Foreign trade
Chapter 1 Distribution Channels
1.Direct and indirect channels in distribution
Company in Belgium lets another company (the channel) take care of their export. If
that second company is based in Belgium we are talking about an indirect channel.
If it is based in the country where you are exporting to, then it is a direct channel
because the company is in direct relation with the country, they help you export to.
Determinants
- International marketing objectives
- Manufacturer’s resource & experience
- Availability and capability of intermediaries
- Customer + product characteristics
- Environment and legislation
2.Direct channels
Exporting without the help of a third party
- Home sales (exception)
Sales are made by members of your company by automatic requests from
abroad
Example: internet sales, trade fairs, export manager
- Representative office
Company is not prepared to invoice in local currency, pay taxes locally or
invoice with VAT and finance locally
è Not a permanent location, temporarily based, although based in another
country they are still part of the Belgium entity, stable and not risky
- Foreign branch
Company is prepared to finance locally but does not want separate legal
entity with separate capital, accounts, and liability
è Long term based, control in Belgium and is still part of the mother
company, no legal or capital autonomy
- Foreign subsidiary
Company is prepared to finance locally and wants a separate entity with
separate capital, accounts, and liability
è Separate autonomous legal entity
è Long term based, confident about foreign market, good client base in
country, dependent on mother company, legal autonomy
Exporting with the help of a third party
Company needs a third party to help them find customers
Commercial agent
Self-employed intermediary that has authority to negotiate sales of goods on behalf
of company
è Promoting your product, but you make the sales, make sure to not have
any competitors working with the commercial agent
Distributor
Buys products from your company and resells on foreign market on his own terms
è Direct contact with client, distributor is one of your customers and needs
guaranty of supply and a contract, sole or exclusive, based on trust and
loyalty
è Long-term based, payment by profit margin, limited opportunity to get to
know the foreign market
3.Indirect channels
With a third exporting party
Export management companies
Acts as export department for one or several manufacturers of noncompetitive
products
è Spreading administration, sales and transport costs, minimal growth
Export trading companies
Identify needs of foreign customers and act as independent distributors, arranging
transactions between buyers and sellers
è Offer services like warehousing and financing
Export commission agents
Represents foreign buyers such as import and industrial firms seeking to obtain
products matching buyer’s requirements
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è Buyer pays commission, no credit risk for company, no feedback on
products, complicated to form a long-term loyal relationship with customers
Cooperative exporters
Manufacturers who sell products of your company together with their own, products
cannot be in competition, complimentary activities based on trust
Carrier owns most of the products
è Pro: low-cost improvement
è Con: quality control
Rider owns the last product needed
è Pro: no investment
è Con: dependent on commitment
Chapter 2 Incoterms
Incoterms rules explain eleven of the most commonly used trade terms on business-
to-business practice.
è 11 international rules to explain who will be responsible for organizing
transport, insurance, costs and risks, administration documents, checking
and packaging, export/import clearance
è Not included: property rights, breach of contract, terms of payment, force
majeure.
4.Categories
E buyer takes care of everything, transport, documentation,…
F buyer pays main transport
C seller pays main transport
D seller takes care of everything
5.Rules for any mode of transport
EXW Ex Works
FCA Free Carrier
CPT Carriage Paid To
CIP Carriage and Insurance Paid To
DAP Delivered at Place
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DPU Delivered at Place Unloaded
DDP Delivered Duty Paid
6.Rules for sea and inland waterway transport
FAS Free Alongside Ship
FOB Free on Board
CFR Cost and Freight
CIF Cost Insurance and Freight
Most incoterms must mention a place to avoid confusion or misunderstanding
Example: FOB Brussels airport
7.When to use which incoterm
- Sometimes you are unable to take care of transportation for ex., so the choice
is made for you
- Sometimes you have a need for control
- Some countries prefer a certain incoterm
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- Depends on mode of transport
- Depends on use of container or not
- No seller will give you transport for free, if the buyer is not charged extra for
the transport the seller is taking care off, it has been included in the price.
