***HELLO WRITER, PLEASE RESPOND TO THE DISCUSSION POST FROM THE CLASSMATE (COPIED & PASTED DOWN BELOW). THE DISCUSSION QUESTIONS THE CLASSMATE ANSWERED ARE FROM “TOPIC #2”. I ALSO ATTACHED THE CHAPTER POWERPOINTS FROM THIS WEEK JUST INCASE YOU NEED IT FOR CONTEXT/REFERENCE.***
Topic #2
What are terms of trade and why are they important? Please choose three different terms of trade and explain how they differ from each other. What term of payment do you feel would most beneficial to the exporter? Why is the letter of credit (LC) preferred?
*****DISCUSSION POST FROM CLASSMATE:
Hello Professor and class,
I hope everyone is doing well. The topic I’d like to discuss is number 2, the importance of terms of trade and delve into a few specific examples. Terms of trade are crucial in international commerce as they define the responsibilities, costs, and risks involved in the delivery of goods. By clearly outlining who handles what, they help prevent misunderstandings and ensure smoother transactions.
Let’s look at three common terms of trade and their differences:
1. FOB (Free on Board):
With FOB, the seller is responsible for getting the goods onto the ship designated by the buyer. The risk and cost transfer to the buyer once the goods are on board. This means the seller handles export duties, shipping costs to the port, and loading the goods, while the buyer takes over from there, covering ocean freight, insurance, and unloading.
2. CIF (Cost, Insurance, and Freight):
Under CIF, the seller covers the cost of the goods, insurance, and freight to the destination port. The risk still transfers to the buyer once the goods are on the ship, similar to FOB. However, the seller pays for and arranges transportation to the destination port and provides insurance, whereas the buyer handles unloading, import duties, and transportation to the final destination.
3. DAP (Delivered at Place):
With DAP, the seller is responsible for delivering the goods to a specified location in the buyer’s country, but not unloading them. The risk transfers to the buyer once the goods are ready for unloading. The seller covers all transportation costs to the specified location and export duties, while the buyer is responsible for import duties, taxes, and unloading.
Now, when it comes to the term of payment most beneficial to the exporter, the Letter of Credit (LC) is often the preferred choice. An LC is a payment guarantee from the buyer’s bank, assuring the seller that payment will be made once the specified conditions are met. This arrangement offers several advantages:
– Security: It reduces payment risk for the exporter, as a reputable financial institution guarantees the payment.
– Assurance: Exporters can confidently ship goods knowing that payment is secured if they comply with the LC terms.
– Credit Risk Mitigation: It minimizes the credit risk associated with the buyer, which is particularly beneficial in international transactions where the buyer’s creditworthiness might be uncertain.
Understanding and choosing the right terms of trade are essential for managing risks and costs in international trade. The Letter of Credit stands out as a preferred payment term due to the financial security it offers exporters, ensuring smoother and more reliable transactions.
Looking forward to hearing everones thoughts and insights on this topic!
-Julian
References:
Novack, R. A., Gibson, B., Suzuki, Y., & Coyle, J. J. (2020). *Transportation: A Global Supply Chain Perspective* (10th ed.). Cengage Learning.
