Prior to Covid-19, most cross-border trade payment methods relied on one known factor – risk profiles of the importer and exporter. An exporter wants to be paid in a timely manner and the importer wants to receive his/her goods promptly and in good condition. These simple requirements were easy to manage. To be sure, relative bargaining power played a role as well but, putting that aside, every payment method relied on perceived risks of getting the benefit of a bargain.
This is no longer the case; especially in the Covid-19 era and, most specifically, in relation to medical equipment or PPE products. In the past, traders who transacted business with Chinese exporters could hope that they would use Documentary Letter of Credit (LC) as a method of payment. This is no longer true, especially regarding PPE. The accepted payment method for PPE products from China is cash-in-advance. For the importer, this poses unacceptable risk. For the Chinese exporter, this is the safest method of payment.
Why is this the case and can this divide be bridged?
From the Chinese exporter’s perspective, it appears not, because they fear that their products can be rejected upon arrival at the destination port for any reason, including non-conformity. This would be the case where the trade term is FOB destination port. For the US importer, the issue is that the product they ordered may be substituted with an inferior version of the same product or may be non-conforming. These are real concerns.
The various concerns (of the importer and exporter) can be addressed. One method of addressing the concerns of both parties (exporters and importers) by 1) using services of agents (in both exporter and importer countries) who are knowledgeable about local export rules and regulations; and 2) employing product delivery terms that mitigate each party’s risk.
- Use of Agents with Knowledge of Local Regulations: Chinese manufacturers of PPE products seem to have addressed this requirement by using licensed exporting agents (“Export Agents”) who are professionals with knowledge of export rules in China. The Chinese Exporting Agent’s role is to ensure that conforming products are shipped. They review the specifications of each item to be shipped to ensure the product specification and certification satisfies existing export regulations. US importers also have “agents” such as import companies and brokers 9US Brokers). However, neither the Chinese Export Agents or US Brokers share knowledge of local rules or have expertise in the other country’s export and import rules. Nor do these agents (Chinese and American) share information related to draft documentary letters of credits to ensure that the terms make the transaction possible (i.e. product delivery and payment). See this article for a good discussion of the various requirements to export from China: https://www.chinacheckup.com/blogs/articles/china-foreign-trade.
- FOB Origin Delivery Terms: There are two forms of delivery methods commonly employed in cross-border trade: FOB Origin or FOB Destination. Ideally, US importers prefer FOB Destination whereas Chinese exporters prefer FOB Origin. Compromising on delivery terms will mitigate the trade risk between these two countries. Chinese government has implemented very stringent measures aimed at stopping the fraudsters. These efforts are bearing fruit (in form of compliant PPE products) but has stalled trade. This is therefore an ideal time to go back to the use of LCs since FOB Origin delivery removes risk of non-payment for the manufacturer. However, this means the risk of loss is passed on to the US Buyer/Importer in China. Since manufacturers use licensed Export Agents who are subject to severe government censure for export of non-conforming products, US Buyers/importers can now be certain they will receive conforming goods. Further, US Buyers/importers can be certain they will not lose their money to fraudsters because the goods are insured while in transit.
Cassona facilitates cross border transactions through document review (including draft LC and shipping documents), product inspection at country of origin and regulatory compliance. Further Cassona International has contractual arrangements only with licensed Export Agents who are vetted by our personnel on the ground in China. We have personnel on the ground in the US (San Francisco), China (Guangzhou & Shanghai), and EU (Estonia) to ensure we provide you real time assistance. Get in touch. www.cassonainternational.com