ECN 736_ASU_ASSIGNMENT_2024_WEEK 4_PAYMENT SYSTEMS IN INTERNATIONAL TRADE TRANSACTIONS

PAYMENT SYSTEMS IN INTERNATIONAL TRADE TRANSACTIONS

ARIZONA STATE UNIVERSITY

ECN 736 - INTERNATIONAL TRADE THEORY

WEEK 4

Overview of Payment Methods in Import-Export:

The international payment system or method is a way or method used in settling payments

due to economic transactions or international trade between countries. As for some methods

or ways of international payments that are commonly used to fulfill all obligations in

international trade transactions are:

Letter of Credit:

Letter of Credit (L/C) is a credit notification letter that is a form of payment agreement in

which the issuing bank to the exporter is worth the L/C as long as the exporter meets the

requirements. Basically, L/C payments can be made if the required documents are in

accordance with the agreement or contract that has been made. L/C involves at least 4 kinds

of contracts, namely: sale and purchase contract, L/C issuance contract, L/C, and agency

contract. However, in the implementation of payment transactions. This event reduces the

credibility of Indonesian companies in the use of L/C. L/C basically has various types, among

which are:

Revocable L/C:

Revocable L/C is a type of L/C that can be changed or canceled at any time by the applicant

(importer) or the importer's bank without prior notice to the exporter, thus causing a risk of

loss to the exporter because the payment of the proposed draft is not guaranteed. This risk is a

consideration for exporters to use revocable L/C.

Irrevocable L/C:

This type of irrevocable L/C is a type of L/C that cannot be canceled by any party, either by

the importer, exporter, including the bank concerned, namely the issuing bank (L/C issuing

bank).

Straight L/C:

A type of L/C that regulates the obligation of the issuing bank to the exporter to pay the draft

and its maturity only to the issuing bank. If there is a nominated bank that accepts the draft,

the straight L/C only functions as a document collector, as well as sending documents and

requesting payment to the issuing bank to be forwarded to the exporter.

L/C Negotiation:

An L/C that gives the issuing bank the right to authorize the nominated bank to negotiate

between the buyer and seller.

L/C Acceptance:

A type of L/C that authorizes the issuing bank to authorize the nominated bank to receive

payments forwarded to the exporter.

Confirmed L/C:

A type of confirmed L/C that can appoint a correspondent bank to guarantee the L/C to

another bank or directly to the exporter.

Unconfirmed L/C:

This type of L/C may request the issuing bank to appoint an advising bank to forward the L/C

to the exporter through its bank. The advising bank in this case has no responsibility in any

respect.

Restricted L/C:

A type of L/C that confirms that the issuing bank appoints a certain bank to pay, accept drafts,

or negotiate a document in accordance with the L/C terms and conditions.

Transferable L/C:

An L/C that allows the first exporter listed in the L/C to request the nominated bank to

transfer all or part of the L/C value to one or more other exporters.

Back to Back L/C:

This type of L/C is opened by the bank upon request and instruction from the importer based

on the master L/C received by another bank, and the importer in this case acts concurrently as

the exporter of the master L/C. The collateral for the opened L/C is the master L/C, the

negotiated draft of the master L/C which will be used to pay to the negotiating bank for the

back to back L/C.

Revolving Bank:

A type of L/C that can be realized repeatedly within a certain period and amount with the

same terms/conditions or can be renewed/re-stated without any amendment/special

replacement of the L/C.

Red Clause L/C:

A type of L/C in which there are special conditions that authorize the confirming bank or

designated bank to make advance payments to the exporter or allow the exporter to withdraw

the advance payment before the submission of documents as required by the L/C.

In addition to the types of Letter of Credit (L/C), there are other payment methods used in

export-import transactions, and there are several types of payment methods, including:

Advance Payment:

Advance payment is a form of non-L/C payment method known in various business contracts,

including international business contracts.

The advance payment system is generally known as "advance payment", meaning that the

importer pays in advance to the exporter through a bank transfer order to the exporter's

account, before the exporter sends the promised goods. After receiving payment of the price,

either in whole or in part, the exporter then carries out its obligation to send the goods through

the port of loading. The goods shipped are already registered in the name of the importer.

Advance payments are also usually made only in small trade transactions, both (exporter-

importer) trust each other, or the importer really needs the goods at the exporter. This is the

impetus for importers to make advance payment methods.

The advance payment method has several variations, namely: payment in full, the

importer pays the entire price of the goods including freight, insurance, and all fees agreed

upon in their business contract. With the delivery of the price, the importer has completed all

its obligations regarding payment, and therefore there are no additional costs to be paid by the

importer. This method is known as payment with order. However, in practice, advance

payment has no international provisions. It is only regulated based on international custom. In

Indonesia, advance payments are made based on Indonesian banking practices.

Partial Payment with Order:

According to this payment system, the importer only pays part of the price first, for example

only paying the price of the goods. Other costs as agreed, such as freight, insurance, and other

costs will be paid by the importer after the exporter has fulfilled its obligation to deliver the

goods. Collection of the remaining payments by the exporter is generally carried out using the

collection system.

Open Account:

The method of payment on an open account is carried out by the exporter first shipping the

goods, then after that the importer pay the price through a bank transfer order to the exporter's

account. In open account the name of the owner of the goods listed in the export document is

already in the name of the importer. Documents submitted by the exporter to the importer can

be through the bank. However, the submission of these documents to the bank is only limited

to being a courier.

Payment made by open account will be very beneficial for the importer, because through

this system the importer first sees the goods sent by the exporter. The importer can see and

check the specifications of the agreed goods first and then make payment. Thus, the importer

has time to declare rejection of the goods that have been sent by the exporter. Another

advantage is that the importer has enough time to provide funds for payment purposes.

Consignment:

Consignment is also categorized as a transaction payment method. Consignment is actually

another variation of the open account payment method. Through consignment, the exporter

sends the goods first. The difference with open account is when the importer delivers the

goods. If on an open account the importer sends the goods to the importer after the goods are

delivered or at a certain agreed time then payment is made, then on consignment the importer

is obliged to make payment for the goods after the importer has successfully sold the goods to

a third party.

This method of payment tends to be very risky for the exporter. The possibility of default

is very high and in certain circumstances difficult to monitor. Possible defaults include:

The importer does not pay the price to the exporter;

The importer has successfully sold the goods to a third party, but the importer delays payment

to the exporter and claims that the goods have not been sold. Thus, the importer benefits from

the delay in payment; or if the importer has sold the goods to a third party at the time of the

price increase, but then notifies the exporter that the goods were sold to a third party prior to

the price increase.

Due to the high risk that exporters may be exposed to, contracts that utilize this type of

consignment payment are equipped with explicit clauses on damages or sanctions in the event

of default. A good understanding of the various forms of indemnity clauses will go a long way

in avoiding losses. It is also very important to regulate the supervision mechanism in

consignment contracts.

