LOGO
Chapter 2
Business transaction methods in
foreign trade
Chapter 2’s objectives
1. Study the business transaction forms in the international trade,
distinguish them and understand the advantages and
disadvantages to apply in international business.
2. Understand the operations for each of the above business
transaction forms
3. Applying business profession in accordance with each mode of
international business
2
Opening Case study
❖ Direct export of fertilizer ❖ Commodity exchange of
in 1990s in Vietnam tomatoes in the USA
Which one is the most popular business transaction
method in the world?
3
Hedging
The tomato farmer plans to harvest 10 tons in December at a cost of
$350/ton. The selling price of tomatoes at this time is $400/ton.
However, the fear of price fluctuations in December may create risks,
that farmer will go to the commodity exchange to sell 10 tons of
tomatoes at $400/ton and expect a profit of $50/ton. In December, if
the price increases to $450/ton, the farmer still sells 10 tons of
tomatoes for $450/ton but keeps only $400/ton and pays the
difference of $50/ton to the exchange. The speculators who predict the
price will go up enjoy this difference. The farmer guarantees a profit of
$50 as expected. Conversely, if the price of tomatoes drops to
$350/ton in December, the farmer will sell tomatoes at this price but
have the right to go to the exchange to get the difference of $50/ton. 4
Transaction methods on international
market
1 2 3 4 5
International Other special
Common sales Countertrade Transactions at transaction
outsourcing fairs and
and re-export methods
exhibitions
transactions
5
1
Common sales
6
Common sales
Common sales is the most common transaction
method on the basis of money and goods
exchange in foreign trade.
Buyer: A person use money to buy goods
Seller: A person has goods for sale
7
Characteristics of common sales
• Participants: buyer and seller have their head
office in different countries
• Currency: foreign currency to one or both
parties
▪ Currency?
▪ Exchange rate?
• Commodities: the object of trading activities,
move across national boundaries.
8
Types of common sales
Common
sales
Direct Indirect
Broker
Agent
9
Direct sales
Direct sales is an agreement in ❖ Types of direct sales
which the buyer and seller
directly establish a
Direct import/
relationship under ordinary export
conditions of sales.
Sales
representative
E-commerce
10
Direct sales
Advantages Disadvantages
Requires experience in
Save more money
international direct trading
Directly approach
Accessibility of information
international customers
Be proactive and decide on High requirements on
your own issues appropriate transactions
Understanding of partners'
Fairness culture and transaction
practices
11
Indirect sales
Indirect sales is a type of common transaction in which a selling and
purchasing relationship is established through a third person (intermediary -
agent, broker).
3rd person => help buyer-seller conduct business transactions
• Broker: introduce partners => brokerage fees
– Not responsible for business dealings
– => thoroughly research the credibility, responsibility and service of the
broker
• Agent: agency contract specifying the rights and obligations of the parties
(performing the work authorized or on their own behalf)
– Join as a part of business
– Responsible for operations and business outcomes
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Agent types
Agent Title &
Task
right cost
Full
Dependent Consignment
Authorized
agent agent
agent
General Commission Exclusive
agent agent agent
Distribution Possession
Special agent
agent agent
Agent of
payment
guarantee
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Agent types
14
Indirect sales (con’t)
❖ Advantages
▪ On the basis of the common and fundamental goods relations => fair
▪ Take advantage of intermediaries: information, experience, cost
savings (market research, establishment of business relations,
establishment of facilities ...)
▪ Fast, effective (entering new markets)
❖ Disadvantages
▪ Limiting opportunities to directly contact business partners,
customers
▪ Share benefits with middlemen
▪ Satisfy the requirements of the middleman
▪ Difficult to grasp customer and partner information
▪ The risk of reduced competition due to lack of market information
▪ Business costs increased
15
EXERCISE
A Taiwanese company wants to find an agent in Vietnam to
sell “Megatool” hand tools with the two requirements:
❖ The agent in Vietnam must pay the COGS immediately
❖ 5 years later, the company will open a representative
office and directly sell Megatool in Vietnam.
If you are the head of the company's sales and market
development department, which agents should you
choose?
16
2
Countertrade
17
Countertrade
Counter trade is a method of exchanging goods, in which exports are
closely associated with imports, sellers are simultaneously buyers, and
the value of goods delivered is equivalent to the value of goods received.