- A trading company that will buy products from one country to sell them to
another makes two contracts with two incoterms included for both countries
è An incoterm for cross-trading does not exist yet
Chapter 3 Modes of transport
8. Ocean transport
Liner vs Tramp
- Liners
‘Line voyages’
Ships, called liners, follow a precise schedule and strict routes
- Tramps
Service available at short notice with no strict schedules and routes
Can be on- and offloaded at any port
Types of cargo
- Container
- Bulk
Not packed, transported in large quantities
- Roll-on-roll-off ship
Containers
- Most used
- Streamlined process
Lift-on-lift-off
- Standardized size of containers
TEU = Twenty-Foot Equivalent Unit
- Variations
Open top, cooler, tank (liquids)
Dry bulk
- Used for homogenous raw materials
- Transported in vessels
- Ex sand, minerals, grains
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Break bulk
- Loaded individually on pallets
- Packaged not containerized
- Pro: less paperwork, universal
- Con: more space, labor intensive, security issues
- Ex metal and forest products
Liquid bulk
- Tanks
- Ex petroleum derivatives, crude oil, chemicals
Roro
- Rolling material
- Ex: transport of vehicles
9. Air transport
High value, perishable or urgent goods
Air waybill – Warsaw convention
Evidence of contract of carriage, releasing goods to named consignee
10.Road transport
- Trading on European continent
- Crucial for products of daily need
- Mostly shorter distances
- Often multimodal transport
- Road waybill – CMR convention
Full truckload
- Most efficient
- Most expensive
Less than truckload: groupage
- Least expensive
- Most time-consuming, damage-sensitive
Partial truckload
- Compromise
Cross docking distribution center
- Distribution center between suppliers and customers
- Goods are unloaded, screened, sorted, reloading
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11.Rail transport
- Ideal for bulk
- Expensive transport
- Medium to long distances
- Rail waybill – CIM Convention Internationale des Merchandises par Chemin de
Fer
12.Multimodal
Load-on load-off
Transport of containers on ships, railway wagons or trucks
Roll-on roll-off
Vehicles (trucks and railway wagons) on ships
Rail and road
Trucks on trains, The Alps
13.Freight forwarders
Specialized company that sells logistical services and offer assistance
- Advice and negotiation
- Documents, legal administration, customs
- Groupage
Freight forwarder can combine two shipments from different companies going
to the same destination
- Exporter/importer remains liable
Advantages:
FF can solve problems with for ex. customs more easily
Disadvantages:
Extra cost
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Chapter 4 Impact of foreign trade on people and nations
14.Influence
The Phoenicians
o First seafarers
o Import trade routes and transit
o Long-lasting impact on the alphabet
The Americans
The Chinese
o Belt & road initiatives
o Infrastructure helping improve trade
15.Wealth
Foreign trade has helped create jobs but also destroyed some.
è According to the EU, international trade created 36 million jobs outside the
EU
è According to some trade unions it is better to create barriers for global
competition, foreign trade has caused some jobs and sectors to be at risk
In developing countries:
o Some sectors are at risk because of global competition
o Jobs were created due to export and import opportunities
è International trade and economic growth correlate due to competition,
economies of scale and innovation
16.Quality of jobs
Example: evolution of textile industry:
UK, USA, Japan, China, Ethiopia, …
è On a macro level, foreign trade has created a race to the bottom, changes
are slow
è On a micro level, job quality has improved, employees receive a higher
pay and have better working conditions due to the pressure of
multinationals
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17.Availability
Increased choice for consumer
è Criticism: choosing products coming from the other side of the world
è International trade is based on offer and demand and will turn to products
with a comparative cost advantage
Example: beans from Kenya being exported to Belgium
Business to Business markets are key to provide complex products and creating
global value chains by opting for the comparative advantage.
Examples of complex products: Cadavers, oil, rare minerals, …
Chapter 5 Protectionism
Definition
Cambridge Dictionary
“The actions of a government to help its country's trade or industry by taxing goods
bought from other countries”
Example protectionist country: United States under Trump.