Given the risks in consignment contracts, consignment contracts are generally rarely used,

except by parties who have known each other for a long time, know each other's reputation,

and most importantly the parties have repeatedly conducted transactions or other business

cooperation.

However, contracts that use consignment for payment also have various advantages.

Exporters will benefit from the ease of marketing their goods abroad, as this method is in high

demand by importers. Meanwhile, for importers, it is very profitable because they do not need

to spend funds to pay for the price of goods in advance.

Collection (Inkaso):

Collection (inkaso) is the payment of export documents by the importer using the services of a

bank to carry out collection of the price of an export-import item. Therefore, in collection, the

exporter acts as a principal who gives trust to the bank to collect from the importer. The bank

receiving the mandate to collect (remitting bank) after receiving the documents will forward

the collection. The remitting bank, after receiving the collection document, then forwards the

document to the collecting bank (the bank appointed by the buyer) using collection

instruction. The collecting bank will forward the documents to the payee

(drawee/importer/buyer).

In the case of a collecting bank, the principal cannot directly forward the document to the

drawee, then the collecting bank forwards it to another bank (presenting bank) that allows it

to deal directly with the drawee. After the drawee makes payment or executes the mandate to

the collecting bank or presenting bank, the collecting bank will forward it back to the

remitting bank. This remitting bank will make payment to the principal.

To avoid misunderstandings regarding the procedures for payment of transactions using

collection, the International Chamber of Commerce (ICC) published Uniform Rules for

Collection (URC), which was last revised in 1995 recorded under publication number 522

(URC 522). Based on URC 522, payment by collection can occur by two methods, namely:

document against payment and document againt acceptance. In document against payment,

the collecting bank appointed by the importer withholds the documents of ownership of

imported goods and only submits the import documents after full payment from the importer.

Whereas in document against acceptance, the exporter through the collecting bank will

submit export documents after the importer has accepted the time draft/time bill of exchange.

The payment system through the collection method when viewed from the possible risks

that arise is indeed classified as a safe payment method compared to the open account

method. Especially in document against payment because in this method, the bank holds

ownership of the document to the importer before the importer makes a cash payment to the

exporter, unlike in open account where the goods are shipped first, and the importer has

access to see the goods sent by the exporter, then payment is made. Although less risky than

open account or other payment systems, there are a few things to watch out for in using this

method, including:

the extension of the payment period;

The exporter must bear the cost of unloading that has expired or has exceeded the vessel's

charter period (demurrage);

re-shipment costs if the importer defaults;

unilateral cancellation of payment by the importer.

Overview of Risk in Export-Import:

Every action or activity carried out in society, of course, has its own risks in it, especially

export-import activities which are carried out with a great distance between buyers and

sellers, causing ignorance of the character and nature of each other, making this activity a

potential risk. Risks that can arise in export-import activities include:

Transportation Risks:

Mileage and cargo that frequently changes hands and long periods of warehouse storage can

lead to damage, loss or the risk of theft. Such risks require buyers to understand their rights in

transportation matters and the insurance policies that will protect them from losses during the

journey.

Credit or Non-Payment Risk:

Long distances make it difficult for exporters to recognize the importer's reputation regarding

payment. This creates the risk of non-payment, late payment, and even fraud.

Goods Quality Risk:

Importers have difficulty knowing the quality/grade of goods before they are shipped.

Exchange Rate Risk:

Changes in exchange rates or fluctuating foreign exchange rates will inevitably be beneficial

or detrimental. For this reason, exporters and importers must be able to protect their

respective interests in order to avoid the risk of changes in exchange rates, for example,

purchasing foreign exchange first and then delivering it, both goods and money.

Unexpected Event Risk:

This risk is related to events that occur beyond the control of exporters and importers that can

hinder the flow of export-import transactions, for example, natural disasters, wars, and

accidents in the transportation of exporters' goods. These unexpected risks can add extra costs

to an export-import transaction.

Legal Risks:

This risk involves changes in the laws of the country relating to the choice of law in a

contract. Unforeseen changes in the law may prompt alternatives for both parties to opt for

international commerce arbitration.

DOCUMENTS IN INTERNATIONAL TRADE:

In international trade (export-import), several important documents are required as a condition

of the agreement. Export and import documents in international trade fulfill all requirements

before and after the transaction. All types of documents in the process of export and import

transactions, whether issued by entrepreneurs, banks, shipping, and other agencies have their

respective functions and roles. Therefore, all documents related to these activities must be

made and examined as clearly as possible. Export and import documents in international trade

are divided into three groups, namely:

Parent

Support

Helper

Master Document:

It is the core document issued by the Main Implementing Agency for International Trade.

Which has a function as a means of proof in the implementation of a transaction. Included in

this document, among others:

Letter of Credit (L/C):

It is a letter issued by a bank at the request of an importer addressed to an exporter abroad,

which gives the exporter the right to draw drafts on the importer concerned. For example, if

Mr. Budi wants to send goods to Surabaya from his colleague in Japan, then Mr. Budi is the

importer. And his colleague is an exporter. As an importer, Mr. Budi has the right to apply to

the bank to have the right to send notes from his colleague when the trade is in progress.

Bill of Landing (B/L):

It is a letter of receipt of goods that have been loaded onto a sea vessel which is also a proof

of ownership of goods. This letter is proof of two things. The first thing is that the B/L is

proof of ownership of the goods on the sea vessel. The second thing is that the B/L is proof of

a contract for the transportation of goods on a ship.

So, in essence, the Bill of Lading (B/L) contains an explanation that your goods are on a

ship. And the Bill of Lading (B/L) contains the rights and obligations between you and the sea

freight transportation service. Also as evidence of a contract or agreement for the

transportation of goods by sea.

Insurance Policy:

It is a proof of liability letter issued by an insurance company at the request of an exporter or

importer to guarantee the safety of the goods being sent. The insurance policy is important

because it can prove that the goods mentioned in it have been insured. This document also

states the risks that are covered. It states which party requested the insurance and to whom the

claim is payable. Any insurance must be paid in the same currency as the L/C, unless the L/C

terms state otherwise.

Invoice:

It is an important document used in the trade process. In the invoice, data will be known about

how much money orders will be drawn, the amount of insurance coverage, and the settlement

of customs duties. Invoices can be divided into 3 types, namely:

Proforma Invoice:

It is an offer in the form of a regular invoice from a seller to a potential buyer. A proforma

invoice is also an offer to the buyer to place his order which often gets a request from the

buyer so that the seller gets an import permit from the competent authority in the importing

country.

This invoice usually states the terms of sale and the price of the goods. Once the buyer

has agreed to the order, there will be a definite contract. The use of this invoice is also used

when settlement will be made with payment in advance before shipment, on a consignment

basis or subject to tender.