• The goods exchange
⇒Currency: calculation function (without payment function)
• Export is closely associated with imports
⇒Procedures: the buyer and seller jointly complete the import and
export procedures
⇒Do not increase or decrease the national trade balance
• Purpose of exchange should make the amount of goods delivered and
received with equivalent value (quantity, price, sales terms)
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Characteristics of counter trade
❖ Balance requirements
▪ Obligations and Rights
▪ Prices and transactions
▪ Merchandise: value and value of use
❖ Balance characteristics:
▪ Types of good
▪ Price
▪ The total value of goods delivered to
each other
▪ Delivery conditions
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Counter trade types
20
Barter
Barter is a form of counter trading where
the parties exchange equivalent goods
and the exchange activity takes place
almost simultaneously.
▪ Do not use currency as a payment function
▪ Equivalent goods
▪ Delivered and received at the same time
Barter is the direct exchange of goods and/or
services between two parties without a cash
transaction. Although barter is the simplest
arrangement, it is not common.
21
Compensation
Compensation is the method of counter trading
that the delivery and receipt of goods will be
recorded so that during each business period, it
will be settled and compensated each other.
● Parallel compensation - Before / after
compensation
● Partial / full compensation
22
Clearing
Clearing is a form of counter trade, which the
parties appoint the payment bank to open an
account (called a Clearing account) to record
and settle the total value of goods delivered
and goods of each side.
● Purchases and payments take place on
the account
● 4 subjects open tracking accounts:
○ 2 Transaction subjects
○ Banks of seller and buyer
23
Counter purchase
Counter purchase is a form of purchase and
sale whereby one party undertakes to
repurchase certain goods of the other party in
the future
● The previous delivery party will accept to
receive back some of the other party's
identified items within a specified time
● The shipper will repurchase the goods for
the counter purposes of the goods
delivered
24
Offset
Offset is a form of purchase and sale whereby one party undertakes to
repurchase certain goods of the other party in the future in order to
offset the consignee of the corresponding amount of foreign currencies.
● The forwarder will accept future purchases of some unspecified
goods
● Purpose: to return the goods to the previous delivery party an
amount of goods = foreign currency equivalent to proactively
deliver the goods according to the received value.
● Suitable for countries with strict foreign exchange control
regime, large trade deficit
25
Switch
Switch is a form of purchase and sale in which one party transfers
its repurchase obligations from one party to a third party in order
to fulfill its committed obligations in the future.
▪ Usually happens when the company receives goods that are
not in its specialty => transfers to a third party to fulfill its
obligations.
▪ Creating better conditions for specialized companies to
engage in the nations’ counter trading commitments
▪ Usually takes place between rich (technologically strong) -
poor (agriculturally strong) countries
26
Buy backs
Buy backs is a form of purchase and sale by one party to hand over the
production line and equipment to the other in order to receive back the finished
products produced from such production line or technology.
(if selling equipment, lines, technology and acquiring finished products)
-> often associated with technology transfers (total equipment supply /
inventions / technical know-how)
• Take advantage of cheap raw materials and labor in the country
participating in the exchange
• Participants: Governments of the countries or companies guaranteed by
the government
• The effect is not considerable:
– High equipment prices
– Control the price of the product
– Restrict activities of the transferee
– The profits of the transferee are low due to low risk
27
Advantages and disadvantages of
countertrade
❖ Advantages
▪ Do not use currency => do not bear the risk of exchange rates, reduce
transaction costs and payments
▪ Promote trade even in the absence of transaction conditions: foreign
currencies, imperfect goods, inventories, etc.
❖ Disadvantages
▪ Complicated business and application principles
▪ Requires intensive foreign trade skills and international experience
▪ Limited items
▪ Conflicts of interests imposed by the parties
▪ The trend of trade liberalization does not create an incentive for this
kind of trade
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3
International outsourcing and re-
export transaction
29
International outsourcing
Definition:
International outsourcing is a business transaction
method in which one party (the outsourcee) imports
raw materials or semi-finished products of another
party (the outsourcer) to process them into finished
products and deliver them to the outsourcee and
receiving remuneration (called processing fee)
● Buying and selling: money - services
● Labor export on the spot
30
International outsourcing
Characteristics:
● Outsourcing activities associated with export -
import activities
● Commodity: The value of labor synergy, does not
require much intellectual thinking
● One-way operation:
○ Outsourcer: a country with a developed
technology
○ Outsourcee: less developed countries in
technology, labor-intensive
31
Types of international outsourcing
Based on payment methods
● Contractual method: determining target price for
each product including contractual cost and
contractual remuneration
● Cost plus contract: payment of the entire product at
the actual cost plus processing costs.
