Risk of importer and exporter in international payment

Risks in international payment activities are economic risks arising in the process of performing international payment activities, it is caused by causes arising from the relationship b

BỘ GIÁO DỤC VÀ ĐÀO TẠO TP HCM ĐẠI HỌC KINH TẾ - TÀI CHÍNH TP HCM

UE UNIVERSITY OF ECONOMICS & FINANCE

IE Lecturer : Tran Minh Tu

Subject : International Payment

Class: A06

Ho Chi Minh City, 20/03/2022

FOREWORD

First of all, I would like to express my sincere thanks to Mr Tran Minh Tu - lecturer of

"International Payments" at University of Economics and Finance, Ho Chi Minh City During the course of studying and making presentations as well as essays, even though there were many groups and not much time, especially in the situation of the Covid-19 epidemic, which was still booming, he still took time to guide the students guided and interested in asking about the situation of each lesson, imparting experience and knowledge to help the class and each group complete the course

Besides, our group would also like to thank our classmates, who were always ready to help and answer questions and problems so that the group could complete the essay to overcome difficult times towel easier

However, because the time to make the essay and search for information is not much along with limited knowledge, our group will inevitably make mistakes during the process of making this essay, so we I very much look forward to receiving the advice of teachers and classmates so that our group can make more complete essays in future essays and through that our group will also learn a lot of knowledge and skills experience from teachers and friends

And again, our team would like to send our most sincere thanks to you for your help, dedicated guidance, experience and knowledge, and thank you for your very happy help Our team would like to wish you and your friends always full of health, happiness and more success in life

Ho Chi Minh City, 10/03/2022

TABLE OF CONTENTS

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II Contents/AnalySis 25 2-22 2 2 HH HH HH HH HH Hư 9 1 The case of Imporfter”s rIsks In International Paymens . -c-ccecseresrees 9 2 The case of Exporfer”s risks In International PaymenIs . sec se 14 3 The Methods of Payment in International Trade Transactions 3 Essay By Mehmet GOCINEZ 23

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1 Introduction:

Today, to succeed in the global market and win sales against foreign competitors, exporters must offer their customers attractive sales terms backed by appropriate payment method Since the seller's ultimate goal is to be paid in full and on time, the force chooses the right payment method carefully to minimize payment risks while also fully meeting the buyer's needs

To settle financial transactions in the bond, money and futures, derivatives or options markets, or

to transfer money between financial institutions called a settlement system

In this report, our team deals with the international payment system, risks, forms and tools of the international payment system For importers the most important risk from their point of view is whether they will receive the goods they ordered after payment has been made As for the exporter, it is to be paid in full and on time

Although both parties to a commercial sale and purchase agreement have a common interest in the success of each transaction, their respective interests in relation to payment are very different Good payment terms for importers can mean poor payment terms for exporters, or vice versa Consider starting with a low-risk option and move on to other solutions as trust in the supplier relationship grows over time

Risks in international payment activities are economic risks arising in the process of performing international payment activities, it is caused by causes arising from the relationship between international payment activities and parties involved in international trade (exporters, importers, banks, organizations, individuals and intermediaries ) or other objective factors such as natural disasters, wars, politics

Risks in international payment activities related to international commercial transactions It is similar to risk in domestic commercial transactions, but more complicated by geographical distance, cultural differences, law, etc

When it comes to trading commodities, there is always a certain level of risk and trust involved Whether you are a buyer or a seller, you are bound to assume some risk when conducting international transactions Much of the risk depends on the payment method you use There are

international payment, classify by methods, from which to have a more holistic view of this activity

Il Literature Review

1 Risk in international payment

¢ Credit risk

Risk of insolvency of one of the payment participants

Foreign exchange risk refers to the risk arising from fluctuations in currency conversion rates Currency fluctuations occur due to many reasons including monetary policy, economic conditions, government actions, speculation by currency traders and the supply and demand for currencies being bought and sold sell