Commercial Invoice:

It is a detailed memorandum on the description of the number of goods sold, the price of the

goods, and the calculation of payment. This invoice is addressed by the seller (exporter) to the

buyer (importer) whose name and address are as stated in the L/C and signed by the person

entitled to sign it.

Consular Invoice:

This is an invoice issued by an official agency, such as an embassy or consulate. These

invoices are sometimes signed by the buyer's domestic trade consulate, with the signature of

the exporter. Or made and signed by a friendly country of the buyer's country. The purpose of

this invoice is to check the selling price against the prevailing market price and to ensure that

no dumping has occurred.

Supporting Documents:

These are documents issued to strengthen or detail the information contained in the parent

document, especially invoices. Which includes supporting documents in export and import

documents, among others:

Packing List

This is a document created by the exporter that provides a description of the goods packed,

wrapped, and bound in the crate that is usually required by customs.

Certificate of Origin

It is a signed declaration to prove the origin of an item.

Certificate of Inspection

Namely a certificate about the condition of the goods loaded by an independent surveyor,

goods inspector or official body authorized by the government. Serves as a guarantee of the

quality and quantity of goods, size, weight, condition, packing, and quantity of packing.

Certificate of Quality

Namely information made relating to the results of the analysis of goods in the company's

laboratory or independent research bodies concerning the quality of goods traded.

Manufacture's Quality Certificate

This document describes the quality of the goods, including a description of whether or not

the goods are in new condition and whether or not they meet the specified goods standards.

Weight Note

It is a record containing details of the weight of each package of goods, as stated in the

commercial invoice. The weight details of goods shipped on the basis of an L/C must be the

same as those stated in the shipping documents.

Measurement List

It is a list containing the size and measurement of each package, such as length, thickness,

volume, and centerline. The size in this document must be the same as the terms stated in the

L/C.

Chemical Analysis

Namely a statement that explains the ingredients and the dosage and content of the ingredients

contained in the goods being examined. This research is conducted by the drug and chemical

analysis agency.

Bill of Exchange

It is a means of payment that provides an unconditional order in writing addressed by one

person to another. The parties involved in money orders include:

Drawer, who signs the money order.

Drawee, the one who pays.

Payee, who receives the payment.

Endorsee, the party to whom the draft is transferred or assigned.

Assisting Documents in Export and Import Documents:

Auxiliary documents are some additions to export and import documents which, although not

shipping documents, are often necessary for the smooth acceptance of shipped goods at the

importer or exporter's place. The auxiliary documents referred to in export and import

documents include:

Freight Forwarder's Receipt:

Its function is to mark the receipt of goods and is usually a contract of carriage or a sign of

ownership of the goods while in the custody of the shipping company.

Delivery Order:

Serves as a road letter issued by the exporter.

Warehouse Receipt:

The receipt issued by a warehouse for the receipt of goods is called a "warehouse receipt".

Sometimes banks are forced to keep imported goods that are not redeemed by the importer in

the warehouse.

Trust Receipt:

A document used by an importer to obtain or possess the shipping documents of an L/C, so

that the importer can sell the goods concerned before paying/redeeming the shipping

documents to the bank. By signing the document, the importer binds himself to the bank in

order to obtain the proceeds from the sale of the goods to settle the payment of the shipping

documents to the bank. As long as the goods have not been sold, the rights to the goods are

still owned by the bank.

In international trade, there are many procedures to go through. Therefore, it is not

surprising that there is a stack of files and documents that need to be prepared. And each

document does not only come from one or two agencies. There can be 5 to 10 related agencies

whose licenses need to be prepared. Be it from banking, shipping, customs, taxation, and

other agencies. This includes documents such as inventory lists.

Every document needs to be made clearly, thoroughly, and carefully. Because differences

in data in the export or import process can cause several things, including: (1) obstruction of

the goods delivery process; (2) detention of goods by customs because they are considered

illegal goods; and (3) a very large fine. Therefore, if you want to export or import, the first

thing you need to do is check the completeness of the documents. Even if using import

services, this should not be ignored.

TRADE-OFFS IN INTERNATIONAL TRADE:

Imbalance buying is essentially an agreement. This agreement has legal consequences for

those who sign it, so there is an obligation to carry out everything that has been agreed upon

in the agreement. In a buyback, foreign counterparties that do not fulfill their obligations are

subject to penalties. However, in more than three years of the implementation of buyback,

penalties have never been imposed on foreign counterparties that have defaulted on their

obligations. Buyback has been in place for more than three years. Even so, this policy has not

been widely recognized.

The term counterpurchase can be equated with the term counterpurchase.

Counterpurchase is one of the countertrade techniques. In counterpurchase two agreements

are required, as stated by Hsung Bee Hwa stating that:

"It differs from barter in that instead of a single contract, two contracts are involved and each

is paid in money."

In the first agreement one party undertakes to sell goods and equipment to the second

party, and in the second agreement the first party also states that it wishes to purchase goods

and equipment from the second party or to arrange for the equipment to be exported from the

second party's country. This is stated by Herta Seidman that:

"Counterpurchase transaction entails an agreement by one party to sell goods and services to

a second party, coupled with a commitment by the first party, to purchase goods and services

from the second party's country."

In this case, the first party receives payment for the equipment and goods it sells, while

the purchase it intends to make is of a certain amount (generally a percentage) of the export

value of the equipment it sells. As mentioned below, the first party may also delegate its

desire to purchase the equipment to a third party:

In counterpurchase the exporter receives payment for goods supplied to his import partner.

However, the exporter commits himself in a parallel contract to purchase goods for a certain

percentage value of his export contract from the importer's country. He can fulfill this

commitment himself or, if he has approved a 'third party clause' in his contract, he can

transfer this commitment to another partner.

In Indonesia, the term buyback is similar to the term counterpurchase proposed by Herta

Seidman. Buyback has specific characteristics. As stated above, the counterpurchase policy is

an effort to increase non-oil and gas exports by utilizing the government's purchasing power

for capital goods and supporting raw materials. Thus, in Indonesia, the government purchases

goods, including construction work, from foreign suppliers or contractors through imports.

On the other hand, the foreign supplier or contractor has an obligation to purchase Indonesian

non-oil and gas export commodities.

In accordance with the aforementioned ministerial letter, government purchases are

defined here as purchases/procurement of goods carried out by Departments/Non-

Departmental Government Agencies and State-Owned Enterprises (SOEs). Financing for such

purchases is sourced from the State Budget (APBN) and/or export credits. Imbalance

purchase is imposed on the purchase of goods whose import components are worth more than

500 million rupiah. One of the important elements in a counterpurchase agreement is the

existence of a penalty clause. This clause is stipulated if one of the parties is negligent in

carrying out the obligation to make purchases from the counterparty. In general, penalties are

in the form of fines and ranges from 10% to 15% of the value of the purchase made. This is

stated by Herta Seidman that:

"A third variable is the 'penalty' clause, which imposes a specified penalty for failure to meet

counterpurchase obligations. Most counterpurchase agreements include such a clause, and

the penalty often amounts to between ten and fifteen percent of the initial sale."