è Combats against multilateralism and individual nations
è Average U.S. tariff on Chinese imports increased from 3% to 20%
è USA under Biden
o Almost nothing changes
o Limitations to technology
o Key difference are allies
è The Biden approach does not look like a retreat from Trump but rather a
professionalization of it
European Union
- Strategic autonomy
o Medical equipment
o Microprocessors
o Telecommunication networks
o Reducing “strategic dependencies”
- Restricted trade deals
o MERCOSUR
Trade union between Brazil, Argentina, Paraguay, Uruguay, Venezuela
o Australia
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- Environmental protectionism
o Carbon Border Adjustment Mechanism
China
Protector of free trade or the reason for mounting protectionism?
- Encourage local manufacturing activities
- Higher tariff
o Electronics
o Automotive
o Chemicals
- Lower tariff
o Scrap iron
o Naphtha
o Gemstones
18.Reasons for protectionism
Domestic Jobs
“Bringing back our factories”
è High tariff on Chinese products only increased export on same product
from other countries
è Multiple companies like Samsung, Nike, Adidas, … moved their production
from China to Vietnam due to rising production costs
è USA has not reclaimed manufacturing jobs
Nearshoring: Protecting sectors with experience
è USMCA Agreement
Friendshoring: Trust
US trade with China
- Number of industries in the US that use steel in production process outnumber
the industries that produce steel by 80 to 1.
- Indirect job losses
- Example: Steel industry
o 25% tariff on import of steel applied worldwide
o Consequence is the decline of employment in steel industry
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New industries
Tariff protection on infant industries enables industry to grow, become more efficient
in long run and protects them from global competition
è Not advantageous for local customers
è No space for innovation
è Needed in developing countries to diversify the economy
Example: Japanese cars
National defense
Protecting industries based on national security threats
19.Different tariff forms
Import tariff
Consequences are higher prices for both foreign and local products.
Import quota
Governmental restriction on the quantity of imported goods within a specific period of
time to protect domestic producers from foreign competition
Forbidden under the WTO – Article XI of the general agreement on tariffs and trade
Quota vs Tariffs
- Flexibility
- Monopolies
- Revenue
- Discrimination
- Market system interference
Tariff-rate quotas TFQ
A pre-determined quantity of a product is allowed to be imported at lower import duty
rates (in-quota duty) than the usual duty rate for that product
20.Standards and regulations
International Organization for Standardization
22.000 standards in 300 categories
Example in automotive industry:
Regulations on child seats, license plates, airbags, etc.
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Chapter 6 Multilateralism and the WTO
Multilateralism = refers to an alliance between multiple countries with a common goal
è free trade
21.World Trade Organization
1930: the Great Depression led to protectionism measures
è General Agreement on Tariffs and Trade (GATT)
è 1995 World Trade Organization (WTO)
o 164 countries
Principles
1. Most Favored Nation
Some countries have more bargain power than others: China > Oman
- Same treatment to all
è If you want to give an import tariff to a specific country, the MFN principle
states that you have to apply the tariff to all country members in the WTO
- Includes services, intellectual property rights, etc.
- Exceptions
o Free Trade Agreement
o Advantages to developing countries
2. National treatment
- Same treatment for local and international products
- Local producers can’t have an advantage that foreign producers don’t receive
- Includes services, investments, trademarks
3. Predictability
- Stability is essential
- Clear and transparent policies and trade practices
- Example: promise not to raise import tariffs: import ‘ceilings’
4. Dispute settlement
- ‘Specific trade concerns’
- Avoiding conflicts not settling
o Example dispute:
EU banned and refused to import hormone-treated beef coming from
the US
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Evolution
Focus on import tariffs ® all kinds of protectionism
Focus on goods ® everything related to trade
GATT Trade rounds:
Negotiations on multiple subjects take place
1. Geneva Tokyo
Success with concessions by nine major industrial markets with
harmonization
è Concerns:
o Free rider’s problem
An individual making use of a public good / service without paying for it
o Different forms protectionism
o Loopholes or system deficiencies: Agriculture and textile
o Confusing legislation
2. Geneva Uruguay
Pushed by United States due to its bigger market, capitalism, …
Addressing concerns of Tokyo round
- Trade liberalization
o Stop quotas on textile & agriculture industry
o Government Procurement Agreement
- Institutional reforms
o WTO 01/01/1995
- Trade rules
o Antidumping
Companies choosing a dumping price based on cost and profit,
consequences are duties or a minimum price
o Agreement on subsidies
Governments offering subsidies (financial contribution) to companies to
give them a cost-based competitive advantage allowing them to sell at
a lower price.