For the importer, choosing a different payment and settlement currency in a transaction also creates risks for the importer when there are exchange rate fluctuations When the exchange rate fluctuates, it will be disadvantageous for importers because they buy foreign currencies to pay for imported goods at high prices, but the prices of consumption or raw materials still depend on market supply and demand and cannot compensate susceptible to exchange rate fluctuations Any depreciation or appreciation of the base currency or depreciation or appreciation of the face currency will also affect the cash flow resulting from that transaction Foreign exchange risk can also affect investors, people doing business in international markets, and importers and exporters

of products or services to multiple countries

An import-export business is exposed to foreign exchange risk because its payables and receivables are affected by foreign exchange rates This risk arises when the contract between two parties stipulates the exact price for the goods or services, as well as the delivery date If the value of the currency fluctuates between the time the contract is signed and the date of delivery,

it could cause a loss for one of the parties

Political or national risk refers to the risk arising from the actions of governments and authorities

or regulatory bodies leading to adverse effects on trade with counterparties within their jurisdiction term The causes of risk are manifold and they include geopolitical tensions, economic crises, and political instability These are risks related to political, economic, and foreign exchange management policies of a country that make exporters not receive money for goods, importers do not receive goods

The risk to the importing country occurs due to fluctuations or unusual events in the importing country that cause the importing country's government to prohibit its companies from paying foreign currency abroad, or imported goods Imports are banned from import, so they are not allowed to carry out customs clearance procedures

Country risk can also occur simultaneously with exporters and importers if after signing a foreign trade contract, the governments of the importing and exporting countries do not allow the import and export of such goods

2 Method of international payment

This payment method is simple, low cost However, this is the method with the greatest risk for both the seller and the buyer

There are 2 ways to transfer money:

+ Prepaid money transfer (TT): Importer

pays an amount in advance to the Exporter

before delivery Risk of advance remittance:

/ Risk for the exporter (low): Delivery after

receiving the goods, so the exporter does not

bear any risk

/ Risks for importers (high):

« The exporter may deliver goods that do

not conform to the quality requirements

« Exporter may not deliver or deliver late

" In the above case profit will be reduced

+ TT after shipment: the importer pays the exporter after receiving the goods The following remittance risks:

/“ Risks for exporters (high):

* Person responsible for payment of draft, non-payment-due to dispute

« The person responsible for paying the bill

of exchange, unable to pay- insolvent/ has

no cash

« Not enough foreign currency

« No longer control the goods

#“ Risks for importers: none

A method of payment by collection with documents in which the seller entrusts the bank to collect money from the buyer based not only on the bill of exchange but also on the

accompanying set of shipping documents, provided that: If the buyer pays or accepts to pay the draft, the new bank will hand over the consignment documents to the buyer to receive the goods Instruments of international payment usually include: bill of exchange; Promissory Note, International check, Financial Invoice

There are two types: collection of documents for fast payment (D/P) and collection of documents

Importer is unable to pay- Importer does not pay

insolvent/insufficient cash ¬

Importer's inability to pay

Country risk, not enough foreign currency There is not enough foreign currency

Once the importer has accepted the bill of

the goods

If the goods are delivered by sea, the goods

can still be controlled

This is a payment method whereby, at the request of the importer, the bank will open a letter of credit (Document of Guarantee) committing to the beneficiary (the exporter) to pay, accept the draft if the exporter presents a set of payment documents in accordance with the terms and conditions set forth in the credit

Among international payment methods, payment via L/C is used quite commonly This is a method of transferring payment responsibility from the importer to the bank to ensure that the exporter delivers and receives money safely and quickly, and the importer receives the invoice for shipping goods on time Therefore, to a certain extent, L/C is a payment method that balances the interests of both exporters and importers and resolves conflicts of distrust of both parties

before making shipments Unfortunately, taking these steps could delay shipments or exclude potential customers that are unable or unwilling to provide these documents, causing exporters to lose out on business opportunities

