LETTERS OF CREDIT AND TRANSSHIPMENT IN INTERNATIONAL TRADE
Author: Puru Grover, M.B.A., LL.M. © Credit Guru Inc | CreditGuru.com
Consider that there are 10 individuals in New York who wish to fly to 10 different small regional destinations in England.
Ideally, each would prefer a direct flight from New York to their respective destination airport in England, but there may not be enough volume to justify a direct flight with an adequate level of frequency to all 10 destinations in England from New York.
Therefore, in order to work optimally within these constraints, air transportation follows the "hub and spoke" network model. London would work out as a "hub" to fly these 10 passengers first in one single flight from New York and then put them on to regional aircrafts in London that will then connect them to their 10 smaller airports "spokes" in England. In essence, the passengers were ‘transshipped’ in London. London can be called the transhipment hub in this example. Also, this model gives the regional airlines the ability to collect more passengers arriving at the "hub" in London from different places in order to fill up their regional 'feeder' flights.
The above logic is applicable to marine shipping of cargo too. In the wake of increased global trade within the network of maritime transport, such hubs called transshipment hubs have emerged and shipping companies are now relying even more on transshipment hubs to connect to different ports in the world.
Defining transshipment
Transshipment is the shipment of goods (or containers) to an intermediate destination and then to yet another destination.
Or another way of looking at transshipment from the maritime hub point of view is the process of off-loading a container from one ship and loading it onto another ship.
Reasons why transshipment occurs
- Transshipment may be required to change the means of transport. Example: [From Ship to Truck]
- Transshipment may be required to change from one type of ship to another. Example: [Ship operation, capacity, size and type differ between deep sea, inland waterways and feeder lines]
- Hub-and-Spoke type transhipment connects short distance feeder lines (and ports) with long distance deep-sea lines (and ports). Thus facilitating link-ups of local shipping networks with international shipping networks.
- Transshipment may be required in order to consolidate i.e. to combine smaller shipments into one large shipment or vice versa (division).
- At times service coverage of smaller shipping companies are broken up into smaller trade lanes and therefore a shipment by such carrier may be subject to several transshipments from the port of origin to the port of destination.
- Relay transhipment happens in cases where the transhipment hub connects shipping routes along the same region, but services different port calls.
Transhipment hubs in maritime shipping require sizable space for storage of containers sometimes for days before the cargo gets loaded to connecting ships at these terminals. These hubs have designated customs area to avoid hindrances while the transhipment hub is being used as a temporary port during the movement of goods designated for a different destination.
Major transshipment hubs exist along the main east-west and north-south shipping corridors and hence they also serve as major points of intersection between the two corridors. Many of the major container shipping lines (like NYK, Evergreen Marine Corporation, MSC, Maersk, Hapag-Lloyd, COSCO etc.,) offer service covering virtually the entire globe using transshipment hubs (ports) along their service routes that have connection to other ports of the world.
The 5 major international transshipment hubs
Five prominent transshipment hubs of the world are as follows:
- Port of Singapore
- Port of Singapore is the world's largest transhipment hub that connects to 600 ports in over 120 countries world wide.
- Port of Shanghai (China)
- Port of Shanghai is the largest port in the world in terms of the twenty-foot equivalent unit (TEU).
- Port of Shenzhen (China)
- Shenzhen is the second largest port city in the world which has now grown to become the wealthiest region in China.
- Port of Busan (South Korea)
- Port of Busan is the largest port in South Korea and is located in the city of Busan. It ranks in the top ten ports of the world in terms of cargo tonnage.
- Port of Hong Kong
- By traffic, the Port of HK is the world's sixth-busiest container port.
