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International Commercial Transaction

Foundations of International Commercial Transactions
Lecture -01:
Introduction to International Trade

1. Meaning of International Trade: International trade means the exchange of goods,

services, technology, capital, or intellectual property across national borders. It takes place
when buyers and sellers are located in different countries and their transaction is
governed by more than one legal system.
2. Basic Idea of International Trade: International trade developed because no country is
fully self-sufficient. States differ in natural resources, labor cost, technology, climate,
capital strength, and industrial capacity. Therefore, countries export what they can
produce efficiently and import what others can produce better or cheaper.

Importance of International Trade:

A. Expands Market Access Beyond Domestic Borders: International trade allows businesses
to sell their goods and services in foreign markets instead of depending only on local
customers. This increases the number of potential buyers and helps firms grow faster. A
company operating in a small domestic market can earn much higher profits by exporting
internationally. It also reduces overdependence on one country’s economy. Access to
global markets encourages production on a larger scale. As a result, businesses become
more competitive and sustainable.
B. Increases Foreign Exchange Earnings: When a country exports goods or services, it earns
foreign currencies such as US Dollar, Euro, or Pound Sterling. These earnings are important
for paying for imports, repaying international debts, and maintaining economic stability.
Strong foreign exchange reserves help protect the economy during crises. They also
strengthen the value of the national currency. Countries like Bangladesh earn foreign
exchange through garments, remittances, and exports. Therefore, international trade is
vital for national development.
C. Encourages Competition and Innovation: International trade exposes domestic producers
to competition from foreign companies. This pressure encourages local businesses to
improve quality, reduce costs, and adopt better technology. To survive in the global
market, firms must become more efficient and innovative. Competition also prevents
monopoly and benefits consumers through better products. Many new inventions and
business models emerge because companies compete internationally. Thus, trade
promotes progress and modernization.
D. Creates Employment Opportunities: As exports grow, industries need more workers for
production, packaging, transport, banking, and logistics. This creates direct and indirect
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employment opportunities for people. Large export sectors such as garments, agriculture,
shipping, and IT employ millions worldwide. Increased employment improves income
levels and living standards. Trade also supports small businesses connected to supply
chains. Therefore, international trade plays a major role in reducing unemployment.
E. Improves Consumer Choice: International trade gives consumers access to a wide variety
of foreign goods and services. People can buy products that may not be available or
affordable in their own country. Imported goods often provide better quality, lower prices,
or more advanced features. Consumers can compare brands from different countries and
choose according to their preferences. This increases satisfaction and improves living
standards. In modern economies, consumer welfare greatly depends on open trade.
F. Facilitates Transfer of Technology and Know-how: Trade allows countries to gain access
to modern machines, technical skills, and advanced production methods. Foreign
companies often share expertise through investment, licensing, training, and joint
ventures. Local industries learn new management systems and innovation practices. This
helps developing countries modernize their industries more quickly. Technology transfer
increases productivity and product quality. As a result, trade contributes to long-term
economic growth.
G. Strengthens Diplomatic and Commercial Relations Among States: Countries that trade
regularly tend to build stronger political and economic relationships. Trade creates mutual
dependence, trust, and cooperation between nations. It often leads to treaties,
investment agreements, and regional partnerships. Strong commercial ties can reduce
conflict and encourage peaceful relations. Diplomatic relations also improve when nations
benefit from each other economically. Therefore, international trade is not only economic
but also strategic and political.

Elements of International Trade:

1. Multiple Legal Systems: International trade involves parties from different countries, and each
country has its own laws relating to contracts, taxation, customs, and dispute resolution. This can
create legal complexity when disagreements arise. Businesses must decide which law will govern
the contract. Example: A Bangladeshi exporter sells garments to a buyer in Germany. Bangladeshi
law and German law may treat contract breaches differently.
2. Different Currencies: Cross-border trade often requires payment in foreign currencies such as
USD, Euro, Yen, or Pound. Exchange rates may change between the contract date and payment
date, affecting profit or cost. Example: A Bangladeshi importer agrees to pay USD 10,000 for
machinery from China. If the Taka weakens before payment, the importer must pay more in local
currency.
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3. Cross-Border Transport: Goods must be moved from one country to another by sea, air, road,
or rail. Transport creates issues of delay, damage, freight charges, and delivery responsibility.
Example: Tea exported from Sri Lanka to United Kingdom may travel by sea container and face
port delays.
4. Customs Duties and Tariffs: Governments impose taxes or duties on imported goods. These
charges increase the final price and may affect trade decisions. Some countries also use tariffs to
protect local industries. Example: If United States imposes higher tariffs on imported steel,
foreign exporters become less competitive in that market.
5. Political and Exchange Risks: Trade may be affected by war, sanctions, sudden policy changes,
strikes, or currency restrictions. These risks are beyond the control of the contracting parties.
Example: A company exporting to Russia may face payment difficulties due to international
sanctions or banking restrictions.
6. Conflict of Laws Issues: When parties from different countries dispute a contract, questions
arise: Which country’s law applies? Which court has jurisdiction? Where will the judgment be
enforced? Example: A seller in Bangladesh and buyer in Singapore dispute delivery terms. The
contract may state that Singapore law governs and arbitration will occur there.