In the ministerial letter mentioned above, it is also known that there is a penalty provision,

which is 50% of the residual value that is not imported by the foreign supplier or contractor.

The penalty clause is set out in the export undertaking statement submitted by foreign

suppliers or contractors who wish to participate in the tender. The export undertaking

statement is called a Letter of Undertaking which has a standardized form. If a foreign

supplier/contractor has filled out and then submitted a Letter of Undertaking to the Ministry

of Trade, this means that he is willing to purchase Indonesian non-oil and gas export

commodities. He is responsible for carrying out the purchase and this also means that he is

willing to pay a penalty if he fails to do so.

Indeed, this policy has yielded a lot of results. Herta Seidman states: "As of last August,

this program has resulted in nearly $600 million of counterpurchase commitments." That's a

lot of money. One of the World Bank's consultants, P.N. Herta Seidman Agarwala mentioned:

"The total value of counterpurchase contracted until January 1984 in Indonesia amounted to

US$756 million." While Pompiliu Verzariu states: "Total contracts signed under the

countertrade requirements through December 1983 amounted to $742 million." These data

show the results obtained from the countertrade policy that has been implemented for almost

three years. The figures above prove that the countertrade policy has worked in practice.

However, this does not mean that the policy has not come under scrutiny, especially from

foreign businessmen. For example, from Japanese businessmen who are members of the

Japan-Indonesia Economic Committee. They expressed their objection to the policy,

especially with the 50% penalty. This is something to ponder considering that Japan is by far

Indonesia's largest trading partner.

Legal Basis and Regulations Relating to Buyback:

The legal basis for buyback is the Letter of the Minister/Secretary of State Number R-

079/TPPBPP/1/1982, dated January 21, 1962, concerning "Basic Provisions for Linking

Government Purchases and Imports with Indonesian Exports Outside Oil and Gas".

Meanwhile, the regulations related to the purchase price here mean the following regulations:

Presidential Decree of the Republic of Indonesia Number 10 of 1980 concerning the

Government Procurement Control Team, which was improved by Presidential Decree of the

Republic of Indonesia Number 17 of 1983 concerning the Improvement of Presidential

Decree Number 10 of 1980 concerning the Government Procurement Control Team.

Presidential Decree of the Republic of Indonesia Number 14A of 1900 concerning the

Implementation of the State Budget, which was refined by Presidential Decree of the

Republic of Indonesia Number 18 of 1981 concerning the Refinement of Presidential Decree

Number 14A of 1900 concerning the Implementation of the State Budget.

Presidential Decree of the Republic of Indonesia Number 15 of 1980 concerning Procedures

for Providing Funds and Procedures for Implementing Payments in the Context of

Procurement of Goods / Government Equipment.

Government Regulation of the Republic of Indonesia Number 1 of 1962 concerning the

Implementation of Export, Import, and Foreign Exchange Traffic.

Minister/Secretary of State Letter No. R-079/TPPBPP/1/1982:

President Soeharto, in a Plenary Cabinet meeting on December 30, 1981, gave instructions

that government import procurement should be utilized in an effort to increase non-oil and gas

exports, namely by linking it to the export of non-oil and gas commodities. In accordance

with this instruction, this letter was issued. Previously, the necessary materials were collected

from the Ministry of Trade. In this confidential letter, The letter contains the implementation

provisions and the main provisions of the purchase price. The minister/secretary of state

stipulates the letter as the Chairperson of the Government Procurement Control Team. This

team is also called the Presidential Decree Team 10 which was formed based on Presidential

Decree Number 10 of 1980 concerning the Government Procurement Control Team

(hereinafter referred to as the Procurement Control Team). The Chairman of the Procurement

Control Team, in accordance with his duties, stipulates the provisions for the implementation

of the purchase consideration. An important element in the implementation provisions is the

requirement for foreign partners who wish to participate in the tender to declare their ability to

export Indonesian products. This statement is set out in a Letter of Undertaking.

This ministerial/secretary of state letter came into effect on January 1, 1982. In this

connection, it can be noted that from that time on, the procurement of equipment by

Departments/Non-Departmental Government Agencies and State-Owned Enterprises

(hereinafter referred to as agencies), with a value of more than 500 million rupiah, was linked

to contracts for the sale of exports of Indonesian products.

Terms of Implementation of Linkage:

The ministerial letter contains the following provisions for the implementation of the linkage:

every procurement/purchase made through imports by agencies must be linked to export sales

contracts for Indonesian products, with a record of financing the purchase from the state

budget and/or export credit;

provisions linking government purchases to exports of Indonesian products are included in the

tender documents. The auction here refers to the auction for the procurement of government

equipment through imports with a value of 500 million rupiah or more;

A statement of ability to export must be included when the bidder (foreign counterparty)

submits a bid addressed to the Directorate General of Foreign Trade, Ministry of Trade;

original statement of export capability as soon as possible submitted by the agency concerned

to the Directorate General of Trade Foreign Affairs, Ministry of Trade with a copy to the

Chairman of the Procurement Control Team;

The agency concerned assesses all tender documents of each participant, including the

assessment of the technical quality of the price and financing conditions and the ability to

export;

A decision is then made on the winning bidder and this decision is notified to the agency

concerned and to the Ministry of Trade;

The winning bidder is required to prepare an export contract as well as a procurement contract

with the agency concerned. The procurement contract can only be signed after the winning

bidder proves that it has entered into an export contract.

Terms of Linkage:

Agricultural goods, industrial products, and mining products other than oil and gas are

attributed to Indonesian products;

The winning foreign partner can fulfill the obligation to purchase Indonesian products by its

own company, a company affiliated or related to the winning company or by another

company (third party). For the latter, the delegation of obligations is set out in an Assignment

Agreement and must be approved by the Ministry of Trade;

The value of exported goods attributed must be equal to the value of government purchases

from abroad, in FOB terms (excluding transportation costs, insurance, maintenance costs, and

local components, i.e. items that can be obtained in Indonesia, such as sand). The value of the

imported materials/goods component after aggregating is the value subject to attribution. This

is specific to construction contracting;

After selecting one or more types of goods/products to be purchased from Indonesia, the

winning bidder can enter into direct contact with the Indonesian exporter to then sign a sales

and purchase contract according to the usual form of contract;

The purchase made by the winning bidder must be in addition to the amount of the previous

trade transaction. The intent of this provision is that if prior to the implementation of the

purchase reciprocity policy the winning bidder has made purchases from Indonesia, then after

the policy comes into effect, the purchases made must be in addition to the purchases made

previously;

The export destination of Indonesian products is to the country of origin of the winning

bidder. The export destination can be to the country of the winning bidder or to the country of

origin of the goods, if government purchases are supplied from several countries. A third

country may be an export destination if the "third country is not a traditional market for the

exported goods concerned" and the export does not interfere with existing marketing

channels. A third country here means a country other than the country of origin of the winning

bidder or the country of origin of the goods;