o Safeguards
When an industry is affected by an unexpected increase in import.
- New issues
o General agreement on trade in services (GATS)
o Trade-related investment measures
o Trade-related aspects of intellectual property rights
Copyrights, trademarks, patents, industrial designs, undisclosed
information (trade secrets)
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22. GSP & FTA
è Generalized System of Preferences
US trade preference program providing nonreciprocal, duty-free treatment
to developing countries
è Free Trade Agreements
Non-reciprocal preferences for developing countries
Exception 1 to the Most Favorite Nation principle
I. GSP
- Conditions
o Low-income or lower-middle income countries
o Agree to respect principles of fifteen conventions on human and labor
rights
- Impact
o Tariff eliminations and reductions
o Fluctuating number of beneficiaries
II. GSP+
= Mechanism that completely removes all tariffs on 66% of the EU’s products list
- Conditions
o Low income or lower-middle income countries
o Incentive arrangement, agree to implement 27 international
conventions
- Impact
o Tariff eliminations
o Strong monitoring
III. Everything But Arms (EBA)
= Initiative removing all tariffs and quotas for all import goods, except arms and
ammunitions, coming in the EU from least developed countries
- Conditions
o Least developed countries
o Agree to respect principles of fifteen conventions on human and labor
rights
- Impact
o Tariff eliminations except for arms and ammunitions
o Monitoring
IV. Impact of GSP
- Economy of exporting country
o Better market access for products + growth
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o Diversification
- Economy of importing country
o Interest of local industries safeguarded
o Competitiveness
- Social, environmental, and governmental impact on exporting country
o Facilitating dialogue and leverage
o Transparency
V. GSP in the USA
- Expired since 2020
- Strong protection for American companies
- No environment or human rights in criteria
Regional Trade Alliances
Exception 2 to Most Favorite Nation principle
I. Different stages
- Free trade agreement
o Lower barriers
- Free trade area
o Remove internal tariffs
- Customs union
o Common external tariffs
- Common market
o Common factors of production and non-tariffs barriers
- Economic union
o Coordinating economies
- Political union
II. Criteria for an exception to the Most Favorite Nation principle under GATT rules
- “Substantially” all trade
- “Reasonable” short period
- Not on the whole, more restrictive common external tariffs in case of a
customs union
III. Free Trade Agreements
- Challenges
o Countries not interested in a deal
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Example: GSP countries
o Not all negotiations lead to FTA
o Ratification is needed
Example: MERCOSUR
IV. Other types of regional integration
- Customs union
o Common external trade policies
o Single payment
- Common market
o Harmonization
- Economic union
o Coordinating economic policies
o Harmonization
- Political union
o Complete integration
V. Advantages and disadvantages of integration for a member
- Advantages
o Consolidation of peace and security
o Deep integration
o Bigger market
- Disadvantages
o No protectionism
o No protective tariffs
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Chapter 7 Documents of international trade
23.Transport documents
Bill of Lading
1. Receipt or certificate proving goods are in a good condition
Clean bill: apparent good order and condition
è Claused, dirty, foul bill
2. Evidence of the contract on the carriage of goods
Not the contract itself
è Dead freight
The amount the seller must pay to the customer because the goods
weren’t delivered
3. Document of title
- 2 or 3 ‘negotiable’ originals + copies
- Signed Original Negotiable Bill is needed in order to release and transfer
ownership of the goods
- Protection against non-payment
The seller will not send the negotiable bill of lading to customer unless they
have proceeded the payment.