Major Participants in International Trade

i. Exporters: Exporters are sellers who send goods or services from their own country to
foreign buyers. They earn revenue by accessing international markets. Exporters must
comply with shipping, customs, and payment requirements. Example: Beximco exports
textiles and garments to Europe and North America.
ii. Importers: Importers are buyers who purchase goods or services from foreign countries
for domestic use or resale. They arrange payment, customs clearance, and local
distribution. Example: Unilever Bangladesh may import raw materials, chemicals, or
packaging inputs from abroad.
iii. Banks: Banks facilitate international payments, provide trade finance, issue letters of
credit, and reduce payment risk between buyer and seller. They are essential in cross-
border commerce. Example: HSBC often provides trade finance and documentary credit
services for exporters and importers.
iv. Carriers and Shipping Lines: Carriers transport goods by sea, air, rail, or road from one
country to another. Shipping lines specifically operate cargo vessels and containers.
Example: Maersk carries containers between Asia and Europe.
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v. Insurers: Insurers provide protection against risks such as cargo loss, damage, delay, or
political risk during international trade. They compensate financial loss under agreed
policies. Example: Allianz offers marine cargo and trade insurance coverage.
vi. Customs Authorities: Customs authorities are government agencies that control imports
and exports, collect duties, prevent smuggling, and enforce trade regulations. Example:
National Board of Revenue supervises customs operations in Bangladesh.
vii. Inspection Agencies: Inspection agencies examine goods for quality, quantity, safety, or
compliance before shipment or delivery. Their certificates often help in payment and
dispute avoidance. Example: SGS inspects cargo and issues quality certificates worldwide.
viii. Freight Forwarders: Freight forwarders organize shipment logistics on behalf of traders.
They arrange transport, warehousing, documentation, and customs coordination.
Example: DHL provides freight forwarding and supply-chain services.
ix. Arbitration Institutions: Arbitration institutions help resolve international commercial
disputes outside ordinary courts through neutral arbitration procedures. Their awards are
widely enforceable internationally. Example: International Chamber of Commerce
administers many international trade arbitrations.
International Trade Terms

Meaning of International Trade Terms: International trade terms are standardized words or
abbreviations used in contracts for the international sale of goods. They define the respective
obligations of the seller and buyer in relation to delivery of goods, carriage, insurance, customs
clearance, and allocation of risk and cost. These terms are widely used in commercial invoices,
purchase orders, sale contracts, shipping documents, and letters of credit.

Purpose of Trade Terms:

The main purposes of international trade terms are:

• To clarify the duties of buyer and seller;

• To determine who arranges transportation;
• To specify who pays freight charges;
• To identify who bears the risk of loss or damage;
• To allocate responsibility for export and import formalities;
• To reduce disputes arising from vague contract language;
• To facilitate smooth banking and shipping operations.
Common Traditional Trade Terms: Some frequently used trade expressions are:
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• FOB – Free On Board

• CIF – Cost, Insurance and Freight

• CFR – Cost and Freight

• EXW – Ex Works

• FCA – Free Carrier

• DDP – Delivered Duty Paid

Each term has a technical meaning and should not be interpreted casually.

INCOTERMS

Meaning of INCOTERMS: INCOTERMS means International Commercial Terms. They are

internationally accepted standard rules issued by the International Chamber of Commerce (ICC)
for interpreting trade terms used in sale contracts. The first version was introduced in 1936. Since
global trade practices evolve over time, the rules have been revised periodically. The current
widely used version is INCOTERMS 2020.

Nature of INCOTERMS: INCOTERMS are not automatically applicable law. They become binding
only when the parties incorporate them into their contract.

Example: “1000 Metric Tons Rice, CIF Singapore, INCOTERMS 2020.” Once inserted in the
contract, the selected rule determines obligations of the parties according to that term.

Functions of INCOTERMS: INCOTERMS primarily regulate: Place of delivery; Transfer of risk;

Division of transport costs; Insurance responsibilities; Export clearance; Import clearance (in
some terms); Documentary obligations.

