From producers to consumers, there are numerous points through which goods are transmitted. Where is the problem of sending goods to consumers by producers? Why do consumers not go to producers directly to buy goods? If these propositions are held true, the price of goods may be lower. This is good for individuals in a sense, but price for transactions between producers and consumers cannot employ people of economies to a very great extent.
As such, low product prices cannot increase purchasing power. Products need multiple changes of hands -- from producers to dealers, to agents, to wholesalers, to retailers. In addition to these fundamentals, there are many other factors involved in the process. These are agents, transportation, warehousing, advertisement, etc. Every factor is a cost centre. Producers add their cost including profits to reach a price. As such, the price of different factors is included with producers’ prices. These additional costs are the incomes of those factors, and they increase the final price, but also create employment in the process.
Bangladesh is on track to becoming a developing economy, as its manufacturing sector has been improving at a breakneck speed. Despite such progress, agricultural products still dominate consumer markets, and the producer’s price is said to be three times higher to consumers as the middlemen enjoy super profits. Producers earn little, then. This may be an expected situation of trading activities since producers cannot reach consumers as support from trade facilitators are part and parcel of trading itself.
In addition to domestic trading, trade also crosses borders as we all know. Except for a few nations, most of the world depends on each other through international trade -- we can take our country as an example. Bangladesh depends on imports from external sectors for different cases such as capital equipment, finished goods, raw materials, services, etc, while we also export as well. Right after independence, Bangladesh depended on jute and tea as its primary export items. Later, readymade garments were added to the basket.
RMG is currently our biggest export, and the beauty of the product is that it is incredibly basic as far as consumer goods go, the durability of which is very low. On the other hand, jute goods, like carpets, are durable. Enhancement in export of durable goods is not so easy unless value added products including new features are introduced in the market. Considering the nature of trade, RMG is expected to hold the top position in the export market for some time to come.
In introducing products, theory advocates “marketing mix.” This is commonly known as 7 Ps which comprise product, price, place, promotion, people, process, and physical evidence. Of all the Ps, promotion is perhaps the most vital factor as far as cost centres go. In international trade, transactions are executed between exporters and importers. You think it’s easy to move a product abroad? Most definitely not. There are different parties involved in the transactions. One of the main factors is trade facilitators, otherwise known as buying agents, brokers, or even trader-importers. They work as the veritable king makers of international trade transactions. Often they are termed as a bridge to connect exporters with importers.
Facilitators are of two types -- regular agents and independent contractors. Regular agents are found in Bangladesh in case of imports. They work on behalf of foreign suppliers to sell their products in Bangladesh and they receive commissions from them. But regular agents are rare in case of export trade. They are independent agents. They arrange export orders from foreign buyers. Afterwards, they seek exporters and negotiate prices with them in terms of specifications. Upon reaching a consensus, orders are placed to ultimate exporters.
Normally, independent contractors get orders from original buyers. The orders are passed to the original exporters. This makes a bridge between exporters and importers. What benefits go to independent contractors is the question. Independent contractors earn a lot through the arrangements, as they play a financial game that gives them their earnings.
It is in practice that trade is executed by four methods: Payment in advance, LC (letter of credit), documentary collection, and open account. LC is said to be phased out, and in its place, sales contracts are now widely used. This is true in case of bilateral trade between exporters and importers, but the LC method works for trade executed through facilitators. They receive LC from importers and based on this instrument, they move forward.
In the normal course of business, transferable LC is used. Trade facilitators receive this LC which is transferred to the end exporters. Exporters’ banks submit documents to facilitators’ banks which send documents, after substitution by original price, to the end importers’ banks. In the process, facilitators receive full payment from importers. Of the payments, they transfer funds to exporters as per understanding and retain the remainder as their income.
This is a well practiced method which is used in trade facilitating hubs like Singapore, Hong Kong, Dubai, and other nations. Through the transferable LC method, merchanting trade is executed. This is possible for Bangladeshi merchanting traders. This is a paper trade which brings income. Dhaka can be recognized as a trade hub since it has wide experiences in global trade. Policy support is in place in terms of export policy of the country. It can be expected that we will be a trade facilitation center in the near future.
Bangladeshi RMG companies are said to be developed through the operation of buying agents, commonly known as buying houses. They receive LC from importers and transfer the same to exporters. But the buying house business is reported to have come to a halt due to direct operation of buying offices in Bangladesh by foreign importers. This bodes well for the sector. The country as a whole loses nothing since the buying houses' commission is replaced by inward remittances for office maintenance in Dhaka -- a no loss-gain situation on the aspect of foreign currency inflow.
In addition to leading buyers, there are numerous buyers, including e-commerce traders, in export destinations. Their operations are small but it is not so small if accumulated. These buyers do not know about ultimate exporters, rather they depend on buying agents. As such, they do not want to establish second layer relations with exporters through transferable LC as they issue irrevocable LCs. This cannot be transferred to end exporters. As this is a non-transferable LC, buying agents need to execute separate contracts with exporters in accordance with the relevant LC.
Exporters need to submit export documents, after shipment, through their banks to banks of buying agents. Ultimately, the documents are passed to buyers’ banks abroad in accordance with irrevocable LCs. Under the proposition, buying agents are buyers here since they make arrangements for delivery of goods to ultimate buyers. Whatever the proposition stands for, it is an export for which exporters’ banks need to observe some regulatory instructions.
This is basically related to conduct due diligence with regards to importers and bonafide of the transactions under the arrangements with local buying agents by exporters. Business insiders indicate that there is potential for export under the irrevocable LCs which can generate exports in many small lots. The business is said to be going on on a small scale. But there is no uniformity in transactional formalities.
Since the new mode of export trade can increase exports of the country, this needs to be accommodated in the trade transactions framework. It may not be tough work for the authorities concerned, as exporters’ banks just need to be given some assurance with the bonafides of the transactions through designated banks of buying agents. In this case, LC-receiving banks can confirm to exporters’ banks to the effect that there lies irrevocable LCs under the arrangements between buying agents and exporters. They should also ensure the credentials of foreign buyers and counterpart banks.
Additionally, payment collection banks need to be given authority to retain full export proceeds before transferring the same to exporters’ banks. Furthermore, in addition to the country's exports, buying agents can be allowed to make arrangements with exporters abroad. In this context, banks need to be allowed for parking of export proceeds and payments to exporters after encashment of commission or service income to bank accounts of buying agents.
The trade model is dynamic and is prone to experiencing rapid, continuous changes. Which is why our trade regulations need to be aligned in line with global trends, or else we risk being completely left behind in this incredibly crucial sector.
Mehdi Rahman works in the development sector.