Stale bill:
If the goods are never picked up by customer the carrier will issue a stale bill, a
daily payment that customer must pay until they pick up the carriage.
Sea, Air, Road, and Railway Bill
- A receipt for the goods
- Evidence of the contract of carriage
- Not document of title
o Goods can be released to named consignee, not in exchange for an
original bill
24.Import and export documents
Commercial invoice
- Information containing transaction
- Decided value of customs
- Buyer can prove ownership and the arranged payment
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Pro forma invoice
Preliminary bill sent to buyer in advance of shipment or delivery
- Delay is possible
- Detailed description
Certificate of origin
- Proof that goods are wholly obtained in producing country
- Eligible for preferential duty rate, lower average duty rate
- Chamber of Commerce and customs
è EUR 1
è EUR-MED: product of partners countries count
è Form A/REX
Export packing list
- All parties involved, content, packing, weight, dimension
- Detailed
- Checklist for customs
Pre-shipment inspections certificate
- Price is right value, quality is sufficient
- Ensuring custom duties
Export manifest
- Confirmation of departure of goods
- For customs of receiving country
Declaration of customs value
- Proving value of goods for duties
Customs import declaration
- For clearance
Documents depending on different situations
- ATA carnet
- Insurance certificate
- Sanitary certificate
- Proof of delivery
- Dangerous goods declaration
- …
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Chapter 8 Customs
Purpose
- Ensuring citizen’s security
- Protecting European Community and its Member States’ financials interests
with the collection and checking of import duties, excise duties and VAT at
import
- Protecting European Community against unfair and illicit trade and promoting
lawful economic activity
- Increasing European enterprises competitiveness with up-to-date methods
supported by an easily accessible electronic customs environment
Export
- Certificates
- Export declaration
- Statistical purposes
- Sometimes export license and control
o Strategic, technological, and cultural values
o Dual use concept
Import
- Statistical purposes
- Duties, excise, VAT, standards
Import duties
Nomenclature
= system for giving names to things in a particular profession or field
- Legal obligation of nomenclature
- Brussels Tariff Nomenclature (1957)
o Classification system for international import goods used for
specification and statistics of tariffs
- Harmonized system of World Customs Organization (1988)
- E.U. Integrated Tariff (TARIC)
o Database integrating all measures relating to EU customs tariff,
commercial and agricultural legislation
- Misdeclaration can have consequences
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Value
- Mostly ad valorem (%)
- Customs value declaration
- Costs incurred until first point of entry
- Add or deduct
- Not under €20 000 or not commercial
Import: Excise, VAT and Standards
Excise
- Community or national excise products
Value Added Tax (VAT)
- Applies within EU
- Outside EU: often exempt
Standards
- Seen as barriers
Transit
- Leave or pay
- Before: duty deposit, check products
- Now: TIR – Transports Internationaux Routiers
- International Road Transport Union
- Guarantee replaces deposit
- Approved vehicles
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Chapter 9 Methods of payment & Risks
Method of payment can be a marketing tool
- Role & charges of the bank
- Bank transfer / open account
- Advanced payments
- Cheque payments
- Documentary collection
- Letter of Credit
Role & charges of the bank
- Middleman
- Sharing costs between importer and exporter
- Payer to the bank should be in the contract
o Standard fees – often flat (fixed rate)
o Payment charges – flat or %
o Handling charges – often %
o Risk commissions – often %
Bank transfer / open account
- Advantage for buyer
- “Open account”
- Majority of transactions
- Pro: simple and cheap
- Con: risk of non-payments or payment delays
o Credit insurance coverage policy
o Goods and documents must be in order
o Clear instructions
Bank transfers:
SWIFT
- ‘Society for Worldwide Interbank Financial Telecommunication’
- Owned by partners
- Payments and messages
SEPA
- Single Euro Payments Area
- 36 members
- One zone and system
o International Bank Account Number (IBAN)
o Bank Identifier Code (BIC)
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Advanced payments