- Cannot execute the terms of L/C

A method of payment that occurs before the goods are delivered by the seller to the buyer The buyer accepts the seller's price according to the order (irrevocable) and transfers part or all of the payment to the seller

This method is applied in the international sale of goods as follows: The exporter (the

bookkeeper) after fulfilling his/her obligations (usually the delivery obligation) specified in the international sale of goods contract (base contract) will open a debit book for debiting The importer (recorded person), in a certain currency and at a certain period agreed upon by the two parties, uses the method of money transfer to pay the bookkeeper

from a cultural value perspective: A case study in Zhejiang, China (Jiang Zhou, Yang- Yon Hang, 2011)

The international financial crisis highlights the payment risk in exporting goods, especially overdue and bad debts by credit risk and transaction exposure by exchange risk With reference

to private small and medium-sized enterprises in Zhejiang, one of the most developed export- oriented provinces in China, the paper firstly discusses the negative impact of international financial crisis on payment risk in export sector followed by estimation for post-crisis era, then explores the causes of increased international payment risks from a perspective of cultural values and how the traditional values of private foreign traders in Zhejiang relate to international payment risk and its management Finally, it puts forward recommendations for private SMEs in international payment risk management during post-crisis era, and concludes that because of the intrinsic role of "culture values" in risk management

II Contents/Analysis

1 The case of Importer’s risks in International Payments

1.1 Foreign exchange risk

factories in Vietnam Of the total factories owned by Samsung Group, six factories in Vietnam produce nearly one-third of the company’s global product output Samsung Group has invested a total of about 17 billion USD in Vietnam Vietnam is currently Samsung's largest production base abroad At the same time, Samsung Group also became the largest FDI investor in Vietnam with a total announced capital of 17.3 billion USD Billions of devices were brought to the global market from 6 factories in Vietnam in 2019 bringing export revenue of 59 billion USD, equivalent to 22% of Vietnam's export turnover (VietNam Report, 2021)

Figure 1: Movement of VND/USD exchange rate in the period from January 2009 to May 2012

Sep-11 Jan-12 May-12

Table 1: Table of import turnover and net revenue for the period 2010-2012 of Samsung

Electronics Vietnam

Unit: USD billion

fluctuations In 01/2010, the exchange rate remained at 18,479 VND/USD By the end of 2010, the foreign exchange market received a real fever of the exchange rate In 11/2010, the exchange rate skyrocketed to 21,380 VND/USD and the increase lasted until the end of the year Because

of this exchange rate fluctuation, the import turnover in 2010 was 1.516 billion USD and profit from import only stopped at 0.10685 billion USD, accounting for 7.047% of import turnover The tension of the exchange rate at the end of 2010 was carried over to the beginning of 2011 It was not until early April 2011 that the exchange rate began to show signs of stabilizing And also this exchange rate stability has spurred the company's import of spare parts to increase sharply Import turnover in 2011 was 5,102 billion USD, making the profit from import increase to 0.782 billion USD, accounting for 15.33% of import turnover

In 2012, the USD/VND exchange rate was always kept stable, the official and parallel rates in

2012 were quite close to each other This exchange rate stability made the import turnover of the company continue to increase to USD 8,504 billion and the profit earned from import also increased to USD 1.357 billion, accounting for 15.957% of import turnover

1.1.1 Solutions: Using Exchange Rate forecating methods

PPP is perhaps the most popular method due to its indoctrination in most economic textbooks The PPP forecasting approach is based on the theoretical law of one price, which states that identical goods in different countries should have identical prices

The relative economic strength approach looks at the strength of economic growth in different countries in order to forecast the direction of exchange rates The rationale behind this approach

is based on the idea that a strong economic environment and potentially high growth are more likely to attract investments from foreign investors And, in order to purchase investments in the desired country, an investor would have to purchase the country's currency4creating increased demand that should cause the currency to appreciate

model that relates these variables to the exchange rate The factors used in econometric models are typically based on economic theory, but any variable can be added if it is believed to significantly influence the exchange rate