A practical way to define transshipment
The literal definition of Transshipment as defined earlier is the shipment of goods (or containers) to an intermediate destination and then to yet another destination. This could also literally mean the passing of goods from one carrier to another. This rather strict definition of transhipment would then encapsulate all 'through' transportation of goods too. However, a more pragmatic definition of transshipment would be that transshipment occurs when more than 'one of the same kind' of conveyance is used as 'main' carrier. To illustrate this definition consider that goods have to be shipped from Vancouver to Manila. Let’s say there is a particular carrier service that connects Canada to the Far East and this liner service calls Busan, Shanghai, Xiamen, Yantian, Hong Kong and Singapore as part of its port rotation from Canada to the Far East. This shipment from Vancouver in Canada to Manila in the Philippines is undertaken by this liner service. Since the vessel from this liner service does not call Manila as part of its rotation/service, the container that is sent by this liner from Vancouver will have to be taken off at the port of Singapore and then loaded onto another vessel that operates on a route that connects Singapore to Manila. The container is eventually delivered in Manila by a second ship and not the original ship that took the container on board in Vancouver. So what has occurred in this case is that the container that left Vancouver on vessel X arrived at its destination in Manila on another vessel Y after being transhipped in Singapore. The bill of lading that gets issued to the shipper/seller in Vancouver shows Vessel X as the carrier vessel, but upon arrival in Manila the notification that the consignee/buyer receives will show Vessel Y as the container's discharge vessel. (When an ocean bill of lading is issued, it will list the name of the ocean vessel on to which a container is loaded at the port of origin. If upon arrival at the port of destination, the container is on a different vessel than what was listed on the ocean bill of lading, it is then evident that the cargo was transshipped.)
However, a shipment made by truck to the Vancouver port, where it is loaded on to a vessel bound directly for Manila, would not be considered transshipped, since in this case one single vessel would have completed the 'main' carriage.
Letter of Credit and Transhipment
Should Transhipment be ‘Allowed’ or ‘Not Allowed’ in a Letter of Credit by its Applicant?
Since the hub system is widely used by maritime and air transport, transshipment is a common occurrence in international trade (especially with respect to containerized marine shipments). Also, in a multimodal transport, transhipment will occur, i.e., unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport) during the carriage from the place of dispatch, taking in charge or shipment to the place of final destination. Therefore, with letters of credit (L/C) transshipment becomes an important issue especially if transshipment is prohibited by the L/C.
In a LC transmitted by SWIFT message, MT700 Field Tag 43T specifies whether or not Transhipment is allowed under the documentary credit.
Generally, in international trade, 'commercial' (or otherwise 'trade') letters of credit are governed by the rules contained in the Uniform Customs and Practice (UCP). Uniform Customs and Practice for Documentary Credits (UCP) are rules for L/C. It is published by the International Chambers of Commerce (ICC) and the latest version of this publication is UCP600. It should be noted that that UCP contains specific articles regarding transshipment that define terms in a manner that may produce unexpected results unless the applicant of the L/C fully comprehends these provisions. As an example, if a L/C requires a bill of lading (a shipping document) that must contain a prohibition of transhipment [i.e. Field Tag 43T| Transhipment : 'Not Allowed']. The applicant then will, in most cases, have to exclude relevant UCP article(s) to make the prohibition against transhipment effective. [i.e. exclude UCP Article 20(c) (contained in UCP's latest version UCP 600)]. Otherwise, according to the rules in UCP a transport document may indicate that the goods will or may be transhipped provided that the entire carriage is covered by one and the same transport document and this transport document indicating that transhipment will or may take place is acceptable, even if the L/C prohibits transhipment. i.e. if the goods have been shipped in a container, trailer or LASH barge as evidenced by the bill of lading.
Note regarding LASH Barge: A LASH Bill of Lading (B/L) implies goods have been shipped using a LASH (Lighter Aboard SHip) Barge. An applicant of a L/C (the buyer) may add a clause in a L/C that goods are not to be transhipped onto a LASH Barge(s) by the seller (the beneficiary of the L/C). In that case the beneficiary of the L/C (the Seller) must familiarize themselves with Article 20c UCP 600 according to which, a B/L that indicates that transhipment will or may take place is acceptable, even if the L/C prohibits transhipment, as long as the cargo has been shipped in a container, trailer or LASH barge (as evidenced by the B/L).
UCP 600 articles such as 3, 14, 19, 20, 21, 23, 24, 28(i), 30 and 31 would be noteworthy for the Applicant and Beneficiary of a L/C with respect to Transhipment of goods.
Uniform Customs and Practice for Documentary Credits (UCP) are rules for L/C. It is published by the International Chambers of Commerce (ICC) and the latest version of this publication is UCP600.
Author: Puru Grover, M.B.A., LL.M. © Credit Guru Inc | CreditGuru.com