- Advantage for sellers
- Only in few specific situations
o E-commerce
o Smaller individual transactions
o Specific countries
o Part of bigger transactions
Cheque payments
- Becoming exception
Documentary collection
- A documentary collection is a process by which an exporter’s bank collects
funds from the importer’s bank in exchange for documents detailing shipped
merchandise
o Funds: payment or bill of exchange
o Role of banks
- When is it used
o Lower risk involved
o Combination of open account and Letter of Credit
- Documents against payment
o Safest
è Sight Bill: Bill of exchange with immediate payment
- Documents against acceptance
o Higher risk
o Draft turns into Bill of exchange
o Documents released against acceptance of the bill
è Usance Bill: Bill of exchange with a payment timeframe
- Steps of documentary collection
o Exporter
Shipping
Collecting all documents
Sending documents to its bank
o Exporter’s bank: remitting bank
Sending documents to importer’s bank
o Importer’s bank: collecting bank
Inform importer
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o Importer
Inspect documents
Pay or accept bill of exchange
Clearing goods at customs
- Risks of documentary collection
o Risk of non-payment
Possible with bill of exchange
Formal protest necessary
o Risk of losing control over goods
Possible when Bill of Lading is not involved
Bank or freight forwarder as consignee
- Consequences of documentary collection for importers
o Pro:
Certainty of shipping and possibility to check documents
o Con:
Not possible to check the goods
- Consequences of documentary collection for exporters
o Pro:
Remain owner of goods until payment or acceptance of bill of
exchange
o Con:
Risk of non-payment
Letter of credit
- A written commitment of payment by the importer’s bank (issuing bank) to the
exporter’s bank (advising bank)
è Letter of credit guarantees payment of specified sum in specified currency
è The seller must meet the precisely defined conditions and submit the
prescribed documents within fixed timeframe
o ICC Uniform Customs and Practice for Documentary Credits
UCP600 = set of rules to help bankers, buyers, sellers in the collection
process of LoC
o Promise of bank > promise of company
o Irrevocable
- When used
o 15% of all international trade
o Preference of exporter when confronted to big amount or high risk
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- Steps of Letter of Credit
o Importer
Arrange LoC with issuing bank
o Issuing bank
Formal credit approval
Send LoC to advising bank
o Advising bank
Inspection and confirmation
Send LoC to exporter
o Exporter
Inspects documents and agrees or changes
Sends goods and prepares documents
Sends documents to advising bank
o Advising bank
Inspects documents and sends to issuing bank
o Issuing bank
Inspects documents
o Guaranteed payment
- Risk of non-payment
Almost non-existent
è Irrevocable if compliant
- Risk of non-compliance
o Doctrine of strict compliance
o Majority of first LoC are rejected
o Second attempts possible
o If not: security lost and becomes documentary collection
o Worst case scenario: auction
- Consequences of LoC for importers
o Pro:
No payment needed when documents do not comply
Possibility to negotiate better deals
o Con:
Expensive
Not possible to check the goods
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- Consequences of LoC for exporters
o Pro:
Guarantee of payment when compliant
o Con:
Expensive
Strict compliance rules
Risks of foreign trade
- Non-payment risks
- Product, production & transport risks
o Impact of climate on the products
o Packing problems
o Issues during transport
o Incomplete documentation
è Internal procedures
è Trusted partners
è Incoterms
- Political risks
o Changes in laws and regulations
o Import and export restrictions
o Expropriation
Government taking ownership
o Political violence
o Transfer & currency
- Exchange rate risks
Own currency is most valuable (EUR)
Example:
A Belgian company imports shoes from Turkey. It made a deal in April 2019 to
import 100.000 pair of shoes for a value of 600.000 Turkish Lira. The
exchange rate at that moment is almost 7 lira = 1 EUR. The price for the
Belgian importer is 600.000/7 = 85.000 EUR. But the payment takes place in
July, when the exchange rate is almost 6 lira = 1 EUR. The price for the
Belgian importer is now 600.000/6= 100.000 EUR.
The exact same goods cost almost 15.000 EUR more for the Belgian
importer.
è Forward contracts
è Currency accounts
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