The currency used in transactions of Indonesian products is the United States dollar (US$) or

other currencies listed on the Indonesian foreign exchange market;

The contract between the Indonesian exporter and the winning bidder in this case does not

constitute "future's buying", i.e. the foreign counterparty who has imported before he

participated in the tender incorporates the value of the import into the purchase consideration

after he wins the tender. This is an attempt to secure the position of the foreign counterparty

or exporter against future price developments (hedging);

the obligation to purchase Indonesian products must be completed at the expiration of the

contract to purchase Indonesian products. Such purchases shall be shipped gradually and

regularly throughout the term of the government purchase contract. If at the end of the

implementation of the government purchase, exports from Indonesia have not been partially

or fully completed, the foreign counterparty or the person to whom the obligation is delegated

shall be subject to a penalty of 50% of the value of the exports that have not been carried out;

10)

The purchase of Indonesian products must begin gradually within six months of the award.

In addition to the above provisions, there are also other prohibitive provisions, namely:

prohibiting transactions with the countries of Angola, South Africa, Israel, and the People's

Republic of China. There are also several products that are prohibited from being exported,

including: gold, silver, raw cowhide, unprocessed rubber with certain categories, and logs.

This buyback policy has exceptions, namely:

if the source of costs is not from the state budget or export credits, but from soft loans, credits

from the World Bank, Islamic Development Bank, and Asian Development Bank;

against domestic components included in foreign counterparty contracts, such as service

components, taxes/duties, and goods;

Services used by government agencies that are related to specific expertise, such as lawyers,

consultants, surveyors, technology purchases (patents), and so on;

imports or purchases in the framework of joint ventures between state or foreign companies.

Presidential Decree of the Republic of Indonesia Number 10 of 1980 in conjunction with

Presidential Decree of the Republic of Indonesia Number 17 of 1983:

Presidential Decree No. 17 of 1983 confirms and improves the duties, functions, and

membership of the Controlling Team that have been made in Presidential Decree No. 10 of

1980. This was deemed necessary to further improve the smoothness, effectiveness, and

results in the procurement of equipment and contracting work required by agencies. The main

task of the Procurement Control Team is to control and coordinate the procurement of

equipment and contracting of work valued above 500 million rupiah and carried out through

auction or without auction. Without an auction here means that the government has directly

appointed the selected foreign partner. The Procurement Control Team also carries out

functions, namely:

research and determination of types, quantities, specifications, prices, and procurement

procedures;

assessment of technical aspects, quality of goods, and the most favorable price;

coordination and supervision of procurement;

guidance on procurement administration and documentation.

With the clear composition, functions and duties of the Procurement Control Team, it is

hoped that the implementation of linkages can also run smoothly in accordance with the

provisions in the minister/secretary of state's letter.

Presidential Decree of the Republic of Indonesia Number 14A of 1960 in conjunction

with Presidential Decree of the Republic of Indonesia Number 18 of 1981:

Both the quantity and quality of equipment and supplies for agencies need to be increased, in

line with the increase in development programs and in order to maintain the momentum of

development. Also included in the definition of equipment is equipment organized by

importing it from abroad. As a routine expenditure, the cost of procuring this equipment is

obtained from the State Budget. In this connection, in order to achieve efficiency in these

expenditures, the government conducts and pays attention to standardization and quality

control of the equipment. This is in accordance with the principles of the implementation of

the State Budget, namely the principles of thrift, non-luxury, and efficiency, as well as the

principle of being directed and controlled in accordance with the activities and functions of

each agency and other institutions.

Procurement of equipment/goods is carried out centrally by the State Secretariat under the

coordination of the Procurement Control Team, for example the procurement of motor

vehicles and other goods determined by the team. Similarly, for the procurement of The

procurement of goods/equipment and contracting of work worth more than 500 million

rupiah, with or without auction, is carried out under the coordination of the Procurement

Control Team. The team also sets the standard letter of agreement for various kinds of

equipment procurement and contracting work. In this regard, for the implementation of

reciprocity, there is another condition prior to the signing of the procurement contract, which

is that the foreign counterparty also submits a statement of intent to export Indonesian

products.

Presidential Decree of the Republic of Indonesia Number 15 Year 1900:

Funds for equipment procurement are made available after the minister/head of the agency

concerned submits a letter requesting the provision of funds to the Minister of Finance. This is

done after a procurement agreement has been signed with the foreign counterparty upon

written approval from the Procurement Control Team. The signed procurement agreement is

attached together with the letter requesting the provision of funds.

This presidential decree is stipulated "for the sake of smooth, efficient, and efficient

procurement of government goods/equipment in conjunction with the implementation of

Presidential Decree Number 10 of 1980". This procedure is expected to ensure the smooth

achievement of all the goals that have been set.

Government Regulation of the Republic of Indonesia Number 1 Year 1982:

This government regulation is a government policy to increase exports of Indonesian products

by strengthening their competitiveness in the world market. Under this regulation, exporters

are exempted from the obligation to sell foreign exchange to Bank Indonesia. From this

provision, it can be seen that the government provides opportunities for exporters to make the

best use of foreign exchange for the purchase of capital goods to support their exports or to

obtain maximum results from the use of their foreign exchange. It is hoped that with this

policy exporters can compete and gain a place in the world market. Furthermore, It is also

expected to facilitate foreign trade and ultimately improve Indonesia's economic

development.

One way to improve competitiveness is to provide export credit. Export credit is a

working capital credit to finance:

a. exporter's activities from collecting goods to shipping them for export;

b. production of goods intended for export as well as the product/purchase/import of materials to

be manufactured into goods for export;

c. needs during the grace period between the shipment of goods and the acceptance of term

notes or the payment of cash notes abroad.

In connection with the implementation of the purchase consideration, it has been

recognized that export credits are one of the sources of costs for procuring equipment through

imports.

Principal Agreements in Buyback:

As described above, in the case of reciprocal purchase, another condition is set prior to the

signing of the equipment procurement agreement. This requirement is a letter of intent to

export Indonesian products that must be attached when the foreign counterparty applies for

the tender. This statement is called a Letter of Undertaking. From this description, it can be

seen that a foreign partner cannot participate in the tender if he does not attach the statement

of ability to export. Sometimes the foreign counterparty is not an importer, so he needs to

delegate to an importer who is able to purchase Indonesian products. For this assignment, an

Assignment Agreement is made between the foreign counterparty and the foreign importer.

For foreign counterparties who are not importers, of course, they cannot fulfill the

requirements for being able to participate in the auction; without the Assignment Agreement.

Thus, it can be understood that the Letter of Undertaking and Assignment Agreement are

absolute conditions for the implementation of the purchase consideration.

