7. Methods of payment in foreign trade

The flow of money across national borders is complex and requires the use of special documents. Foreign trade usually is financed on credit. Exporters rarely get paid right away because of collection and foreign-exchange problems.

The basic methods of payment for exports are:

• Cash in advance

• Letter of credit

• Documentary collection or draft

• Open account

• Other payment mechanisms, such as consignment sales or countertrade.

If payment is to be made by a documentary collection or draft, also known as a commercial bill of exchange, the drawer (exporter) instructs the drawee (importer) to transfer the face amount on the bill of exchange at a given time. If the exporter requests payment be made immediately, the exchange instrument is called a sight draft. If payment is to be made later, for example, 30, 60, or 90 days after delivery, the instrument is called a time draft.

A letter of credit obligates the buyer's bank in the importing country to accept a draft presented to it, provided the draft is accompanied by the prescribed documents. A documentary letter of credit stipulates that payment will be made by the bank on the basis of the documents, not on the terms of the sale.

A letter of credit can be revocable or irrevocable. A revocable letter of credit is one that can be changed by any of the parties involved. An irrevocable letter of credit is a letter that cannot be cancelled or changed in any way without the consent of all parties to the transaction.

A letter of credit transaction may involve a confirming bank in addition to the parties mentioned above. With a confirmed letter of credit, the exporter has the guarantee of a bank in the exporting country as well as the guarantee of the importer's bank.

An exporter may sell on an open account. This means the necessary shipping documents are mailed to the importer before any payment from or definite obligation on the part of the buyer. An exporter ordinarily sells under such conditions only if it successfully conducted business with the importer for an extended time.

8. Barriers to international trade

Governmental attitudes toward foreign trade vary significantly from one country to another and are reflected most visibly in the degree to which they restrict trade.

The most common barriers to trade include tariffs, quotas, boycotts, monetary barriers, and standards.

A tariff, or duty, is a tax imposed by a government on goods entering its borders. If collected by the exporting country, it is known as an export tariff; if collected by a country through which the goods have passed, it is a transit tariff; if collected by the importing country, it is an import tariff.

A quota is a monetary or quantity limit placed on a particular product coming into a country. Products limited by quotas may be subject to tariffs as well. A specific type of quota that prohibits all trade is known as an embargo. Although embargoes are generally imposed for political purposes, the effects may be economic in nature.

A boycott is a restriction against the purchase of goods from a particular country primarily for the purpose of protecting domestic industries. Boycotts can also be used as a punitive measure.

The most restrictive monetary barrier is a blocked currency. A nation's currency is considered blocked when it has no value in the foreign exchange market or when the government will not allow it to be traded for hard currency and taken out of the country.

Hard currency (such as the dollar, pound sterling, and yen) is backed by gold reserves, is less subject to sharp fluctuations in value, and is easily convertible to other currencies. Currencies in a number of countries are currently blocked because they are not members of the International Monetary Fund (IMF). When a country does not belong to the IMF it is difficult to establish the value of its currency in relation to other currencies.

Governments usually establish various standards to protect health, safety, and product quality. Sales of everything can be controlled by government standards. Countries commonly have set classifications, labeling, and testing standards in a manner that allows the sale of domestic products but inhibits the sale of foreign-made products.