13 – Terms of Payment and Delivery

Introduction

Multinational marketers face the key difficulty of determining prices for their products and services in foreign markets. Currency exchange rates, economic conditions, production costs, competition, and consumers in the target market are all variables that influence international pricing. To be effective, international pricing strategies must be carefully planned and continuously managed.

Various elements must be examined when determining prices, including the company’s manufacturing costs, the host country’s standard of living and income level, people’s openness, and other considerations. International marketers should also study the purchasing habits of the general public to assess how much value individuals place on specific products and services.

The proper foreign pricing tactics are critical to any company’s marketing activities. The more you know about your target market, the better you can establish your prices to appeal to consumers while still earning a profit for your company.

13.1 Payment Terms

Any country’s central bank is usually the driving force behind the development of the national payment system. As the country’s central bank, the Reserve Bank of India (RBI) has been playing this developmental role, launching many measures to provide a safe, secure, sound, and efficient payment system. The buyer and seller include instructions about how payments for items will be sent in the contract of sale. Payment terms are determined based on the bargaining power of the buyer and seller, the rules of exchange contracts in the nations involved, the duration of the buyer and seller’s trading relationship, and the parties’ creditworthiness. In general, terms of payment show the extent to which the seller requires a guarantee of payment before losing control of the products.

13.1.1 Payment in Advance

Meaning: A sum paid before it is earned or incurred. For example, a prepayment by an importer to an exporter before the shipment of goods or a cash advance for travel expenses.

This strategy is ideal for the exporter; the importer must rely on the Exporter’s honesty and ability to complete the order on time. Furthermore, the Importer financed the entire transaction using this technique, making the transaction more expensive and exposing him to credit risks. Because of the considerations above, some governments have imposed Exchange Control restrictions on imports.

Advance payment is only permitted in India for the import of books, journals, life-saving payment apparatus, capital goods, machinery, and a few other items.

An advance payment of USD 2500 or a sum equal to this amount is permitted for commercial purposes. If the contracting party meets the following conditions:

1. Documents submitted by the parties must be evidence of the foreign supplier’s demand.
2. The overseas provider must be compensated.
3. Endorsement in the import license, if applicable.
4. An OGL-covered license approves imports. Depending on the type of items sold and the commodity’s competitiveness, advance payments are required for exports. For example, a 100 percent advance payment is typical for vegetable and fruit exports.
5. Application in duplicate in F.A.I.
6. Within three months, the importer will produce evidence of import in the Exchange Control Copy of the Bill of Entry/Postal Wrapper.

13.1.2 Account Opening System

1. It is directly opposite the Advance payment.
2. Meaning: When an Exporter agrees to sell a commodity on an open account system to an Importer, he sends the items directly to the buyer, along with the transport paperwork and an invoice seeking payment.
3. The exporter loses complete control of the goods and relies entirely on the buyer’s integrity.
4. It benefits the importer; the exporter faces all financial and commercial risks. This technique is typically used when the goods command a buyer’s market.
5. Taking an ECGC policy reduces commercial risk to some extent. To protect the interests of Indian exporters, the Reserve Bank of India imposes Exchange Control limitations on open account export sales.

13.1.3 Sale on Consignment

If you sell items on consignment, you have promised to do so without first purchasing the goods from the owner. Typically, your contract will state one of the following:

1. You agree to act as an agent for the owner in selling the products.
2. When you find a buyer, you agree to purchase the goods at an agreed-upon price.

The kinds of commodities that can be sold on consignment are unlimited. Motor vehicles, boats, bridal and formal dresses, cameras, farm gear, and artwork are frequently sold on consignment.

Selling on consignment, for example, is entrusting your vehicle to someone else, typically a car dealer, to sell on your behalf. In most cases, you establish the minimum price you will take, and the dealer adds a commission.

In an open account system, ownership and possession pass to the buyer; in a consignment transaction, ownership remains with the seller.

Freight and maritime insurance must be secured in India for items exported on a consignment basis.

13.1.4 Documentary Archive

The exporter creates the necessary financial and commercial documents, including the transport document, and gives them to his banker. He requests how the papers should be sent to the importer on the other end.

The principal, i.e., the exporter, the remitting bank, the exporter’s bank, the collecting bank (the bank in the importer’s country), and the importer, the consignee, are the four critical parties to a documented collection.

When the Exporter requests that the Bank pass over the export documents to the Importer solely in exchange for immediate payment, the bill of exchange is referred to as a Sight Draft. If the exporter wishes to give the importer some time (30 days, 60 days, 90 days, etc.) to arrange finances but does not wish to part with the documents before payment, the proper bill of exchange is known as a D/P (Document against Payment).