Commonly used when the outsourcer is
knowledgeable and has good control of the
outsourcee' activities
32
Types of international outsourcing
Based on the right to transfer ownership of materials and finished
products
❖ Delivery of raw materials to receive finished products:
The outsourcer orders the raw material / semi-finished product to the
outsourcee
The outsourcee produces finished products within the prescribed time
limit
The outsourcer receives the finished product and pays the processing
fee to the outsourcee
During production, material ownership remains with the outsourcer
❖ Purchase raw materials - Sell finished products
The outsourcer sells the raw material to the outsourcee and acquires
the finished product of the outsourcee.
Ownership of raw materials belongs to the outsourcee 33
Types of international outsourcing
Based on the subjects involved
● Two-sided outsourcing: only the outsourcer and outsourcee
● Multi-side outsourcing: (transition outsourcing)
● A outsourcer
● Many parties act as outsourcee
● A outsourcer processing transactions on its behalf with
multiple outsourcee.
34
Advantages and disadvantages of
international outsourcing
❖ Advantages:
▪ Promote specialization and international division of labor
▪ Enterprises in outsourcee countries have access to modern production
technology, learn from experience in international management and
production of goods.
▪ Labor is trained to produce goods that meet international standards and
earn income (solve the employment issues for the densely populated
and underdeveloped country)
▪ Collect foreign currencies, improve the national trade balance
❖ Disadvantages:
▪ Cheap remuneration
▪ It is difficult to establish long-term outsourcing relationship (when
cheap labor is no longer a competitive advantage)
▪ Cultural conflict and abuse of labor by the outsourcee
35
Re-export
Re-export is a form of international business in which export
activities take place on imported goods that have not been
processed domestically.
➔ Commercial intermediaries, collecting money from re-export
services
➔ 3 parties = Exporting country, importing country, re-
exporting country
➔ Re-export transactions = 3-party transactions / triangle
transactions
36
Types of re-export
(1) Common re-export (Temporary import and re-export)
Note:
Exporting Good transfering
country Payment
Re-exporting Importing
country country
(2) Transshipment of goods
Exporting
country
Re-exporting Importing
country country
37
Advantages and disadvantages of re-
export
❖ Note:
▪ Common re-export:
• Often requires changes in brands and packaging
• The re-export party does not want to deliver goods directly from the exporting country
to the importing country
• Keep information about the source confidential
▪ Trans-shipment of goods:
• Do not focus on information security or auxiliary packaging services
• Pay much attention to payment
❖ Advantages
▪ High profitability with excellent profession and geographical and financial privileges (Hong
Kong, Singapore, UK, USA, Netherlands ...)
▪ Limit deficit of the national trade balance
❖ Disadvantages
▪ It is no longer effective when trade liberalization develops
▪ Not a national sustainable development solution
38
Re-export
❖ Simultaneously signing the Import Contract and Export Contract: suitable
for:
▪ Goods
▪ Packaging, brand
▪ Delivery term
▪ Voucher of goods
❖ Payment: Back-to-back L / C - opened on the basis of another letter of credit
(original letter of credit):
▪ The value of back-to-back letter of credit is lower
▪ Larger number of documents
▪ Sooner delivery time
39
4
Transactions at fairs and
exhibitions
40
Transactions at fairs and
exhibitions
❖ Definition
Transactions at fairs and exhibitions is a form of transaction
occurring periodically in a certain time at a defined location and
regulations.
❖ Characteristics:
• At 1 place, 1 specific time
• Take advantage of time and seize the maximum opportunity
• Requiring standards on product quality, decoration,
advertising ...
• High transaction professions are required
• Requires thorough preparation
41
Types of transactions at fairs and
exhibitions
❖ Based on the content:
✓ General exhibition fair
✓ Trade fairs and exhibitions
✓ Highly targeted and focused on a specific group of customers
and customers
❖ Based on organization size
✓ Local fairs and exhibitions
✓ National fairs and exhibitions
✓ International fairs and exhibitions
✓ Not targeted to groups of customers, but to businesses attending
42
Note when participating international fairs
1. Consider the nature, location, time of the fair or exhibition
2. Do research about conditions and display methods
3. Evaluate participants, visitors
4. Select the location of the stall, calculate the rental price of the
stall and related service costs
5. Analyze benefits and costs when attending
43
Advantages and Disadvantages when making
transactions at fairs and exhibitions
❖ Advantages
▪ Contact potential customers selectively
▪ Develop business profession and promote businesses
▪ Collecting information about competitors
❖ Disadvantages
▪ Only takes place in 1 place in a short time
▪ Requires high professional and management skills (import-
export, marketing ...)
