Kunseo Park - Academia.edu (original) (raw)

Papers by Kunseo Park

Social Science Research Network, 2011

It is an undeniable notion that international traders have used letters of credit (LCs) as a basi... more It is an undeniable notion that international traders have used letters of credit (LCs) as a basic form of trade payment, causing them to be called the lifeblood of international commerce. Their status, however, has been significantly undermined by the drastic shift from LCs to non-LCs in international trade and open accounts (OAs) selling methods have replaced LCs as the majority method of trade payment. Some recent articles show that businesses use LCs in less than one-fifth of cross-border sales of goods. This shift from LCs to OAs is not a temporal phenomenon but a pre-ordained result of the LCs' own characteristics, accelerated by recent innovations in trade. Among the many factors involved are the recent innovation of e-commerce, supply chain finance and increased use of export credit insurance, all of which enable traders and bankers to change and improve how to pay for and finance cross-border sales in ways once unimaginable under traditional LCs. This shift in payment and finance also brought about a shift from traditional paper-based transactions to information-based transactions, where most of the information is dematerialized and flows rapidly along the payment and finance chain. Formerly well-established and safe LC payments have given way to non-LC transactions, which seek cost-effectiveness and flexibility to accommodate streamlined payment processes such as supply chain management (SCM) and e-commerce trading. In global supply chain thinking, through an enhanced information technology (IT) infrastructure and dematerialized information, the flow of goods and the flow of payment can be synchronized and the visibility over the goods can be enhanced. Despite significant progress in payment and finance, the shift has also brought unprecedented risks. Among the many possible issues which may arise from the transition to OA trading, some urgently require reviewing. These issues include (1) the law applicable to non-LC transactions and its challenges, (2) the availability of expanded trade financing products, and (3) the new necessity for using credit insurance. The Uniform Customs and Practice for Letters of Credit (UCP) or other LC laws cannot give guidance for non-LC transactions and the principles and standards in non-LC v transactions differ from those in LC transactions. The U.N. Convention on Contracts for the International Sale of Goods the (CISG), the basic contract law for the international sale of goods, is expected to play an important role in filling the gap as a uniform law, while its substantive terms and standards, such as 'fundamental breach', 'detriment', 'sale', 'goods', and 'reasonable person', are vague and ambiguous, adding temporary confusion and requiring developments in rules and practices. This uncertainty can be partially alleviated with the help of prudent lawyers in this area and advisory bodies such as the CISG Advisory Council. Traders, as customers of trade credit products, now can select their own finance portfolio. Invoice financing, armed with simplicity free from the rigid rules of negotiable instrument law, is gaining ground as a major form of trade financing. In addition, export credit insurance is expected to grow significantly to fill in the credit gap in non-LC transactions, while the ambiguity in insurers' liability needs to be corrected for this credit product to serve cross-border sales. The relatively few studies in this field also suggest the need for in-depth study of this background subject and for an evaluation of its future impact on international trade. The last concern is the expected disparity in the development of trade finance among individual traders, industry sectors, and countries, which may cause frictions with the shift from LCs to OAs. IT, supply chains, and the shift to OAs can be drivers which will create new winners, very few in number but large in size, that survived the competition. Even mega-banks in the global financial market may be challenged by unexpected competitors, such as UPS Capital in trade finance. This dissertation gives some recommendations and alerts trade participants, i.e., banks, exporters, importers, and export credit insurers, to possible risks and benefits. Exporters will benefit from diversified payment options and financing products. However, even though costs will decrease and efficiency will increase, credit risks of buyers will persist. Therefore, exporters, especially small and medium-sized ones, should consider how to set and manage their trade accounts receivable portfolio, actively seeking solutions vi since they generally have little buffer from credit risks. Importers will be able to enjoy more visibility over the goods and avoid documentary fraud committed by foreign sellers. Among the other big players, banks must recognize that the new mechanism in payment and finance creates both opportunities, such as the better possibility of streamlining their existing trade payment system, and threats, as from new kinds of competitors that offer more in-depth credit enhancement services for non-LC transactions. The competition will come from almost every direction, i.e., factors, export credit insurance companies, big logistic companies, and even the big traders themselves, which have established their own supply chains. Arguably, the banks alone cannot develop this payment and finance mechanism and must discover ways to maintain their initiative in this area. Some of the leading banks in the global trade market are likely to try, but few will succeed. Lastly, export credit insurers will be the new major players in non-LC trade. However, they cannot be behind-the-scene facilitators who maintain their own rigid rules 31 See Xiang & Buckley, supra note 25, at 121.