Letter of Undertaking:

Letter of Undertaking is submitted when a foreign partner submits an application to

participate in the tender as a letter of intent, in the Letter of Undertaking the foreign partner

states his ability to:

purchase Indonesian agricultural and/or industrial products. This obligation may be carried

out by the foreign counterparty itself, the company with which it is associated, or by a foreign

third party. These purchases are made by the foreign counterparty by selecting one or more

products. Each purchase made by the foreign counterparty is confirmed by the Department of

Trade in Annex A. Annex A is a notification from the Department of Trade to the foreign

counterparty, which confirms: a) the FOB value of all equipment, materials, and products

provided that are not of Indonesian origin; b) the destination country where Indonesian

products are remarketed or used, provided that it does not interfere with the trade activities

that Indonesian traders have carried out to that country; c) the company/joint venture making

the purchase; and d) the period of the purchase consideration;

using Indonesian products in Ministry of Trade-approved countries, if the foreign

counterparty is not allowed to resell them to other countries;

began purchasing six months after the award date and was executed before the end of the

contract;

submit evidence of shipments of Indonesian products in the form of Annex Bs (Annex Bs are

notifications from foreign counterparties to the Department of Trade about purchases made)

and other evidence. With this evidence, the Department of Trade can monitor the fulfillment

of the obligation to purchase Indonesian products.

In addition to the above, the Letter of Undertaking also states that:

a. Prices and delivery and other terms in relation to purchases from exporters will be negotiated

at the time of such purchases;

b. The value of each purchase is equal to the list price contained in the invoice, excluding the

shipping charges contained in the invoice and other taxes and duties;

c. The value of each purchase is calculated according to the exchange rate determined by Bank

Indonesia in effect on the date of the invoice;

d. purchases of Indonesian products are additional purchases. This is so because there are

foreign counterparties that have made purchases from Indonesia prior to the reciprocity

policy;

e. The Department of Commerce will give consideration if, while performing its obligations, a

foreign counterparty encounters the following circumstances:

l) the unavailability of the particular product that he/she intends to buy;

a product does not meet export quality;

certain products are less competitive in the international market.

In this regard, the Ministry of Commerce will take note of such circumstances and make

adjustments as necessary, e.g., extension of the period of purchase consideration. An

important provision in the Letter of Undertaking is the provision stating that the foreign

counterparty agrees to pay compensation of 50$ of the remaining obligations that have been

performed. This provision is called a penalty. As the paragraph on penalties states that:

If we fail to comply with our undertaking contained herein, we hereby agree to pay to you as

liquidated damages an amount equal? To 50% of the difference between the total value of

products actually purchased pursuant to this undertaking and the foreign currency to be

confirmed as aforesaid.

Foreign associates also stated that:

The foreign counterparty has full power, authority and juridical right to perform such

obligations and comply with the terms and conditions in the Letter of Undertaking;

the foreign counterparty has taken the necessary legal actions to carry out such obligations;

the reciprocal purchase obligation is a valid and binding legal obligation;

no law, regulation, treaty obligation or other binding obligation shall conflict with the signing

of the Letter of Undertaking and its consequences or with the performance of the terms of the

Letter of Undertaking;

The obligation is binding on the foreign counterparty's successor.

Another condition states that the Letter of Undertaking is signed by the head of the

foreign counterparty's overseas headquarters or his/her proxy (with a power of attorney). The

signature is on a Rp500.00 stamp.

The Department of Trade also published a list of products to buy and a list of Indonesian

exporters. The first is the book

A.l and book A.2 entitled, List of Indonesian Export Commodities Available for Additional

Exports in 1982. The books were published in January and March 1982 and contain more than

30 Indonesian products. The second is book B.1 and B.2 containing the names of Indonesian

exporters and associations, which makes it easy for foreign counterparties to select Indonesian

exporters who will provide the Indonesian products they buy. The book is titled, List of

Indonesian Commodity Association and Exporters. Both books make it easy for foreign

counterparties to purchase Indonesian products.

Assignment Agreement:

There are two parties in this Assignment Agreement. The first party is the foreign partner who

won the auction, hereinafter referred to as the assignor. Then the party that will be given the

obligation to buy Indonesian products, hereinafter referred to as the assignee.

In accordance with the Letter of Undertaking and Annex A, the assignor has accepted the

obligation to purchase Indonesian products. It has also been outlined that a foreign

counterparty who is unable to purchase such products because he is not an importer, can

assign the obligation to a foreign importer. This is done by signing an Assignment Agreement.

In This Assignment Agreement states that the assignor will delegate the obligation to purchase

Indonesian products. As mentioned in the Assignment Agreement that: "WHEREAS, the

assignor desires to assign to the assignee, without recourse to the assignor, all of its rights

and obligations under and with respect to the Letter of Undertaking". "Entirely" means that

all rights and obligations contained in the Letter of Undertaking are assumed by the assignee.

The main condition assumed by the assignee is the condition relating to penalties in the event

that the assignee does not fulfill the conditions in the Letter of Undertaking. It is stated in the

Assignment Agreement that:

The assignee hereby accepts such assignment and specifically agrees, for the benefit of the

Department of Trade of the Republic of Indonesia, to assume and be bound by all of the terms

end conditions of the Letter of Undertaking, end in particular those relating to the payment of

liquidated damages in the event the assignee fails to comply with the terms of the Letter of

Undertaking had originally been executed by the assignee.

The Assignment Agreement needs to be approved by the Ministry of Trade. This approval

confirms that the assignor is released from the obligation to purchase Indonesian products, as

the obligation has been fully delegated to the assignee.

As of the date of approval by the Ministry of Commerce, the Assignment Agreement shall

enter into force. Assignor and assignee shall execute it from the date it is entered into by them

(in accordance with the date stated in the first paragraph of the Assignment Agreement).

Buyback Agreement Process:

Based on Minister/Secretary of State Letter No. R-079/ TPPBPP/1/1982, it can be concluded

that the reciprocal purchase agreement process can be divided into three stages. The first stage

begins with the agency organizing a tender/auction by inviting foreign partners. This tender is

with the knowledge of trade, for foreign partners who wish to participate in the tender, a

Letter of Undertaking is attached to the application to participate in the tender. The Letter of

Undertaking is submitted to the Directorate General of Foreign Trade, Ministry of Trade for

review. After which it is issued Letter of Undertaking Approval. The results of the research

are submitted to the Procurement Control Team (hereinafter abbreviated as TPP). The TPP

determines the winner of the tender, this decision is notified to the agency concerned. From

Article 20 paragraph 6 and paragraph 7 point c of Presidential Decree No. 14A of 1980, it is

known that the procurement of government equipment can be carried out with or without

auction. In this regard, for equipment procurement without auction, the agency concerned

only invites the designated foreign partner. In the second stage, the agency provides a letter to

the Department of Trade containing: the TPP's decision letter on the winning bidder, FOB

details, and delivery time, i.e. the deadline for completing the procurement of goods. The

