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View GuideTrade Insurance
What are the challenges and risks in international trade? Transactions across borders can be complex and risky. From not getting paid to geopolitical crises, businesses that trade across borders face many uncertainties. These can partly be eased by insurance. From the moment a transaction is started, there can be doubts about the trustworthiness of a business partner, whether the specified amount and quality of goods will be shipped, when the goods will be received, and more. Businesses should consider which risks they are most likely to face with any given transaction and weigh up the costs and potential benefits of purchasing some form of trade-related insurance. What types of trade-related insurance are available and what do they cover? Bonds are a financial product that ensures payment of a transaction. It is a type of insurance whereby an insurance company guarantees scheduled payments of interest and principal on a bond or other security in cases where the issuer of the bond or security has defaulted on payment. Credit insurance is a frequently used type of trade insurance. Importers guarantee to exporters that they will pay them in full when the contractual conditions are met. If the buyer does not fulfil the contract and defaults on payment, the insurance company compensates the seller. Foreign exchange risk insurance is a forward operation where a contract can be arranged with a financial institution to buy/sell currency on a specific date at a pre-defined exchange rate. This type of insurance is offered by financial institutions to lessen the loss from exchange rate fluctuations. Financial guarantees are binding, non-cancellable promises backed by banks or insurers to underwrite a contract and make payments to a recipient if terms are not met. Besides protecting the exporter against non-payment, guarantees can also protect importers against the risk that the supplier will not fulfil the contract. Political risk insurance covers the risk of the overseas government intervening in the investment, and if events that are considered “political” in nature interfere with a transaction. Examples of the latter situation include the expropriation of assets or the outbreak of violence. Although sometimes sold separately, it is important to note that many credit insurance contracts also cover political risk. Product liability insurance covers risks from litigation if the product fails to comply with national regulations. Surety is a guarantee issued by a third party to pay the loss suffered by one party in a contract in the event of complete failure to fulfil a contract. In this case, the third party assumes the responsibility of paying the contract. Transit insurance, for merchandise that is currently being transported, includes: Marine cargo insurance, which protects the shipment of merchandise via a cargo vessel, including from ship to terminal. Air cargo insurance, which provides protection against loss, damage, and sometimes the delay of shipments via aircraft. Ground transportation insurance, which is available for additional coverage for goods shipped by road and rail. This type of shipper is usually already liable for delivering the merchandise as received, with certain exceptions. Links to Supporting Information Trade Finance Global Risk and Insurance – Trade Finance Global An overview of the various types of trade insurance available and guides on how they work. Trade Finance Global Bond Insurance Policy Information on Bond Insurance
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Trade Finance Providers
What kind of trade finance lending do I need? Small businesses and new exporters can often find it difficult to access credit and finance, there are however lots of different resources MSMEs (Micro and Small Medium Enterprises) can explore. Who are the Trade Finance Lenders? There are several types of trade finance lenders to consider. Below are brief descriptions of some of the most common: Corporate and Commercial Banks: These banks can provide a range of trade credit options to businesses, including accepting letters of credit or bills of exchange, or facilitating documentary collection (see Trade4MSMEs guide on Trade Finance). Corporate banks typically service very large transactions, whereas commercial banks are more accessible to smaller traders. Alternative Finance Providers: These are non-bank lenders. These can include private investment, crowd-funding options, or other fintech that allows users to access financial services other than through a traditional bank. Alternative, or non-bank, finance can sometimes be more accessible to smaller traders because they do not face the same regulations as traditional banks, which can make traditional banks unwilling to spend the resources required to enable smaller transactions. Alternative finance providers based on new technologies may also be able to look at different types of collateral, which can open new areas of funding for businesses including Supply Chain Finance (SCF) (see Trade4MSMEs guide on Supply Chain Finance). Development Finance Institutions (DFIs): These provide trade finance help to businesses to promote economic development. They might be funded by national governments and tend to be country or region-specific. DFIs usually operate as joint ventures in emerging markets and can provide insurance and guarantees against political and socio-economic risk to encourage investment. Like commercial banks, they may also provide standby letters of credit, invoice discounting facilities, and project finance from mid-term to long-term projects. Although DFIs may have an overall objective of increasing small business finance, they often do not lend directly to businesses. Export Credit Agencies (ECAs): This financing is used to assist exporters through loans, loan guarantees, and insurance. The transactions supported by ECAs are capital intensive, such as machinery for large-scale projects. They have long-term financing maturities with attractive conditions, as they are usually provided through government financing facilities. ECAs may have minimum requirements, such as the size of a transaction, which could exclude certain smaller traders. What do I need to access this finance? Lenders have different requirements and criteria to access their financing options based on the level of risk, interest rate, and repayment conditions. If you are interested in accessing trade finance, first understand your financial needs and then reach out to your targeted lenders. Links to Supporting Information International Trade Centre (ITC) How to Access Trade Finance A guide for small exporters. Trade4MSMEs guide Trade Finance Introduction Trade4MSMEs guide Supply Chain Finance United Nations OHCHR | Development finance institutions OECD (Organization for Economic Cooperation and Development) Development finance institutions and private sector development – OECD The ITC’s SME (Small and Medium Enterprises) Trade Academy Export Finance and Payments Course Online training course Trade Finance Global Trade Finance Explained, an SME Guide for Importers and Exporters, is a publication co-authored by Trade Finance Global, the ITC, the Federation of Small Businesses (FSB), the Institute of Export & International Trade (IOE&IT), the British Exporters Association (BExA), the Forum of Private Business (FPB), and the International Finance Corporation (IFC).
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Trade Finance Introduction – for Businesses
What is trade finance and why may I need it? There are many definitions of trade finance, varying by organization and purpose. Trade finance...
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Supply Chain Finance
What is Supply Chain Finance (SCF)? Supply Chain Finance (SCF) is a cash flow solution that businesses can adopt to help free up working capital stuck in global supply chains.
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Incoterms
What are Incoterms? Incoterms is an abbreviation for “International Commercial Terms.” Issued by the International Chamber of Commerce (ICC) and globally recognized, they prevent confusion in foreign trade contracts by clarifying the obligations of both the buyers and sellers and provide a standard list of global terms and acronyms used in trade. Why would I use Incoterms? Different practices and legal interpretations between traders around the world necessitated a common set of rules and guidelines, which led to the development of Incoterms. These are terms that hold a common, precise, and defined meaning. Whether you are filing a purchase order, packaging and labelling a shipment for freight transport, or preparing a certificate of origin at a port, the Incoterms rules are there to guide you. Various parties involved in both domestic and international trade use Incoterms as a shorthand to help understand one another and the exact terms of their business arrangements. Given the clarifying advantages of incoterms, it is recommended that they be used in a sales contract. What are the different Incoterms that have been developed? The ICC updates Incoterms every 10 years to align them with the latest trading practices. The most recent version is Incoterms 2020. Some examples of Incoterms include: Rules for any Mode of transport Ex works (EXW): These imply minimum obligations on the seller, requiring goods to be collected and loaded onto a vehicle by the buyer. Delivered at place (DAP): This requires the seller to deliver goods ready for unloading at the destination place agreed by the buyer. Delivered duty paid (DDP): This states that the seller is responsible for all costs and risks of delivering goods to the buyer, including goods clearance and handling customs formalities. There are others in this series Carriage and Insurance Paid to (CIP): This requires the seller to obtain insurance in addition to complying with obligations on handing over goods to carriers and clearing goods for export. Rules for sea and inland waterway transport Free alongside (FAS): This requires the seller to bear risks until goods are either procured or placed alongside a ship/vessel nominated by the buyer. The buyer is responsible for carriage of the goods from the shipment port onward and handling all