44
5
Other special transaction methods
45
Special transaction methods
1. International Auction
2. International Bidding
3. Transaction at commodity exchanges
46
International auction
International auction is a special method of sale
held in public in a certain place where buyers are
free to preview the goods and compete to bid for
them.
➔ One seller, many buyers
47
Types of auction
❖ Based on the purpose of use
▪ Commercial auction: commercial purposes
▪ Non-commercial auction: goods with cultural or unique values
(antiques, memorabilia ...)
• Possession purposes
• Humanitarian and charitable purposes
❖ Based on the auction content
▪ Up auction: offer the lowest price and pay up gradually up to the
highest price that can be sold.
▪ Down auction: the highest bid offered will be sold and paid down
gradually, going to the highest bidder accepted to buy.
❖ Based on the scope and form of implementation
▪ Public auction
▪ Ballot
48
Advantages and Disadvantages of auction
❖ Advantages
▪ Seller benefits: 1 seller, sets their own purchase rules and auction
rules
▪ Buyers benefit: fairness, publicity, quality assurance
❖ Disadvantages
▪ Trade frauds are likely to occur: collusion with prices (detrimental
to sellers), inciting high bids (detrimental to buyers).
▪ High cost
49
International Bidding
International bidding is a special transaction method whereby the
buyer makes a predetermined demand for goods and services,
under the terms of sales; so that many competitors make their
offers to win the right to supply, and the buyer chooses to sign the
contract for the supplier has the most reasonable price and
condition.
50
Types of international Bidding
❖ Based on the object
▪ Construction and installation bidding, management bidding,
consultancy bidding ...
▪ Distinguish based on the object of trade
❖ Based on scope
▪ Open bidding
▪ Limited bidding
▪ Appointing bidding
❖ Based on the form of bidding
▪ Bidding 1 envelope / 1 bag of documents
▪ Bidding 2 envelopes / 2 bags of documents
❖ Based on how to organize bidding
▪ 1-phase bidding
▪ Multi-stage bidding
51
Several principles in international bidding
o Information: public, early and accurate
o Fairness, confidentiality, objectivity
o The source of capital is clear
o Economical and highly effective
52
Advantages and Disadvantages of international
bidding
❖ Advantages:
▪ The bid solicitor has the opportunity to choose the contractor
that is most satisfied
▪ Management and funding agencies: avoiding losses in goods
and capital construction
▪ The contractor is guaranteed of solvency
❖ Disadvantages
▪ High cost
▪ Difficult to control fraud: bid rigging
53
International bidding
1. Bidding preparation
2. Prequalification of bidders
3. Answer and explain questions of bidders
4. Collect records
5. Organizing bidding opening and contractor selection
6. Organize the announcement of bid results and sign contracts
54
Transaction at commodity exchanges
Transaction at commodity exchanges is a mode of
purchase and sale through brokers appointed by the
Exchange, to purchase and sell goods in great quantity,
of similar nature, of interchangeable qualities; following
certain contract forms at a fixed location.
55
Types of transaction at commodity
exchanges
❖ Immediate transactions
❖ Forward transactions
❖ Hedging
56
Immediate transaction
❖ Prices of goods and delivery time almost simultaneously
❖ Make offers, sign contracts and fulfil contractual obligations
(payment, delivery) immediately (3-10 days).
❖ Subjects: available and classified goods
❖ Do not attract speculators to trade
57
Forward transactions
❖ Prices are set at the time of signing the contract
❖ Time of delivery and payment: after 1 period (1 time in
the future).
❖ Attracting speculators
▪ Đầu cơ giá lên (Bull) – backwardation
▪ Đầu cơ giá xuống (Bear) – contago
58
Hedging
Through a forward transaction at an exchange, the
owner of the commodity signs a forward contract
for selling the goods with a guaranteed price fixed
in the future.
59
Advantages and disadvantages of
transaction at commodity exchanges
❖ Advantages
▪ Sharing commercial risks
▪ Large import-export transactions with countries with
international commodity exchanges
▪ Refer to international commodity prices
▪ Rapid capital turnover
❖ Disadvantages
▪ Requires high profession
▪ Large trading capital
▪ Requires the ability to analyze information and forecast the
market
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LOGO
END OF CHAPTER 2