Department of Trade then contacts the winning bidder to draft Annex A, Annex A is made in

triplicate. Each for the Department of Trade, the agency concerned, and the winning bidder to

sign. The winning bidder at this stage must also submit an Assignment Agreement if he or she

is assigning the purchase consideration obligation to a foreign third party. This Assignment

Agreement must be approved by the Department of Trade. In the final stage, the Department

of Commerce issues an Award Expenditure Approval Letter. This letter is a notification that

an agreement to carry out the procurement of government equipment can be signed between

the agency and the winning bidder. Previously, the winning bidder entered into a direct

contract with an Indonesian exporter to purchase Indonesian products. This contract must be

presented at the time of signing the agreement between the agency and the winning bidder. At

this point, there is a purchase agreement between the agency and the tender winner. As noted,

purchases of Indonesian products must begin six months after the award is made. Purchases

can also be made several times until the value is equal to the value stated in Annex A. Each

purchase is confirmed by the Ministry of Trade. It can be concluded that the foreign

counterparty basically organizes two contracts. The first contract is with the government, in

this case with the agency concerned. The second contract, still in relation to the first contract,

is the contract with the Indonesian exporter. The second contract is in accordance with the

usual contract in the world of trade. This contract included an additional clause on linking

government purchases. The two contracts are closely related and important in a buyback. A

contract with the government alone (agencies) cannot be called a buyback, without a contract

with Indonesian exporters. And vice versa.

Take for example the purchase of contraceptives by the Ministry of Health. In the first

phase, the Department of Health invited foreign partners. Among them was Commonwealth

Benefit Enterprises Limited, Hong Kong (hereinafter abbreviated as CBE), with a Letter of

Undertaking dated July 19, 1984, the TPP determined CBE as the winner of the tender. TPP

decision dated July 27, 1984.

In the second stage, the MOH drafts a letter to the MOFCOM containing the TPP

decision, FOB details of the CBE and delivery time. The Commerce Department then contacts

the CBE to draft Annex A. Annex A is given to the Commerce Department, the Health

Department and the CBE respectively.

In the last stage, the Department of Commerce issued an award letter dated August 27,

1984. Before CBE signed the letter with the Ministry of Health, it first contracted with

Indonesian exporters. CBE made the purchase of the product itself, namely by the companies

incorporated in it, namely CBE, USA, Polomate Corp., USA, and Argus Brand, USA. Thus,

there is no Assignment Agreement in this case. These three foreign companies contacted

Indonesian exporters and selected their products. They chose rubber, pepper, and plywood.

Their purchase consideration was US$624,419.63 with a term until March 1985. The

obligation was settled on December 14, 1984 (Department of Commerce confirmation), with

a surplus of US$30,225.37. Thus, the CBE signed two contracts for the implementation of the

buyback, namely with the Ministry of Health and with Indonesian exporters.

Barriers to Buy-In:

In Minister/Secretary of State Letter Number R-079/TPPBPP/1/1982, it is stated that: "Each

bidder at the time of submitting the bid, must include / attach a statement of the ability to

import goods from Indonesia ...". This statement of intent is not an easy requirement for

foreign counterparties wishing to tender in Indonesia. The consequence of the statement is

that the foreign counterparty is responsible for the fulfillment of the statement. In other words,

he must purchase the Indonesian products. This is certainly a matter of consideration for

foreign partners, especially the issue of financing. If this is the case, two possibilities will

arise. First, the foreign counterparty increases the price of the goods to be purchased by the

government. This is clearly detrimental to the government. If there is no other choice of

foreign partners and for the sake of smooth procurement of goods for development, the

government is forced to incur additional costs to purchase the equipment. Secondly, another

possibility is on the part of the foreign partners themselves. They have to spend money to buy

Indonesian products. Especially if they have to find a partner to make the purchase, because

foreign partners are not importers. This means that there is not much profit to be made by the

foreign counterparty. It is not impossible for many partners to resign because of this

obligation. If this happens when the government really needs the equipment, at least the

purchase will be delayed. If the purchase is delayed, the smooth running of a government

project will be disrupted. If a project is disrupted, it will ultimately disrupt the smooth

development momentum that the government wants to maintain.

In point 4 of the Principal Terms of Attribution of Government Purchases in the

minister/secretary of state's letter (hereinafter Principal Terms of Attribution), it is stated that:

"Export goods that are linked are agricultural products, industrial products, and others

outside of oil and gas...". These products are generally products that do not sell well.

Therefore, to increase their exports, these products are linked to government purchases. For

example: wood and plywood. The overseas market for plywood is very weak. It is no small

risk for a foreign counterparty to choose a product that does not sell well. Especially when

this is associated with the FOB value of the contract, which is not small. In addition, most of

these products are highly competitive in the world market and are subject to large

fluctuations.

The foreign counterparty can select one or more products that it will purchase from

Indonesia. This is in accordance with paragraph 6 of the Principles of Linkage Provisions.

Most foreign counterparties, such as foreign counterparties from Japan and the United States,

are concerned that sourcing products is difficult. This concern is justified if it is related to the

production of these Indonesian products. There are times when there is surplus production, so

a product can be exported to meet the demand of foreign counterparties, however, it is not

uncommon for the government to prioritize the domestic market. An example is palm oil, as

one of the products. If the domestic market shows symptoms of price increases or supply

shortages, palm oil is preferred for domestic market supplies. In this regard, the government

must be able to provide assurance to foreign counterparties that these products are available.

The definition of available here means that the products remain available for an indefinite

period of time. Thus, continuity is assured that the government will be able to provide these

products for the purpose of trade-offs. This assurance is important for foreign counterparties

who will select products. These products must also meet quality standards.

Point 14 of the Principles of Linkage Provisions states: "Contracts for the export of

Indonesian goods shall be executed gradually and regularly throughout the term of the

government purchase contract, and shall be completed before the expiration of the purchase

contract". Due to the difficulty in finding products, the requirement to make regular purchases

is difficult to expect. The same applies to the requirement to complete the purchase before the

end of the purchase contract period. The latter is generally the case in a reciprocal contract

where the procurement of goods can be completed within one year. In this connection, the

purchase of products must also be completed within one year. An example is the procurement

of urea fertilizer for the 1984/1985 planting season by Trans-Continental Fertilizer, USA

(hereinafter TCF). According to the TPP Decree dated July 10, 1984, TCF had completed the

supply of fertilizer by September 1984. However, the obligation to purchase products by

October 1985 had not been carried out. The reason given was that the time given was too

short. This is understandable. Within one year it was difficult for the foreign counterparty to

select products which is appropriate. The counterparty also looks at what the quality of the

product is, how many there are, which exporters are able to provide the product, and so on.