import formalities. Free on board (FOB): This deems that the seller is the one to deliver goods on board the ship agreed by the buyer. Once the goods have been loaded on board the vessel, the responsibility for carriage of the goods and all import formalities transfers to the buyer. Cost and freight (CFR): CFR is similar to FOB but requires the seller to bear risks until goods are placed on board the vessel at the delivery port and costs to the destination port. The seller must also manage all export formalities and unloading costs when goods reach the destination port. The buyer is responsible for insuring the goods once the goods have been loaded on board at the departure port. Cost, insurance, and freight (CIF): CIF is similar to CFR but requires the seller to insure the buyer’s risk of loss or damage from the shipment port to the destination port, at least. For detailed information about Incoterms 2020, see the ICC’s new e-commerce platform in both print and digital formats, which can be purchased online for a fee. The edition is also translated into twenty-nine languages. You can contact your local ICC country office and representatives for their help and for more information. You can also visit the websites of some international law firms to learn more about different types of incoterms. Where can I get training on how to use Incoterms? The ICC national committees worldwide organize different training seminars, online courses, and certificate programs on Incoterms and other related topics. Their Incoterms 2020 professional certification covers each Incoterm’s rules and the corresponding obligations. It is especially helpful for professionals involved in trade and international business transactions, including those working in legal and regulatory affairs. Links to Supporting Information ICC International Chamber of Commerce (ICC) website and ICC Knowledge 2 Go Guide to Incoterms 2020 ICC local ICC country office and country representatives Contact information for your local International Chamber of Commerce Aceris Law Aceris Law also provide information on incoterms ICC ICC Incoterms 2020 Certificate. IOE&IT Export essentials: Incoterms and selling goods overseas – The Institute of Export and International Trade
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Legal Entity Identifier
What is a legal entity identifier (LEI)? A Legal Entity Identifier (LEI) is a 20-character, alphanumeric code that provides unique identification to businesses and other entities participating in financial transactions. The LEI contains information on business ownership structures, that regulators require in order to assess financial risks and therefore promote market integrity. LEIs are part of global standards that rely on high data quality for enhancing transparency in marketplaces. More information on what an LEI is can be found at the Global Legal Entity Identifier Foundation’s (GLEIF) website, and at LEI Worldwide in the links below. How can my business benefit from having an LEI? Although an LEI is not a legal requirement, it does provide benefits to businesses, such as international recognition and credibility with investors and customers, because LEI data will optimize business procedures for market transactions. Having an LEI number can also enhance business security by providing more detailed information about suppliers and partners when doing business overseas. An LEI may encourage a financial institution to give your company a loan, and an LEI can help your business to comply with many international regulations, secure your brand identity, and enhance reporting requirements. How can I get an LEI? LEI Worldwide has a website where you can sign up to get a new LEI code or renew an existing one. The process begins with completing an application form, with basic company details such as name, addresses, and telephone number. You will also be asked to provide ownership information for your company with supporting documents. Once you submit your form, you will receive a confirmation within a few hours, depending on the country where your business is located. It is important to note that although LEIs can provide a number of benefits, they do require an annual fee. Learn more about the LEI application process at the LEI website. Where can I learn more about LEIs? Some institutions offer online materials and courses that can help you learn more about LEIs and the legal landscape around business and trade. Global Legal Entity Identifier Foundation (GLEIF): The GLEIF has an online archive on their website of videos and podcasts that explain relevant LEI facts so that you can make the most of their potential benefits. Links to Supporting Information Global Legal Entity Identifier Foundation’s (GLEIF) website Introducing the Legal Entity Identifier (LEI) – LEI – GLEIF Legal Entity Identifier (LEI) Worldwide What is a Legal Entity Identifier – LEI Worldwide (lei-worldwide.com) Learn more about the LEI application process at the LEI website LEI Application – How to get an LEI Code – LEI Worldwide (lei-worldwide.com)
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Regional Trade Agreements and Preferential Trade Agreements – for Businesses