Classification of INCOTERMS 2020:

INCOTERMS 2020 contains 11 rules. They are commonly grouped as follows:

Group E – Departure Term: EXW (Ex Works): The seller places goods at its premises or another
named place. The buyer bears almost all costs and risks from that point. Example: A factory in
Dhaka makes goods available for collection. The foreign buyer arranges pickup, export, shipment,
and import.

Group F – Main Carriage Unpaid: FCA (Free Carrier): Seller delivers goods to the carrier
nominated by the buyer at a named place.

FAS (Free Alongside Ship): Seller places goods alongside the vessel at the port of shipment.
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FOB (Free On Board): Seller loads goods on board the vessel nominated by the buyer. Risk passes
when goods are on board. Example: Under FOB Chattogram, the seller loads garments onto the
vessel at Chattogram Port.

Group C – Main Carriage Paid by Seller: CFR (Cost and Freight): Seller pays cost and freight to
destination port, but risk passes at shipment.

CIF (Cost, Insurance and Freight): Seller pays cost, freight, and minimum insurance. Risk still
passes when goods are shipped. Example: Under CIF Hamburg, seller arranges shipment and
marine insurance to Hamburg.

CPT (Carriage Paid To): Seller pays carriage to destination for any mode of transport.

CIP (Carriage and Insurance Paid To): Seller pays carriage and insurance to destination.

Group D – Arrival Terms: DAP (Delivered At Place): Seller delivers goods ready for unloading at
named destination.

DPU (Delivered at Place Unloaded): Seller delivers goods unloaded at named destination.

DDP (Delivered Duty Paid): Seller bears maximum responsibility including import duties and
delivery at destination.

Legal Importance of INCOTERMS:

1. Create Certainty in International Transactions: INCOTERMS clearly define the duties of buyer
and seller regarding delivery, cost, and risk. This removes confusion in cross-border contracts.
Example: Under CIF Hamburg, both parties know the seller pays freight and insurance to
Hamburg.

2. Reduce Litigation and Disputes: Because responsibilities are standardized, fewer

disagreements arise over shipping, insurance, or delivery obligations. Example: If goods are sold
under FOB Chattogram, it is clear that risk passes when goods are loaded on board the vessel.

3. Harmonize Trade Practices Across Countries: INCOTERMS provide one common language for
traders from different legal systems and cultures. The same term has the same meaning globally.
Example: A buyer in Japan and seller in Brazil both understand EXW in the same standardized
way.

4. Assist Banks in Documentary Credit Transactions: Banks handling letters of credit often
examine documents based on shipment terms stated in the contract. INCOTERMS help determine
which documents are expected. Example: Under CIF, banks may expect a bill of lading and
insurance document before payment.
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5. Help Courts and Arbitral Tribunals Interpret Contracts: When disputes occur, judges and
arbitrators use incorporated INCOTERMS to interpret the contract obligations of the parties.
Example: In a dispute over freight charges under CFR, the tribunal can refer to the INCOTERMS
rule to decide responsibility.

6. Save Time in Contract Drafting: Instead of writing long clauses for transport, delivery, and risk
allocation, parties can simply insert a recognized term. Example: Writing DAP Dhaka, INCOTERMS
2020 is easier than drafting several paragraphs on delivery obligations.

Differences between international trade terms and INCOTERMS:

Basis of
International Trade Terms INCOTERMS
Difference

General commercial expressions used in Official standardized trade rules

Meaning international trade to describe duties, price, published by the International Chamber
delivery, or shipping arrangements. of Commerce.

A broad concept that may include traditional

A specific codified system for interpreting
Scope trade usages, commercial abbreviations, and
selected delivery terms in sale contracts.
market practices.

May arise from mercantile custom, business Issued and periodically revised by the
Source
practice, industry usage, or contract wording. ICC.

Meanings may vary by country, trade sector, or Meanings are internationally uniform
Uniformity
custom unless clearly defined. when INCOTERMS are incorporated.

Becomes binding when expressly

Depends on usage, evidence, or agreement
Legal Status included in the contract (e.g., “FOB
between parties.
Chattogram, INCOTERMS 2020”).

Specifically allocates delivery obligations,

Used generally to facilitate trade
Purpose costs, risk transfer, and certain customs
communication and commercial dealings.
responsibilities.

FOB, CIF, landed price, net weight, shipment EXW, FCA, FOB, CFR, CIF, CPT, CIP, DAP,
Examples
period, trade discount. DPU, DDP, FAS.

Higher certainty because rules are

Certainty
Can be uncertain if not properly defined. standardized and internationally
Level
recognized.