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. 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. 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. 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 the law applicable to non-LC transactions and its challenges, the availability of expanded trade financing products, and the new necessity for using credit insurance. The Uniform Customs and Practice for Letters of Credit (UCP) cannot give guidance for non-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. 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, 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 since they generally have little buffer from credit risks. 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 serving only themselves. They need to work hard to change themselves in order to have reasonable objective standards for their liability and offer insurance conforming to the fair competition requirement. It is no longer proper having a simple single understanding of trade payment and finance, which only emphasizes risks and dangers, making an absolute assumption that there is only one choice, the LC. Rather, the time has come for international traders, not the bankers, to choose and manage the best methods of trade payment and finance. With the advance of IT applying to international trade, traders are being given a significantly increased ability to manage trade and finance. Therefore, with these new mechanisms (non-LC transactions and financing), traders and banks are partners. They must collaborate to manage and develop trade payments and finance efficiently. In this regard, the question is not what the best method is but how traders and banks are to design and manage the optimal payment mechanism. (SJD dissertation, Indiana University Maurer School of Law, 2011)