What is a regional trade agreement or preferential trade arrangement? A regional trade agreement (RTA) or a preferential trade arrangement (PTA) is a treaty or contractual agreement that governments use to manage their trade relationships and market access conditions. Through trade agreements, governments agree on a range of conditions such as preferential tariffs for goods, market access for services, intellectual property rights, competition and investment measures, among other things. How can trade agreements affect my business? Regional trade agreements (RTAs) provide preferential market access, such as full or partial relief from tariffs for goods traded between the RTA parties. They also include chapters related to trade facilitation, SPS and TBT measures, and intellectual property rights, all of which may impact your business. Preferential trade arrangements (PTAs) are usually provided by developed nations that are members of the World Trade Organization (WTO), to members in developing nations, in the form of reduced tariffs for goods. Businesses can claim these benefits by meeting Rules of Origin and other conditions stated in the text of these arrangements. The Trade4MSME guide on Rules of Origin contains more information. What are the different types of RTAs and PTAs? PTAs are unilateral, or one-sided, meaning an arrangement where one government provides preferential access to imports from one or more governments without receiving anything in return. RTAs may involve multiple governments, in the same region, or across different regions, or they may be on a bilateral between two governments. Both the World Trade Organization and International Trade Centre websites have more information on trade agreements. Unilateral agreements: also known as preferential trade arrangements, or PTAs, these provide trade preferences to the markets of the member that developed the PTA, without requiring that beneficiary economies grant the same preferences in return. These preferences often come in the form of zero or lower import tariffs for products, and only cover trade in goods. One example of a PTA is the Generalized System of Preferences scheme GSP, under which developed economies grant preferential tariffs to imports from developing economies. PTAs can also involve more limited schemes such as the United States’ African Growth and Opportunities Act (AGOA) or the European Union’s Everything But Arms (EBA) scheme. These are subject to a waiver granted by WTO Members and subject to review. Reciprocal agreements: Reciprocal agreements are also known as regional trade agreements or RTAs, and these cover the rules and conditions that apply to trade in both goods and services. These include free trade agreements (FTAs), Customs unions, and partial scope agreements. Governments signing these agreements provide each other with preferences and benefits in terms of lower trade barriers and market access. In addition, RTAs can include provisions on investment, Customs cooperation and trade facilitation, trade and environment, trade and labour, and other areas. How do I know if my products benefit from preferential treatment under an RTA or PTA? Trade agencies, industry associations, and chambers of commerce can provide information on how businesses can benefit from trade agreements. For example, the World Trade Organization has an online RTA Database and PTA Database, which provides information on tariff preferences and other provisions such as Customs procedures, SPS and TBT measures, which are under any RTAs and PTAs notified to the WTO. Businesses can also visit the Rules of Origin Facilitator, an online tool that identifies preferential tariffs under trade agreements, so long as these goods meet the rules of origin requirements included under these agreements. Through the Facilitator, businesses can find opportunities for preferential market access under trade agreements that can apply to their products. Links to Supporting Information Trade4MSME Guide Rules of Origin World Trade Organization (WTO) Regional Trade Agreements WTO | Regional Trade Agreements – scope of RTAs International Trade Centre Rules of Origin Facilitator – Introduction to Trade Agreements Rules of Origin Facilitator African Growth and Opportunity Act (AGOA) African Growth and Opportunity Act (AGOA) | United States Trade Representative European Union’s Everything But Arms (EBA) scheme Everything but Arms (EBA) | Access2Markets The Institute of Export and International Trade Export essentials: how to make the most of preferential tariffs – The Institute of Export and International Trade
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Assessing E-Commerce Readiness