SSRN Electronic Journal, 2000

Social Science Research Network, 2011

It is an undeniable notion that international traders have used letters of credit (LCs) as a basi... more It is an undeniable notion that international traders have used letters of credit (LCs) as a basic form of trade payment, causing them to be called the lifeblood of international commerce. Their status, however, has been significantly undermined by the drastic shift from LCs to non-LCs in international trade and open accounts (OAs) selling methods have replaced LCs as the majority method of trade payment. Some recent articles show that businesses use LCs in less than one-fifth of cross-border sales of goods. This shift from LCs to OAs is not a temporal phenomenon but a pre-ordained result of the LCs' own characteristics, accelerated by recent innovations in trade. Among the many factors involved are the recent innovation of e-commerce, supply chain finance and increased use of export credit insurance, all of which enable traders and bankers to change and improve how to pay for and finance cross-border sales in ways once unimaginable under traditional LCs. This shift in payment and finance also brought about a shift from traditional paper-based transactions to information-based transactions, where most of the information is dematerialized and flows rapidly along the payment and finance chain. Formerly well-established and safe LC payments have given way to non-LC transactions, which seek cost-effectiveness and flexibility to accommodate streamlined payment processes such as supply chain management (SCM) and e-commerce trading. In global supply chain thinking, through an enhanced information technology (IT) infrastructure and dematerialized information, the flow of goods and the flow of payment can be synchronized and the visibility over the goods can be enhanced. Despite significant progress in payment and finance, the shift has also brought unprecedented risks. Among the many possible issues which may arise from the transition to OA trading, some urgently require reviewing. These issues include (1) the law applicable to non-LC transactions and its challenges, (2) the availability of expanded trade financing products, and (3) the new necessity for using credit insurance. The Uniform Customs and Practice for Letters of Credit (UCP) or other LC laws cannot give guidance for non-LC transactions and the principles and standards in non-LC v transactions differ from those in LC transactions. The U.N. Convention on Contracts for the International Sale of Goods the (CISG), the basic contract law for the international sale of goods, is expected to play an important role in filling the gap as a uniform law, while its substantive terms and standards, such as 'fundamental breach', 'detriment', 'sale', 'goods', and 'reasonable person', are vague and ambiguous, adding temporary confusion and requiring developments in rules and practices. This uncertainty can be partially alleviated with the help of prudent lawyers in this area and advisory bodies such as the CISG Advisory Council. Traders, as customers of trade credit products, now can select their own finance portfolio. Invoice financing, armed with simplicity free from the rigid rules of negotiable instrument law, is gaining ground as a major form of trade financing. In addition, export credit insurance is expected to grow significantly to fill in the credit gap in non-LC transactions, while the ambiguity in insurers' liability needs to be corrected for this credit product to serve cross-border sales. The relatively few studies in this field also suggest the need for in-depth study of this background subject and for an evaluation of its future impact on international trade. The last concern is the expected disparity in the development of trade finance among individual traders, industry sectors, and countries, which may cause frictions with the shift from LCs to OAs. IT, supply chains, and the shift to OAs can be drivers which will create new winners, very few in number but large in size, that survived the competition. Even mega-banks in the global financial market may be challenged by unexpected competitors, such as UPS Capital in trade finance. This dissertation gives some recommendations and alerts trade participants, i.e., banks, exporters, importers, and export credit insurers, to possible risks and benefits. Exporters will benefit from diversified payment options and financing products. However, even though costs will decrease and efficiency will increase, credit risks of buyers will persist. Therefore, exporters, especially small and medium-sized ones, should consider how to set and manage their trade accounts receivable portfolio, actively seeking solutions vi since they generally have little buffer from credit risks. Importers will be able to enjoy more visibility over the goods and avoid documentary fraud committed by foreign sellers. Among the other big players, banks must recognize that the new mechanism in payment and finance creates both opportunities, such as the better possibility of streamlining their existing trade payment system, and threats, as from new kinds of competitors that offer more in-depth credit enhancement services for non-LC transactions. The competition will come from almost every direction, i.e., factors, export credit insurance companies, big logistic companies, and even the big traders themselves, which have established their own supply chains. Arguably, the banks alone cannot develop this payment and finance mechanism and must discover ways to maintain their initiative in this area. Some of the leading banks in the global trade market are likely to try, but few will succeed. Lastly, export credit insurers will be the new major players in non-LC trade. However, they cannot be behind-the-scene facilitators who maintain their own rigid rules 31 See Xiang & Buckley, supra note 25, at 121.

SSRN Electronic Journal, 2000