Banks operate as middlemen, collecting payment from the buyer in exchange for the transfer of documentation, allowing the holder to take possession of the goods. The process is more straightforward than a documentary credit, with lower bank charges. However, the bank does not operate as a surety of payment but rather as a collector of payments for documents.

In terms of attractiveness, a documentary collection lies in between a documentary credit and an open account for the seller and buyer.

13.2 Payment Methods

In the international commerce market for exports and imports, there are three standard payment methods:

1. Clean Payment
2. Bill Collection
3. Credit Letters L/C

13.2.1 Clean Payments

The clean payment method directly handles all shipment documentation, including title documents, between trading partners. Banks’ roles are confined to clearing sums as needed.

The clean payment technique is a reasonably inexpensive and straightforward way of paying importers and exporters.

Clean payments are classified into two types:

1. Advance Payment: The exporter is trusted to ship the goods after receiving payment from the importer using the advance payment method.
2. Open Account: In this method, the importer is trusted to pay the exporter after receiving the goods.

The fundamental disadvantage of the open account technique is that the exporter faces various risks. In contrast, the importer benefits from the delayed use of the company’s cash resources and is not responsible for the risk associated with goods.

13.2.2 Bill Payment Collection in International Trade

More than 90% of banks worldwide adhere to Payment Collection of Bills, also known as “Uniform Rules for Collections,” a document published by the International Chamber of Commerce (ICC) under document number 522 (URC522).

In this form of payment in international trade, the exporter entrusts the processing of commercial and, in some instances, financial papers to banks and provides the banks with the required instructions regarding releasing these documents to the importer. It is regarded as one of the most cost-effective techniques of documenting a transaction for purchasers, in which documents are modified through the financial system.

There are two ways to collect a bill:

1. Documents for Payment D/P: Documentation is only delivered to the importer after payment is received.
2. Acceptance of Documents D/A: In this scenario, documents are only supplied to the importer after a draft has been approved.

13.2.3 Credit Letter L/C

Letter of Credit, also known as a documentary credit, is a written undertaking by the issuing bank on behalf of its customer, the importer (applicant), promising to effect payment in favour of the exporter (beneficiary) up to a specified sum of money, within a specified time limit, and against specified documents. The International Chamber of Commerce publishes it as Uniform Customs and Practices (UCP) brochure number 500.

There are several kinds of L/Cs:

1. Revocable & Irrevocable Letters of Credit (L/C): A Revocable Letter of Credit can be terminated without the exporter’s approval. An Irrevocable Letter of Credit cannot be revoked or altered unless all parties, including the exporter, agree.
2. Sight & Time Letter of Credit: If payment is to be made when the document is presented, it is referred to as a Sight Letter of Credit. Banks can take the necessary time to review the paperwork in this scenario. If payment is to be made after the expiration of a specific period specified in the draft, it is referred to as a Term Letter of Credit.

Letter of Credit (L/C) Confirmation

Confirmed Letter of Credit (L/C) A bank, known as the Confirming Bank, adds its promise to that of the issuing bank in a Confirmed Letter of Credit. By adding its commitment, the Confirming Bank assumes responsibility for the claim under the letter of credit if all of the letter of credit’s terms and conditions are met.

13.3 Dumping

The most straightforward and apparent concept is that dumping is prohibited. A second activity that the GATT forbids is the payment of unfair subsidies, bounties, or grants. The idea opposes government efforts to skew the global market by expressly supporting exporters. As more governments aid industry in promoting economic growth, the definition of an unfair subsidy has become much more complicated. Governments are increasingly using subsidies in various forms, such as grants, tax forgiveness or deferral, or low-interest loans, to encourage businesses to hire workers, locate in economically depressed areas of a nation, produce essential goods, or restructure sectors. When those subsidies are aimed at enterprises that generate exports, there is a risk that the lower cost of making products for export will distort global markets.

Price discrimination in the form of dumping is a type of price discrimination. It is the practice of charging prices for similar goods in similar markets. As a result, imported items are sold at such slow rates that they harm local suppliers of similar goods.

13.3.1 Different Kinds of Dumping

The following are the most common types of dumping today:

• Overcapacity dumping
• Government-supported dumping
• Tactical dumping (discrimination pricing)
• Predatory dumping

Overcapacity dumping happens when a business manufactures and sells products at a lower price than the average cost of production to cover at least its fixed costs.

