International trade practice and process

Chapter 3. Business Background 49

7) Collecting money from the bank or collecting goods at the port of destination.

Any step that goes wrong causes economic loss. The three salient features of international business: high risks, complexity and long business cycle will account for the dominance of direct requestive strategies in this study.

Chapter 3. Business Background 50

business company in order to attract the addressee if the company is not well known.

The trader states in the third paragraph what s/he wants to buy or sell. The addresser offers various benefits in the last paragraph to encourage communication. A good example can be found in a promise to supply detailed information to the addressee with the illocutionary point of request， whereby the addresser asks for a reply from the addressee (Writing Team, 1989: Unit 2).

Buyers who make enquiries to get information about the goods to be ordered, such as prices and catalogues, can initiate the process of international trade. An enquiry is called First Enquiry if it is sent to a supplier the buyer has not dealt with previously.

An enquiry is usually responded to by an offer, which is a promise to sell goods at a stated price within a certain length of time (Writing Team, 1989: Unit 5). An offer can be accepted, rejected, or responded to by a counteroffer, whereby the party who is offered the price can make changes by adjusting the price of the original offer, for example. If an offer or counteroffer is accepted, an agreement of sale is reached. A formal contract is signed if the order is large.

Before signing a contract, buyers and sellers can always go elsewhere to search for potential business partners and enter into business talks with them. A contract can be drafted by the first party, who sends two copies of the draft contract to the second party. The second party may sign the two copies of the draft contract and sends them back to the first party who subsequently countersigns the contract. Keeping one of the copies for record, the first party then sends the other copy to the second party, which ends the process of contract signing. Some firms require that potential business partners sign a confidentiality agreement before they enter into detailed business discussions that may expose their business secrets.

Payment in international business is highly risky (Writing Team, 1989: 139). The problem of payment arises when buyers and sellers are in different countries and shipment of goods takes weeks, even months. Should the buyer go to the seller’s country to make the payment, or should the seller go to the buyer’s country to collect the money? It is not fair that the seller has to wait for several months before s/he

Chapter 3. Business Background 51

collects the money, if the seller ships the goods first and is paid only after the buyer receives the goods. The seller may also suffer from non-payment when delivery is made before payment. It is not reasonable either if the buyer makes payment before seeing the goods. Moreover, the buyer has to wait several weeks to receive the goods if the buyer pays before the shipment of the goods. To solve these conflicts, agents are needed to arrange payments for exporters and importers in the importers’

countries. The generally used mode of payment is Letters of Credit or L/C for short.

An export Letter of Credit is “a contract between an importer and a bank that transfers liability for paying the exporter from the importer to the (supposedly more creditworthy) importer’s bank” (Crosse & Kujawa 1995: 478).

L/C is a common and secure method of payment, especially in new business relationships. The process of establishing a L/C is illustrated below:

(1) A buyer goes to his/her bank with all necessary documents to open an irrevocable L/C.

(2) The buyer’s bank asks its correspondent bank in the seller’s country to confirm the L/C and advises the seller of the establishment of the credit.

(3) If the seller is satisfied with the conditions set in the L/C, the seller prepares the goods and documents and arranges for the shipment of the goods.

(4) The documents standing for the title of the goods are forwarded to the seller’s bank with a bill of exchange.

(5) The seller’s bank pays the seller and forwards the documents to the buyer’s bank.

(6) The buyer’s bank notifies the buyer of the arrival of the documents.

(7) The buyer pays the bank, obtains the documents and collects the goods.

It takes several weeks for the buyer and seller to go through the process (Ball, &

McCulloch, 1985: 470-472). The buyer gets his/her goods and the seller his/her money probably at the same time.

Shipping is an important step in the process of international trade. Goods must be shipped to the buyer within the period stipulated in the L/C, and must be identical to

Chapter 3. Business Background 52

the specifications made in the L/C. Anything different from the specifications will result in non-payment by the seller’s bank and non-acceptance of the goods by the buyer. Shipment in international trade is usually made by ocean vessels. With the expansion of international trade, container service has become popular and regular.

Containers are large boxes that the seller fills with goods in his/her own warehouse.

The use of containers provides an efficient form of transport by road, rail and air (Ball & McCulloch, 1985: 481). Airfreight has a great impact on international business because of its high speed. Airlines guarantee overnight delivery from China to Europe or North America (Ball & McCulloch, 1985: 482). As such, goods shipped by ocean vessels requiring 30 days can arrive at their destination in one day if shipped by air. Such a speed requires payment before shipment, since the buyer can collect goods before payment if the payment is made by L/C.

The last step in the procedure of international trade is collecting goods and payment.

The seller prepares documents according to the specifications in the L/C. If every item in the seller’s documents is proper, the bank pays the seller on behalf of the buyer. The buyer then pays his/her bank for the documents when they arrive.

Subsequently, the buyer goes to the shipping company to claim his/her goods with these documents, which marks the end of the export and import procedure (Writing Team, 1989)