1.2 Country risk:

On July 6, 2018, the administration of US President Donald Trump officially "ignited" a trade war with China by imposing a 25% tariff on imports worth $ 34 billion from China mainly electronic and high-tech machinery The Chinese side immediately responded by imposing tariffs

of $ 34 billion respectively on goods imported from the US, mainly agricultural products This was followed by a flurry of tariffs and retaliation from both sides

Figure 2 Change of tariff of China and US goods from Jan 2018 to Sep

US-China tariff war

21.8

3.1 , 28

—®— Average Chinese tariffs on US goods(%) —@ Average US tariffs on Chinese goods(%)

Source: PHE, USTR, International Trade Centre, China’s finance misnistry

Figure 3: Fluctuation in export value over the same period last year

Tariff war affects to China and US

China exports to US

——US exports to China

Regarding the US side, most of the Chinese products that are taxed in the US are input materials Therefore, US importers using Chinese inputs will face difficulties when the supply is less and prices increase, thereby increasing production costs and market prices And the imposition of this tax will cause consumer prices to increase in this country and American consumers will be the one to suffer

On the Chinese side, the imposition of US tariffs will make China reduce exports to the US market, making it difficult for exporters to access the US market, especially the high-tech market and have to find a new market The production for exporting is affected leading to the possibility

of increased unemployment and in the long run can affect the economic development of this country

1.3 Moral risk:

Phan Minh Thong 3 Chairman and General Director of Phuc Sinh In 2007, Mr Thong attended Anuga fair to introduce his product such as pepper At that fair, Mr Thong met a customer claiming to be Mike Tyson from a company named Varna - Bulgari

After returning to Vietnam, a guest named Mike Tyson actively contacted by email and fax, offering to buy 50 containers of pepper However, because the order was too large and the time was short, Phuc Sinh only collected 37 containers and after the bargaining, they closed the price

at 6,300 USD/ton Phuc Sinh requires 20% payment in advance and the rest will fax the export documents to them, the importer will pay But the importer refused, they said it was 100% CAD

at their bank, this is too risky for a shipment of up to 3,263 million USD, nearly 53 billion USD Next, the importer accepted a 10% advance, but the rest they still insisted on paying through their bank However, later a man named Mike Tyson offered to pay through a Turkish bank, even though the company Varna introduced at first was in Bulgaria

"The bank that we use the service is Vietcombank (VCB), they warned us that this is a big transaction and asked the buyer to provide the bank name We followed and saw the name of the Turkish bank Ky is quite famous, has a high rank, is safe, so we confirm and make a purchase

Vietnam, he urged Phuc Sinh every day to give the bill of lading number At this time, Mr Phan Minh Thong felt quite doubtful After that, Phuc Sinh sent the collection documents via VCB

and they used DHL service to send the documents to the Turkish bank VCB received a telegram from the new Turkish bank stating: they received the set of documents and they saw that Varna

was not their guest and they felt there was a scam so they sent the documents back (Cafebiz,

2022)

2 The case of Exporter’s risks in International Payments

2.1 Political Risk:

Region: Canada

Challenge: Mitigate risk of conducting

business in countries with volatile

political situations Political risk is an

unavoidable part of doing business on a

global scale When Russia imposed an

Chisholm Limited found itself with

supplies on its way to a Russian market

thought that any meat already in transit

As Ronald A Chisholm Limited conducted its regular business of shipping mect around

would be allowed to go through, which the world, a completely unprecedented, high-profile international situation occurred —

with the potential to have major financial ramifications Thankfully, Chisholm had the

is usually the case of an embargo = said foresight to secure a political risk credit insurance policy from Euler Hermes — to protect

against the unexpected and provide relief when Large invoices go unpaid

Chisholm COO Gregg Badger In this

case, however, the border was closed to this cargo Chisholm has never faced a more dangerous political incident Chisholm also faced another international disaster: a 30% drop in the market

price as it attempted to reroute meat destined for Russia to other countries