Typical international trade transaction

Now that we have reviewed all the elements of an international trade transaction let us see how the whole process works in a typical case, sticking with the U.S. exporter and the French importer. The typical transaction involves 14 distinct steps. The steps are enumerated here.

1. The French importer places an order with the U.S. exporter and asks the American if he would be willing to ship under a letter of credit.

2. The U.S. exporter agrees to ship under a letter of credit and specifies relevant information such as prices and delivery terms.

3. The French importer applies to the Bank of Paris for a letter of a credit to be issued in favor of the U.S. exporter for the importer wishes to buy.

4. The Bank of Paris issues a letter of a credit and sends it to the U.S. exporter’s bank, the Bank of New York.

5. The Bank of New York advises the U.S. exporter of the opening of a letter of credit in his favor.

6. The U.S. exporter ships the goods to the French importer on common carrier. An official of the carrier gives the exporter a bill of lading.

7. The U.S. exporter presents a 90-day time draft drawn on the Bank of Paris in accordance with its letter of credit and bill of lading to the Bank of New York. The U.S. exporter endorses the bill of lading so title to the goods is transferred to the Bank of New York.

8. The Bank of New York sends the draft and the bill of lading to the Bank of Paris. The Bank of Paris accepts the draft, taking possession of the documents and promising to pay the now-accepted draft in 90 days.

9. The Bank of Paris returns the accepted draft to the Bank of New York.

10. The Bank of New York tells the U.S. exporter that it has received the accepted bank draft, which is payable in 90 days.

11. The exporter sells the draft to the Bank of New York at a discount from its face value and receives the discounted cash of the draft in return.

12. The Bank of Paris notifies the French importer of the arrival of the documents. She agrees to pay the Bank of Paris in 90 days. The Bank of Paris releases the documents so the importer can take possession of the shipment.

13. In 90 days the Bank of Paris receives the importer’s payment, so it has funds to pay the maturing draft.

14. In 90 days the holder of the matured acceptance (in this case, the Bank of New York) presents it to the Bank of Paris for payment. The Bank of Paris pays.

Comprehension and Discussion Questions

1. What is the first step involved in the typical transaction?

2. Does an exporter or importer agree to ship under a letter of credit?

3. What does the bank of New York advice the US exporter?

4. What is the term of the time draft of the US exporter?

5. What bank notifies the French importer of the arrival of the draft?

6. When does the Bank of Paris have funds to pay the maturing draft?

7. What is the last step in the typical transaction?