Blog/News

Global Governance of Letters of Credit and the UCP600

By: Slava Vernidub, Express Trade Capital

Every year, trade transactions exceeding US$2 trillion are conducted under UCP600, totaling some 11% of all import/export transactions.­­1 The primary goal of the UCP600 is to ease cross-border trade by providing global uniform rules regulating the issuance and usage of letters of credit (“LCs”).

To date, the UCP (“Uniform Customs and Practice for Documentary Credits”) rules are adopted in 175 countries. UCP rules are issued by the International Chamber of Commerce’s (ICC) commission on Banking Technique and Practice.  It is important to note that the ICC is a private international organization of industry experts, not a governmental body. The UCP600 is arguably the most widely accepted set of private rules for international trade ever developed.

How is UCP600 different from previous UCP publications?

Since the UCP was first established in 1933, it underwent several revisions, each reflecting the evolution of trade finance practices across banking, insurance, and transport industries. The objective was to create a set of internationally uniform rules to remove confusion caused by individual countries promoting disparate laws and practices governing the use of letters of credit. By guiding banks and other players engaged in global trade, the UCP enables greater trust between multinational actors and drastically increases the reliability, frequency and efficiency of international trade transactions. As of today, the UCP600 is the latest published revision issued on July 1, 2007 and includes 39 Articles.

In contrast to previous UCP publications, UCP600 not only lays out guidelines, but also includes definitions (Article 2) and interpretations (Article 3) on how to apply certain provisions of the code. By providing clear, defined terms and information specifying the role of banks in letters of credit, UCP600 removes ambiguity and provides a more concise and precise set of regulations to govern LCs. As a result, compared to transactions governed by previous versions of the UCP, transactions conducted under UCP600 are more streamlined, less risky and require fewer amendments.

Aiming to adapt the evolving practice of submitting electronic documents under letters of credit, UCP600 introduced the eUCP which has 12 articles. The goal of the eUCP is to ‘accommodate presentation of electronic records alone or in combination with paper documents’.2 However, for a letter of credit to be subject to eUCP, it must explicitly indicate so in the instrument. Letters of credit subject to eUCP are also subject to UCP600 even if this is not explicitly stated in the letter of credit. If there is a conflict, eUCP will prevail in situations where it will produce a different result from UCP.

How is UCP600 beneficial for trade transactions?

1. UCP600 levels the playing field by creating one set of operating rules for all international parties. This makes trade more inclusive because it allows SMEs to participate in international markets and integrate global supply chains.  SMEs can now rely on banks and counterparties to follow the UCP600 rather than relying on their network, market position, banking relationships and ability to exercise legal muscle, to hold sway over their trade partners when disputes arise.

2. UCP600 resolves disagreements without court intervention, providing more fair, cost-effective, and efficient global trade transactions. Banks and other LC issuing institutions can perform better as neutral third parties to decide issues that are resolved by the language of UCP600 rather than deferring and referring issues for resolution to courts for fear of incurring liability.

3. UCP600 clearly identifies the roles of parties involved and their responsibilities, reducing risk and increasing transparency and therefore speed for exporters and importers who otherwise would have no recourse beyond suing their trade partners and corresponding banks in courts of foreign jurisdiction.

4. A notable feature of UCP600 is the irrevocable nature of the letter of credit. An irrevocable letter of credit cannot be revoked by the issuing bank or at the request of the letter of credit applicant. It assures the parties involved that the guarantee offered by an LC cannot be rescinded once issued unless all parties mutually agree to cancel it. An LC is irrevocable by default, even if not explicitly stated.

For a letter of credit to adhere to UCP600, it must specify so (unless it states that it is subject to the eUCP in which case, both apply). This ensures that all parties involved understand how their performance under the instrument will be governed. If a transaction requires, certain parts of the UCP600 can be omitted but such exceptions must be specifically and unambiguously written into the LC.

If you would like to find out more about LCs, the UCP600 and how it could benefit your trade transactions, reach out to slava@expresstradecapital.com. A comprehensive understanding of UCP600 will help both small and large businesses mitigate risks and conquer new international markets.

To make sure your LCs are issued under UCP600, reach out to us. We issue LCs, SBLCs, BGs, RWAs, and Proof of Funds. Contact us to understand which instrument is best suited for your business needs.

