CHAPTER XVII

FINANCING FOREIGN TRADE

I. SPECIAL NATURE OF FOREIGN TRADE FINANCE.

IN the preceding chapter foreign exchange was considered in its application to all forms of international business such as shipment of goods, sale of securities, and payment of services. In this chapter attention will be given only to the methods of financing the export and import of goods.

The financing of foreign trade is a problem difficult for both merchants and bankers because of their inability to determine the credit standing of foreign buyers. It is practically impossible to secure information from these firms themselves, since the credit statement is but little employed outside the United States. The necessary facts must be gathered by indirect means. In this work, correspondent banks and branch offices are called upon to express their judgment, but these responses generally furnish little information, for they are based on personal opinions rather than on credit files. The general mercantile agencies, as Dun and Bradstreet, have extended their organizations to foreign fields and are developing a credit service similar to that established in the United States. Because of difference in nationality, local feeling against supplying information, and distance between various countries, very little knowledge can be gathered about the credit standing of the merchant.

This lack of credit information concerning commercial houses vitally affects the nature of foreign trade financing, and differentiates it from the procedure used in domestic commerce. In the first place, banking institutions are relatively more important in international trade, for it is necessary to use their better-known credit in place of the limited

standing of the commercial houses in order to induce sellers to part with their goods.

II. DOCUMENTS IN FOREIGN TRADE.

Absence of credit knowledge limits unsecured loans in foreign trade and therefore most advances are based on some form of collateral. In the movement of goods, this security lies in the shipping documents which accompany the drafts drawn by the exporters. Because of the prime significance of these documents in all phases of foreign trade finance, they will be considered at the outset. The shipping documents attached to the drafts include, as a rule, the bill of lading, insurance policy or certificate, commercial and consular invoices and miscellaneous certificates of minor importance. Most essential of the entire set is the bill of lading, which performs two distinct functions. In the first place, it serves as a receipt from the transportation company that the goods have been accepted for carriage and will be delivered to their destination. Secondly, it is used as a document which indicates the ownership of the goods.

These two functions offer a basis for classifying bills of lading according to carrier and to negotiability. Bills of lading may be of the following kinds: (1) railroad, for goods moved by rail between domestic points; (2) ocean, for freight shipped on board a vessel to foreign countries; and (3) through, for merchandise transported by both rail and steamship or two different steamship lines from inland to foreign points. Bills of lading are not necessarily negotiable. The straight, or non-negotiable form is filled out in the name of a specified party, known as the consignee, who has the right to demand delivery of the shipment from the carrier without even producing the bills of lading. This type offers no security to the banker who has acquired an interest in the goods through granting a loan to the shipper or consignor. A negotiable bill of lading alone is regarded as satisfactory collateral for a lending bank, as this document must first be presented to the carrier before the consignee or any other party can take possession of the goods. Bills of lading are drawn directly to the shipper's order, or in

blank and then indorsed by him. In this way the bank holding one or more copies controls the ownership of the goods and can transfer this title by mere indorsement. Bills of lading could be forged readily by freight agents acting in collusion with unscrupulous shippers, and in consequence banks suffered heavy losses for many years. The KnightYancey cotton frauds alone cost the banks several millions of dollars through payments made on bills of lading which were supposed to represent shipment of cotton, but which, in fact, were forgeries by railroad employees. To prevent the recurrence of these practices and to protect the rights of banks discounting drafts accompanied by bills of lading, Congress passed the Federal Bill of Lading Act which became effective on January 1, 1917. Among other provisions, this statute holds the carrier responsible for any bill of lading issued by its agents, whether the instrument be true or fraudulent.

