
honour or negotiate payment under a credit is not subject to seller claims or defense based
on the credit’s underlying sales contract, nor on any other understanding that the seller may
have with the buyer. The undertaking of a bank is based solely on the credit itself
 Documents vs Goods, Services or Performance: Banks deals with documents, not goods. As
such, they do not physically confirm whether goods have been shipped, or the condition
that the goods were shipped in.
Implication for sellers: Since banks do not deal with goods, sellers must ensure that the
documents which they present are in exact accordance with the credit requirements. Banks
will reject documents containing information that is inconsistent with the information
required by the credit, irrespective of whether or not the seller in question has shipped the
goods.
Source: Secondary Sources on Google

UCPDC
• The following are important clauses of the Uniform Customs and Practice for Documentary
Credits (UCP 600) sellers should understand when receiving payment by documentary credit:
 Banks may refuse to honour or negotiate payment if there are discrepancies in the
documents: If after examination, a bank determines that the documents presented are not
in full compliance with the credit, it may refuse to honour or negotiate payment.
Implication for sellers: If a seller’s bank refuses to honour the credit, the seller must rectify
the document discrepancies within the time limits permitted. If this is impossible, the bank’s
irrevocable undertaking to pay the credit may become void. Usually, the best way to
proceed in such a case is for the issuing bank to approach the buyer and obtain a waiver on
the discrepancies to allow payment to be made.
 Disclaimer on the Effectiveness of Documents: A bank assumes no liability or responsibility
for the form, completeness, accuracy, genuineness, falsification or legal effect of any
documents, nor for any of the information contained in them.
Implication for sellers: Although this clause is a greater concern for buyers, it does place an
expectation on the seller to act in good faith.
Source: Secondary Sources on Google

Transit Risk Management
Source: Secondary Sources on Google

Cargo Insurance
Cargo insurance, commonly known as marine insurance, occupies an important position in
international business. It provides protection against unanticipated business to participate more
freely in the business and expands the scope of their operations. Cargo insurance protects the
traders and others against the risk of loss or damage to goods in transit from the seller to the
buyer. A trader engaged in international business can protect his interests by taking an
appropriate insurance policy from an insurance company
Parties Involved:
There are two parties:
1. The insurance company is also known as underwriter who assumes the liability as and when
loss occurs.
2. The insured is the one who procures the policy or becomes the beneficiary through the
insurance contract.
Source: Secondary Sources on Google

Cargo Insurance
Types of Losses
Source: Secondary Sources on Google

Cargo Insurance
Total Loss:
There are two types of losses:
Source: Secondary Sources on Google

Cargo Insurance
Total Loss:
There are two types of losses:
Source: Secondary Sources on Google

Cargo Insurance
Particular Loss:
There are two types of partial losses:
Source: Secondary Sources on Google

Cargo Insurance
Particular Loss:
There are two types of partial losses:
Source: Secondary Sources on Google

Cargo Insurance
Coverage and Institute Cargo Clause:
Institute cargo clauses are attached to a type of marine insurance that covers cargo in transit.
These clauses are to specify what items in the cargo are covered should there be damage or loss
to the shipment.
These clauses were developed by the International Chamber of Commerce as a means of
insurance for cargo while it is being shipped from the original location to its final destination.
Just like auto insurance, the higher premium you pay the more coverage you get. The three
clauses are briefly described the same way:
• Institute Cargo Clause A is considered the widest insurance coverage and you should expect to
pay the highest premium because you are asking for total coverage
• Institute Cargo Clause B is considered a more restrictive coverage and you should expect to pay
a moderate premium because perhaps you are only requesting the more valuable items in your
cargo to be covered or only partial cargo coverage
• Institute Cargo Clause C is considered the most restrictive coverage and you will probably pay
the lowest premium but your cargo coverage will be much less
Source: Secondary Sources on Google

Cargo Insurance
Marine cargo policy refers to the insurance of goods dispatched from the country of origin to the
country of destination.
Types of Marine Insurance Policies:
• Floating Policy: Large exporters may opt for an open policy, also known as a blanket policy,
instead of taking insurance separately for each shipment. An open policy is a one-time
insurance that provides insurance cover against all shipments made during the agreed period,
often a year
• Voyage Policy: A specific policy can be taken for a single lot or consignment only. The exporter
needs to purchase insurance cover every time a shipment is sent overseas. The drawback is
that extra effort and time is involved each time an exporter sends a consignment. With open
policies, on the other hand, shipments are insured automatically
• Time Policy: Time policy is generally issued for a year’s period. One can issue for more than a
year or they may extend to complete a specific voyage. But it is normally for a fixed period.
Also under marine insurance in India, time policy can be issued only once a year.
Source: Secondary Sources on Google

Cargo Insurance
Types of Marine Insurance Policies:
• Mixed policy: Mixed policy is a mixture of two policies i.e Voyage policy and Time policy.
• Named Policy: Named policy is one of the most popular policies in marine insurance policy.
The name of the ship is mentioned in the insurance document, stating the policy issued is in
the name of the ship.
• Port Risk policy: It is a policy taken to ensure the safety of the ship when it is stationed in a
port.
• Fleet policy: Several ships belonging to the company/owner are covered under one policy.
Where it has the advantage of covering even the old ships. Also the policy is a time based
policy.
• Single Vessel policy: In single vessel policy only one vessel is covered under marine insurance
policy.
Source: Secondary Sources on Google

Cargo Insurance
Claim Process:
Source: Secondary Sources on Google

Cargo Insurance
Documents Required for Claim Process:
Source: Secondary Sources on Google

Cargo Insurance
Exclusions:
Source: Secondary Sources on Google