Government-supported dumping occurs when the government provides subsidies to a specific industry, allowing such enterprises to sell their products at a price lower than their manufacturing costs.

Example: Agricultural items are frequently dumped in this way.

Tactical dumping happens when a company sells the same product in multiple markets at different prices.

Predatory dumping seeks to eliminate competition to achieve complete market dominance. It is a severe form of discriminatory pricing in which the corporation aims to monopolise a market. This dumping method is most likely to cause irreparable harm to the country where the goods are deposited.

Dumping is terrible because producers sell their goods at various prices to different markets. It is also relatively uncommon for prices to fluctuate occasionally, depending on market supply and demand situations. Furthermore, dumping is a widespread type of discrimination in international trade. Moreover, export prices are lower than local prices. As a result, from the standpoint of antidumping practices, dumping is not unlawful. When dumping causes material harm to the country’s domestic industry, the designated authority begins investigations and imposes anti-dumping measures.

13.4 Contra Trade

Countertrade is estimated to account for 5–30% of overall global trade. In the 1980s, counter-trade became extremely popular. Counter-trade is one of the earliest types of commerce in which the government mandates paying for goods and services with something other than currency. It is a process that compels a seller to contractually pledge to reciprocate and perform particular business initiatives that compensate and benefit the buyer as a condition of sale. In a nutshell, Counter-trade is a good-for-goods transaction.

Counter-trade occurs for three key reasons:

1. Gives a trade finance alternative to countries with international debt and liquidity concerns;
2. The connection may provide LDCs and MNCs with access to new markets and
3. The relationship fits conceptually with the return of bilateral trade agreements between governments.

13.4.1 Different Types of Counter-Trade

Counter-trades are classified into numerous types: barter, counter-purchase, compensation trade, switch trading, offsets, and clearing agreements.

Barter is the most basic of the several sorts of counter-trades. It is a one-time direct and simultaneous exchange of equal-value products (one product or another). Barter allows cash-tied countries to buy and sell by eliminating money as a medium of exchange. Although price must be considered in any counter-trade, in the case of barter, price is only implied and works best.

When there are two contracts or a set of parallel cash sale agreements, each paid in cash, this is referred to as a counter-purchase. In contrast to a swap, a single transaction with an implicit exchange price, a counter-purchase involves two discrete transactions, each with its cash value. A supplier sells a facility or product at a fixed price and orders unrelated or non-result products to balance the initial buyer’s expenditure. As a result, the buyer pays in actual money, while the supplier promises to buy specific things within a specified time frame. As a result, no money needs to change hands. The practice permits the initial buyer to recoup their investment.

The next step is a compensation trade or buyback. A compensation trade requires a corporation to provide machinery, factories, or technologies and purchase products from this machinery over a set period. In contrast to a counter-purchase involving two unconnected products, the two contracts in a compensation transaction are exceptionally closely tied. A supplier agrees to buy a portion of the facility’s production for several years under a separate arrangement to sell plant or equipment.

In exchange for the ability to sell its products locally, a foreign supplier or manufacturer must assemble the product locally and purchase local components. As a result, the provider is forced to manufacture in a region that may not be economically advantageous. Offsets are frequently observed in aircraft and military equipment procurement. A clearing agreement is a clearing account swap that does not require a money transaction. The commerce in this situation is continuous, with a line of credit established in the central banks of two nations, and the exchange of products between two governments aims to reach an agreed-upon value or volume of trade tabulated or computed in non-convertible “clearing account units.”

13.5 Transfer Pricing

Transfer pricing in the international market refers to the pricing of goods, services, or intangible assets exchanged between related entities within a multinational corporation (MNC) operating in different countries. Transfer pricing aims to allocate profits and costs accurately among the various entities within the MNC while ensuring compliance with tax laws and regulations in each jurisdiction. Effective transfer pricing allows MNCs to optimize their global tax position, manage operational efficiency, and mitigate risks associated with tax authorities’ scrutiny.

There are several methods commonly used for determining transfer prices in international markets:

1. Comparable Uncontrolled Price (CUP):

• The CUP method compares the price of a product or service transferred between related entities with the price of a similar product or service in an uncontrolled transaction between unrelated parties.
• It relies on finding comparable transactions to establish a fair market price for the transferred product or service.

2. Cost-Plus Method:

• In the cost-plus method, the transfer price is determined by adding a markup to the production cost of the product or service.
• The markup represents a reasonable profit margin based on industry standards or the company’s internal policies.