How can an e-commerce readiness assessment support my business? Selling online has advantages over selling in traditional shops and stores. Businesses can reach customers worldwide and enter new markets quickly and easily. Geography no longer creates the same physical barriers to trade. It is always best to check that you have everything in place before you start. An E-commerce readiness assessment can help you evaluate what stage you are at. What is an e-commerce readiness assessment? An E-commerce readiness assessment is the starting point to help any businesses understand what is needed to design an online sales strategy. An e-commerce readiness assessment is a tool that evaluates the capabilities needed to set up and run a successful online business. It will help you evaluate strengths, as well as identifying areas that need improving. It shows that by investing in market research, online payment systems, developing good fulfillment and logistics, and creating great customer service experiences, will help build a more successful business. What is the structure of an e-commerce readiness assessment? The International Trade Centre ITC has developed a quick and easy short quiz to check your businesses readiness to start online sales. It will look at the following five sections: E-commerce planning: This involves getting you to think about your product and services value proposition, ask yourself why customers should buy your products. It gets you to think about your ideal target customers. Confirm if your products or services comply with regulations in your target markets. Online presence: This involves identifying whether you are going to run your own e-commerce website, or if you will list products and services in marketplaces. Digital marketing: This involves looking at the extent to which businesses use digital marketing to promote their online sales and monitor digital goals and key performance indicators (KPIs). Shipping and inventory: This involves checking that your inventory, fulfillment and shipping options meet the expectations of your customers. Confirming that you can manage the customs import duties, taxes and other charges needed is essential. Customer service: This involves understanding what good customer service is and that your business is supplying the right information about products and services. Coupled with the ability to communicate, interact and build trusted relationships with your customers and clients, will ensure your business will thrive. Links to Supporting Information ITC International Trade Centre ITC ecomConnect – Readiness an e-commerce readiness assessment quiz ITC International Trade Centre How to Start Your First E-commerce Business | ecomConnect ITC ITC ecomConnect – Calculator & Video tutorials from ecomConnect Strive Community’s Ecommerce Training Toolkit ecomConnect IOE&IT Export essentials: How to make the most of ecommerce platforms – The Institute of Export and International Trade
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Authorized Economic Operators (AEOs) – for businesses
What are Authorized Economic Operators (AEOs)? The Authorized Economic Operator (AEO) scheme was introduced in 2007 by the World Customs Organization (WCO), as a way to further improve international supply chain security, and to facilitate legitimate trade. AEO certification is recognised internationally as granting ‘trusted trader’ status, which demonstrates that a business meets the AEO standards of supply chain security and customs compliance. Any business directly involved in the international movement of goods can apply for AEO status, regardless of the size of their business, or role in the supply chain. An AEO is defined as ‘an Economic Operator who is certified reliable in their customs operations,’ and therefore is entitled to certain benefits such as priority clearance for goods at customs, and fewer physical and documentation checks. If your product is selected for controls at the border, it will be given priority as an AEO consignment. What do I need to do to benefit from AEO status? Businesses can apply for AEO status through their Customs authorities (if available). According to the World Customs Organization, there are currently 80 operational AEO programs worldwide, with 5 more under development, the WCO AEO online Compendium provides a list of all programmes. Although different governments have different requirements for becoming an AEO, broadly, to qualify, a company must: comply with national domestic laws; abide by Customs and taxation requirements; maintain appropriate records; and practice required safety and security measures. Where can I learn more about AEO for my business? The World Customs Organization (WCO) offers a guide for small businesses that can help you learn more about the context and general aspects of AEOs. In addition, some institutions offer training and courses that can help you navigate the process around obtaining AEO status. Links to Supporting Information The World Customs Organization (WCO) safe-framework-of-standards and World Customs Organization World Customs Organization (WCO) AEO Compendium 2020 Edition World Customs Organization United Nations Economic Commission for Europe (UNECE) Trade Facilitation Guide – AEO Authorized economic operators The World Customs Organization (WCO) guide for small businesses Guide for small businesses The World Customs Organization (WCO) Authorised Economic Operator (AEO) Validation – WCO – Academy Online training course and aeo-implementation-guidance The European Commission Course: Authorised Economic Operator (AEO), Topic