The second document in the commercial set is the marineinsurance policy. This is a contract whereby a merchant or a shipowner is indemnified by an underwriter or assurer in event of loss sustained by the assured party. Insurance is not taken out to cover goods transported by rail, for under American law a domestic carrier is fully liable for goods. This statute does not affect an ocean steamship company, which assumes very few of the many risks encountered in conveying merchandise overseas. In forwarding a number of shipments, the sender usually applies to the insurance company for an open or floating policy covering all transactions, and under this general contract a separate insurance certificate is drawn to apply to each shipment. In time of hostilities, shippers also insure their goods against war risk. After the close of the war mine-risk policies were continued in order to indemnify owners of merchandise against possible loss from floating mines.

Third in the set of documents accompanying a foreign bill is the commercial invoice. This instrument contains a complete description of the merchandise, the terms under which it has been sold, and the parties involved. The invoice states the quality and quantity of the goods in detail, the

price and all discounts, together with the names of the buyer and seller and any agent who may have been party to the sale. The commercial invoice is of particular interest to the bank, which learns the price paid for the goods and is thereby aided in judging the extent of the loan to be granted on this security.

In addition to the bill of lading, insurance policy, and commercial invoice, a foreign draft may also be accompanied by several other documents. In order to secure the entry of goods into certain countries, it is necessary to obtain a consular invoice in which the government representative of the importing country certifies to the origin of the goods and their current value as expressed in the market of the exporting country. The consular invoice can be used by customs officers of the importing country as a means of levying ad valorem tariff duties which are based on the selling price of the goods. Governments sometimes insist upon a health certificate which certifies to the sanitary condition of certain classes of exports which may carry contagious disease. This statement is required especially in the case of hides and skins in order to guard against the spread of anthrax. Importers often demand certificates of weight, measure, and analysis so as to assure themselves that they will receive merchandise of the quantity and quality specified in the contract of sale. Finally, the banker who purchases the bill may exact from the exporter a letter of hypothecation, which recognizes the assignment of all the above documents, and thereby the ownership of the goods, to any holder of the draft.

III. FINANCING OF A SHIPMENT BY THE EXPORTER.

The burden of financing a shipment of goods may be carried by the exporter, the importer, or their respective banks. The exporter's bank finances the transaction when it discounts his draft drawn on the buyer, for in purchasing the bill the bank pays cash for it or credits the exporter's account with the amount. The procedure is quite similar to that of discounting commercial paper in domestic business. The bill is offered for purchase, and if the credit of

the parties as well as the value of the goods proves satisfactory, the bank will deduct the discount charge, deliver the proceeds to the drawer of the draft, and later collect the full amount from the drawee. The bank as bona-fide holder of the bill expects to receive payment from the drawee, and, if he dishonors the bill, reimbursement will be demanded from the drawer.

Foreign bills drawn by the exporter may be given to his bank for collection, and in this case the customer does not receive credit to his account until the proceeds of the draft have been remitted from abroad. Compared with a bill held by the bank for collection, a discounted draft may be regarded as a cash item, since the customer receives immediate credit. A further difference between these two instruments is to be found in the legal position of the bank, for it is the owner of the purchased bill, while in the forwarding of a collection item it is acting merely as an agent of the exporter.

Collection items may cover all kinds of foreign-exchange transactions such as the handling of shipments, loans, remittances, and insurance, but for the purpose of this chapter only the first need be considered. A bill is forwarded to the bank for collection rather than for purchase, when the exporter has sufficient capital to finance the transaction himself and is thus able to save the discount charge. At times the bank is unwilling to buy the bill outright because the credit standing of the parties does not warrant this step, or the underlying merchandise is not readily marketable.

Both discounted and collection bills are forwarded in much the same manner. They are transmitted to a foreign correspondent bank, which presents them to the drawee, who accepts or pays, whichever the case may be, and then the funds are either remitted to the American bank or credited to its account. Upon receipt of the cash or the credit, the American bank deducts the charges for collection and turns the proceeds of the bill over to the exporter.

The burden of financing a shipment of goods may be carried by the exporter and his bank jointly by what is known as an advance collection. The bank may receive the