3. Resale Price Method:

• The resale price method sets the transfer price based on the resale price of the product or service charged by the buyer, less an appropriate gross margin.
• It is commonly used when the buyer adds value to the product before selling it to external customers.

4. Transactional Net Margin Method (TNMM):

• TNMM contrasts the net profit margin from a controlled transaction with the net profit margin from comparable uncontrolled transactions.
• It focuses on the net profit relative to an appropriate base, such as sales, assets, or costs.

5. Profit Split Method:

• The profit split method allocates the combined profit of related entities based on each entity’s relative contribution to overall value creation.
• It requires identifying each entity’s key functions, assets, and risks and determining an appropriate allocation of profits.

6. Cost Sharing Method:

• Cost sharing involves sharing the costs and risks of developing intangible assets, such as patents or technology, among related entities.
• The transfer price is determined based on each entity’s contribution to the development costs and anticipated benefits from the shared intangible assets.

Effective transfer pricing in international markets requires careful consideration of various factors, including the nature of the transactions, the availability of comparable data, regulatory requirements, and the company’s strategic objectives. By employing appropriate transfer pricing methods and maintaining detailed documentation to support pricing decisions, MNCs can ensure compliance with tax laws while optimizing their global operations and maximizing shareholder value.

9.6 Grey Marketing

Intellectual property owners face an additional challenge in protecting their property rights. The issue is that, in some cases, genuine goods will enter a market via unauthorised methods. These are referred to as grey market goods. Grey market products develop due to a seller pricing items differently in multiple marketplaces or as currency values change, making it viable to acquire goods in other markets and import them.

For example, suppose the dollar’s value relative to the German mark is high. In that case, buying German automobiles directly from German sellers rather than through authorised American wholesalers may make sense.

Intellectual property owners have many challenges when it comes to grey market items. The biggest issue may be the disruption they bring to networks of authorised distributors and dealers, who perceive lower-priced goods as undercutting them. The primary issue for consumers with grey market goods may be obtaining warranty support if something goes wrong. Authorized dealers are sometimes the only ones who can provide warranty servicing. Furthermore, instructions and safety information may not be available in the market language where the sale occurs in some situations.

The same regulations prohibiting the importation of counterfeit goods may also prohibit the importation of certain grey market commodities. Many legal systems are starting to see grey market litigation. For 70 years, the United States has wrestled with the issue of grey market goods. As previously stated, under Section 526 of the Tariff Act of 1930, the proprietor of a trade mark may prohibit imports bearing an identical mark. The statute empowers US trademark owners to exclude all grey market items simply by denying import licenses. However, over time, the customs office construed the law so that numerous grey market imports were permitted.

A trade group and Cartier Inc. brought grey market tactics before the Supreme Court in 1988 in a case against K Mart and 47th Street Photo Inc., two of the biggest grey market importers in the United States. In K Mart versus Cartier, 108 US 1811 (1988), the Supreme Court established an analytical framework and some principles for grey marketers in an exceptionally convoluted case with distinct majorities for different parts of the ruling.

The Court established five structures for grey market imports and decided whether Section 526 obliged customs to exclude items unless the owner of the US trademark authorised the import.

Case 1: A US firm buys the rights to register and use a foreign firm’s trade mark in the US to sell the foreign firm’s products in the US. The court decided in this case that imports of the same items by the foreign manufacturer or a third party who purchased the goods from the foreign manufacturer would unfairly jeopardise the value of the US trade mark holder’s investment. As a result, Section 526 mandates that customs services exclude imports in this situation.

Case 2A: A foreign company manufactures items in another country. A company subsidiary has registered the foreign trade mark in the United States. The court ruled that Customs might let the entry of grey market items into the United States.

Case 2B is the inverse of Case 2A. In this case, a US business establishes an overseas subsidiary to manufacture and sell branded goods. Again, the Court ruled (by a different majority) that customs could allow the products into the country.

Case 2C: In this case, a US company opens a branch or division to manufacture items offshore. The Court ruled that because the commodities were not “of foreign manufacture,” as required under the Act, customs could allow them to enter.

Case 3: In this instance, a US proprietor of a US trade mark grants permission to a foreign company to manufacture items and use a trade mark in international markets. The manufacturer subsequently imports the goods or a third party. The Court decided that Section 526 compelled the exclusion of certain goods unless the holder of the US trade mark consented to the import.

The net result of the various votes on the grey market scenario was that grey market imports were slightly restricted. Imports may enter if the US and the foreign firm share common control as a parent, subsidiary, or branch. If US and foreign enterprises are self-sufficient, the US trade mark owners can block unauthorised imports.