Sources:

1. Collyer, Gary. Guide to Documentary Credits. The London Institute of Banking & Finance, 2017

2. International Chamber of Commerce. Supplement to the Uniform Customs and Practices for Documentary Credits for Electronic Presentations (eUCP), 2007

International Chamber of Commerce. Uniform Customs and Practices for Documentary Credits, Publication 600 (UCP600), 2007

“UCP600.” ShippingCollege,

shippingcollege.co.uk/j365/index.php?option=com_k2&view=item&layout=item&id=193

“Global Rules.” International Chamber of Commerce,

iccwbo.org/global-issues-trends/banking-finance/global-rules/

Thanuja, Rodrigo. “UCP 500 to 600: A forward movement.” Murdoch University Law Review, vol. 18, no. 2, 2011,

research-repository.griffith.edu.au/bitstream/handle/10072/48300/80083_1.pdf

Badlis, Baziz. “UCP600 & UCP500 Compared.”

academia.edu/11329530/DIFFERENCE_BETWEEN_UCP_500_V_UCP600

Castaneda, Cristina. “Comparative Study of UCP500 and UCP600 – Approach to Negotiation and Preclusion.” Jan. 2007,

picadoyleon.com/en/pdf/COMPARATIVE.pdf

Chan, Jeremy. “Banks see uneven digitisation in trade.” The Global Treasurer, 24 November 2020,

theglobaltreasurer.com/2020/11/24/banks-see-uneven-digitisation-in-trade/

Manzella, John. “The New UCP 600: Better Rules to Better Facilitate International Trade.” The Manzella Report, 1 Jan. 2007,

manzellareport.com/index.php/trade-finance/438-the-new-ucp-600-better-rules-to-better-facilitate-international-trade

How Letters of Credit Can Benefit Your Business During COVID-19

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By: Dina Davletshina, New Business Development

COVID-19 has disrupted nearly every part of our lives. Yes, the public health consequences are tragic. But along with this, small and large businesses alike are feeling significant economic pain. Companies in the consumer goods industry are encountering significant supply chain challenges and quickly shifting consumer spending habits. The retail and the apparel apparel industry in particular are facing their own share of supply chain challenges. The list goes on and on.

During times of such economic upheaval and uncertainty, normalcy disappears, once reliable customers start canceling orders and ask for extended payment terms. Stores suddenly close and it’s unclear whether they will ever open again. Shipping delays become more common and trading partners less flexible.

In this climate, all businesses need to reduce their risk to survive this economic storm. One way to do this is to leverage financial instruments like letters of credit (LCs), which can help achieve the highest risk-adjusted returns.

How Letters of Credit Can Benefit Your Business

Letters of credit offer businesses substantial advantages that are amplified by the uncertainty caused by COVID-19.

Supply chain risks and cancelled orders are a greater risk in this global pandemic, so letters of credit can give you more confidence that you’ll actually get paid.

Most prominently, letters of credit minimize risk for both buyers and sellers. Buyers are that their goods are shipped and documentation is in order before submitting payment. Sellers get the confidence they need to ship goods to their buyers.

Letters of credit are also helpful because they free up capital for both buyers and sellers. By using an LC, buyers do not need to leave deposits to start production. Instead, the LC is opened for the transaction’s full value, letting buyers more efficiently allocate their capital. Suppliers can then borrow against their letter of credit, which can provide them with more liquidity before the transaction closes. It is a win-win for both buyers and suppliers. 

Buyers and sellers may be transacting with new parties or others they may not fully trust, letters of credit can include provisions that must be satisfied before the transaction is completed. This can include everything from inspection of the delivered goods to specific delivery times. These provisions can ensure that your goods arrive in the precise manner that you expect – if they don’t, you have the option to reject the goods without payment or to seek a discount for the suppliers errors-

Helping Business Go Forward

It’s unclear when the COVID-19 crisis will end. In the meantime, business has become inherently riskier. There’s a greater chance that your suppliers and customers won’t pay for your goods and services. Because of this, letters of credit can help you continue business as usual while minimizing risk and preserving cash flow. For these reasons, we encourage you to leverage LCs when possible throughout this global pandemic.

At Express Trade Capital, we are happy to help you leverage all the the benefits of letters of credit. Banks require you to jump through several hoops (like collateral requirements or a prior credit relationship with the bank) to obtain a letter of credit. At Express Trade Capital, we have removed these restrictions by allowing clients to use our already existing LC facilities with out banks, thereby allowing you to quickly obtain LCs for your specific business needs without onboarding to a bank.

To learn more about how we can help you, don’t hesitate to click here.

China Market Update

Overall Market Conditions:

China officials have extended the Spring Festival Holiday until after February 2. The length of the extensions may vary depending on the location. Shanghai has extended until February 10, while others until February 14 or longer. As factories re-open, labor continues to be minimal as public transportation in certain cities or provinces are still under restriction and quarantine. These can last up to an additional 14 days or longer. Trucking equipment and services as well are still impacted due to the lack of labor as well as road restrictions preventing normal pickup and delivery services.

Airlines:

Passenger Flights: Over 60 airlines have announced cancellation from flights to/from China.

Freighter Flights: Freighter flights are slowly returning as demand continues to increase. As of now, 60% of freighter flights are still not operating.

Airfreight Pricing: Due do the current supply & demand, transit is continued to be limited under a Force Majeure environment based on first come basis.

Infrastructure:

The major airports that are impacted are PVG & CGO with limited amount of staff. WUH is closed until further notice and those operating under normal conditions include, BJS, SZX, HKG, LAX, ORD, JFK, AMS, & FRA. 

