¶ … International Trade Transaction used by MNEs in Global Business International Trade Transaction

In the Global business environment, a typical trade transaction is either initiated by a seller who wishes to export his goods to the potential buyers in the international markets or by a buyer who is in a need for some specific goods that are not available in his country or it is more feasible for him to purchase them from international sellers. An international trade transaction is quite similar to a general local trade transaction with certain additional steps and precautions. These steps and precautionary measures make the international trade transaction far more complex than a local transaction (Hinkelman & Ebrary 140).

Participants in an International Trade Transaction:

Generally, there are four major participants in an international trade transaction; the seller (beneficiary or exporter of goods), buyer (importer of goods), issuing bank, and advising bank. Every international trade transaction starts with a mutual agreement between the buyer and seller in which they agree on the terms and conditions of their transaction (Winston & Winston, 40). The buyer communicates the quantity, quality, and other important description of the required goods, the means of transport, the credit period (in case the seller allows him to pay on credit basis), final date of shipment, and other terms of the trade agreement (Ward, 13). An issuing bank is the one which issues a Letter of Credit for its customer upon request. An advising bank is the exporter's bank which advises him on different matters from the start of the payment process till the receipt of the full payment (Hinkelman & Shippey, 113).

Letter of Credit (L/C):

It is issued by a bank upon the request made by one party for a particular trade transaction to be carried out in the near future (Schaffer, Gusti & Earle, 235). A letter of credit is a guarantee to the seller that the bank will arrange the full payment for his goods even if the buyer could not pay due to any reason. Therefore, the risk of non-payment from the buyer's side is eliminated by the issuing bank. All the transactions that are carried out through a letter of credit are governed through the Uniform Customs and Practice for Documentary Credits issued by the International Chamber of Commerce. The latest version of these practices is called UCP 600 which is applicable for trade transactions all over the world. The use of a letter of credit has made the international trade transactions safer and faster than ever before (Johnson & Bade, 180).
The Process:

First of all, the buyer goes to bank and applies for opening a letter of credit for a particular transaction. In order to avail this service from the bank, the buyer must an account holder of the bank. In case he is not a former account holder, it is mandatory for him to open the account on immediate basis. After opening the account and accepting the request for opening a letter of credit, the bank perform certain checks and measures in order to ensure that the transaction being carried out is legal in both the countries, the buyer has a good credit standing in the market, and the rates quoted for the transaction are consistent with the local laws and regulations. For opening a letter of credit, the importer needs to produce a set of documents before the issuing bank; including import…