Letters of credit in the global economy: Implications for international trade

Abstract

Commercial letters of credit have been used for centuries to facilitate payment in international trade transactions. A letter of credit is a financial instrument, usually issued by a bank, which guarantees the seller will receive payment for goods sold to a foreign customer. Using a third-party payment mechanism helps importers and exporters maintain strong and effective business relationships. However, recent changes in both generally accepted accounting principles and in the courts'interpretation of the Uniform Commercial Code, which governs such transactions, may impair the use of letters of credit in the future. This paper examines these changes and discusses potential implications for not only importers and exporters but issuers as well.