All Seaports are operating under normal conditions, excluding Wuhan & Yichang a Hunan province. Ocean demand has dropped by more than half and is not expected to pick up again until after February 20.

Please contact our logistics office with any further questions contact@expresstradecapital.com.

If You Import from China – US and China have come to a decision regarding tariffs

Carli Valinoti, Express Trade Capital

Chinese President Xi Jinping with President Donald Trump in June in Japan. They are the primary actors in the longest-running, most serious trade war in history.
via Getty Images/WSJ

After months of negotiation, the US and China have announced that they have come to an agreement on trade. The US will cut the current taxes on $120 billion of Chinese goods from 15% down to 7.5% and has decided to not move forward with adding tariffs to the rest of the $160 billion Chinese goods. This will take effect on December 15, 2019. A 25% tariff rate will continue to stay in place on approximately $250 billion worth of US goods. In return, China has agreed to increase its purchases of US goods and services along with around $40-50 billion in agriculture products.

For questions on how this affects your imports from China, contact our logistics office for further assistance. Contact@expresstradecapital.com

Section 301 Tariffs Increase to 30 Percent on Chinese Goods Suspended

After meeting with Vice Premier Liu He of the People’s Republic of China, President Trump announced in a news release on October 11, 2019 that the duty increase from 25% to 30% on List 1, 2, and 3 products would be suspended. A final decision will be made later regarding the additional duties scheduled to go into effect December 15, 2019 for List 4B commodities.

Information regarding the phase one deal can be found in the White House news release here.

IF YOU IMPORT FROM THE E.U.

Following a World Trade Organization decision paving the way, the U.S. Trade Representative (“USTR”) has published a list of products form E.U. origin which will be subject to additional duty rates of 10% or 25% ad valorem, effective October 18, 2019.

We expect that a FEDERAL REGISTER notice will be published with the details including confirming the definition of the October 18 effective date; effective dates are commonly based on the date of entry. 

A link to the list of products, countries and additional tariff rates may be accessed at:  https://ustr.gov/sites/default/files/enforcement/301Investigations/EU_Large_Civil_Aircraft_Final_Product_List.pdf

As with other tariffs, close coordination with your carrier and EXPRESS representative is needed to avoid duties assessed to shipments arriving before the effective date.  EXPRESS Trade Capital, Inc. is available to answer your questions, help assess impact to your business and discuss mitigation strategies. Reach out to us at logistics@expresstradecapital.com

If you Import from China

By; Carli Valinoti, Express Trade Capital 

After meeting with President Xi over the weekend, President Trump announced decisions regarding the bilateral trade dispute. The President announced that while current tariffs will remain in place, he will not move forward with additional tariffs as negotiations continue. Therefore, there are no immediate plans to implement Tranche or List 4 trade-remedy tariffs.

The United States Trade Representative recently concluded seven days of hearings on the proposed List 4. The testimony and comments solicited from the public as part of the List 4 review may influence the products to be included and tariff rate if and when any additional trade-remedy actions are taken. But for now, any action on List 4 is on hold.

If you import from China, Express Trade Capital is here to assist with trade strategies to minimize the impact, apply for exemptions, and process refund claims where exemptions have been granted. Click here to contact Express Trade Capital for expertise and support. We are here to help.

IF YOU IMPORT FROM MEXICO

By; Carli Valinoti, Express Trade Capital 

Late Friday night the President announced successful negotiations with Mexico.  With a signed agreement addressing illegal immigration, the President has suspended indefinitely the planned tariffs against Mexico. 

The 5% tariff on goods from Mexico will not go into effect on June 10, 2019.  

Issues Importing from India

Carli Valinoti, Express Trade Capital 

On May 31, 2019, President Trump issued a proclamation announcing the termination of India as a beneficiary developing country. The decision comes as a result of the fact that, according to the President, India has not assured the United States that it will provide equitable and reasonable access to its markets as well as refrain from engaging in unreasonable export practices. 

Among other things, this means that US imports from India entered for consumption or withdrawn from warehouse for consumption, will no longer be eligible for preferential duty treatment under the Generalized System of Preferences as of June 5.

Contact Us to learn how ETC can help you manage your supply chain and any unforeseen costs.

Possible Rising Tariffs at the Mexican Border

Carli Valinoti, Express Trade Capital

President Trump has announced plans to impose 5 percent tariffs on all goods imported from Mexico, rising to as high as 25 percent until – according to the White House – the Mexican government stems the flow of migrants. While most specifics are not yet known – conceptually, tariffs will become effective June 10 and gradually increase by 5 percent each month until they reach 25 percent in October.

What we still don’t know:

  • If the action is to be administered by the date of export
  • If all exports from Mexico to the US are covered including non-Mexican origin goods exported from Mexico and the US goods returned
  • Whether NAFTA benefits for duty and merchandise processing fee will be allowed
  • Whether these tariffs are eligible for drawback, among others

Contact us today to learn about ETC’s trade protection financing options.