With regard to the additional condition, it is difficult to know whether purchases made by

foreign counterparties actually meet this condition. This condition is contained in number 9 of

the Principles of Linkage Conditions. Broadly speaking, this condition stipulates that the

purchase of the product is in addition to the number of trade transactions that have been

carried out by the foreign counterparty before the implementation of the purchase

consideration. In other words, if the foreign counterparty has been frequently importing from

Indonesia, then the imports in the context of reciprocity by the foreign counterparty are in

addition to its usual imports.

It is well known that foreign counterparties purchase Indonesian products. Not all foreign

counterparties have agents in Indonesia. This results in the length of time required to negotiate

the reciprocal purchase agreement. For example, the time needed for correspondence, such as

the Letter of Undertaking. The licensing process is also time-consuming, such as permits for

product exports. Especially if the foreign counterparty is not an importer. It also takes a lot of

time to find and negotiate with importers who can import Indonesian products. In essence, the

foreign counterparty considers the additional time and cost for buyback. Of course, with

trade-offs, a lot of time is required. Obviously, without kickbacks, the process of procuring

government equipment is less time-consuming and costly.

Legal Sanctions in Buyback

Penalty Binding Provisions:

In point 15 of the Principal Terms of Reference of Minister/Secretary of State Letter No. R-

079/TPPBPP/1/1982, it is stated that:

"Overseas suppliers are responsible for the execution of export contracts for Indonesian

goods. If at the end of the project completion/implementation of the relevant government

import purchase the export contract cannot be completed, the overseas supplier is subject to a

penalty of 50% on the remaining value that is not exported".

The above provision implies that the counterparty, as a party to the contract, has an

obligation to purchase Indonesian products. From the Letter of Undertaking submitted by the

foreign counterparty at the time of submitting an offer to participate in the tender, it can be

seen that, indeed, the foreign counterparty expressed the ability to make the purchase. In other

words, it is able to perform its obligations as a party to the contract. The consequence when

the aforementioned provisions cannot be fulfilled by the foreign counterparty is the

imposition of penalties. Of course, in this case it must first be seen what reasons cause the

counterparty to be unable to fulfill its obligations. In the event that there are strong reasons

that the non-fulfillment of the obligation is solely due to the negligence or bad faith of the

foreign counterparty, there is no reason not to impose a penalty. It should be noted that this

penalty provision was notified to the foreign counterparty at the time it applied to become a

party to the contract. Here, the foreign counterparty had sufficient time and within reasonable

limits to study the penalty provision. In studying the provision, the foreign counterparty has

already known his capabilities and all possibilities, whether he will be able to fulfill his

obligations as a party to the contract. In other words, if the foreign counterparty has submitted

an application in the form of a Letter of Undertaking, it is also known that the counterparty is

able to purchase Indonesian products. This implies that if the foreign counterparty is not able

to fulfill its obligations as a party to the contract, the foreign counterparty must receive a

penalty. The provision on penalties received by the foreign counterparty at the time he applied

to become a party to the contract, is actually an offer of agreement from the Indonesian side to

the foreign counterparty.

In treaty law, there is an important norm that all agreements must be made in good faith.

Thus, if the foreign counterparty applies to be a party to the contract, the foreign counterparty

has automatically agreed to the government's offer. Here legal agreement arises. As is known

in the field of law, the principle of pacta sunt servanda is known, namely that an agreement

binds the parties as law. In this connection, the legal agreement made between the Indonesian

party and the foreign partner can be categorized as an agreement as intended by this principle.

As is known in the agreement, each party has rights and obligations. The Indonesian party is

entitled to the equipment it buys from the foreign counterparty and payment for Indonesian

products purchased by the foreign counterparty. The obligation of the Indonesian party is to

provide Indonesian products purchased by foreign counterparties and to pay foreign

counterparties for equipment purchased by the Indonesian party. Meanwhile, the foreign

counterparty is entitled to payment for the equipment purchased by the Indonesian

counterparty and the Indonesian products it purchases. The foreign counterparty also has the

obligation to purchase Indonesian products and provide equipment purchased by the

Indonesian party. In connection with the above principle, all rights and obligations specified

in the agreement have binding force for the parties who sign it. In view of the above

understanding, it can be stated that the penalty is a legal sanction, because it arises as a result

of legal agreement.

Legal settlement if a dispute arises between the parties in this paper, the definition of a

dispute in the sense of a dispute arising from a foreign counterparty neglecting its obligation

to purchase Indonesian products. In fact, it is possible for disputes to arise in other forms. For

example, if the Indonesian party neglects its obligations as a party to the contract. In the event

of such a case, there is no provision in the ministerial letter that addresses it. As such, the

Indonesian party who defaults on its obligations cannot be penalized. For this reason, the

second possibility is not discussed in this paper, as it has no relevance to penalties. As is well

known, foreign counterparties are obliged to execute contracts for the export of Indonesian

goods. In this connection, to execute the contract, the foreign counterparty may enter into an

agreement with the Indonesian exporter. This can be seen from number 8 of the Principal

Terms of Association which states that:

"Foreign importers and Indonesian exporters entered into direct negotiations and signed

their trade agreements in accordance with the usual contract with the inclusion of an

additional clause regarding the linkage to government purchases...".

From this provision, it can be understood that the government gives confidence to foreign

partners and Indonesian exporters to make and sign contracts in accordance with their

interests. In relation to the issue of making contracts, especially international contracts such as

this one, the main problem that arises is determining the applicable law. This is also the case

in contracts between foreign counterparties and Indonesian exporters. With the trust given by

the government, it is also possible for foreign counterparties and Indonesian exporters to

choose and determine the law applicable to their agreement. This choice of law is recognized

and respected. If a dispute arises, the law chosen by the parties is used to resolve it. By

determining the applicable law, foreign counterparties and Indonesian exporters will obtain

justice and legal certainty. In practice, it is not uncommon for foreign counterparties and

Indonesian exporters not to specify the applicable law for their agreements. If this is the case,

then it is important to find the law that should apply in the agreement. This is especially

important if a dispute arises between the two. In this regard, theories that have been accepted

as general principles in international treaties should be used.

The theory that was first used was the lex loci contractus theory. According to this theory,

the law applicable to an agreement is the law of the place where the contract was made. This

theory may be said to have been obsolete due to the difficulty of determining the place of

making the contract. In today's world, it is not uncommon for contracts to be made by the

parties without any meeting between them. This possibility can also occur between foreign

counterparties and Indonesian exporters. From the possibility of this possibility, it will

certainly be difficult for us to apply it.

There is also a theory that emphasizes the place where the contract is executed and the

applicable law is the law of the place. Theory This is called the lex loci solutionis theory. In

practice, this theory can also cause difficulties, for example if there is more than one place

where the contract was executed.

In the field of international treaty law, the theory of the proper law of the contract has

also been recognized. In this theory, the linking point must first be sought. If it has been

found, then the law used is the law where the heaviest link is found. In order to find the

strongest link, all linking points, all influencing factors and circumstances surrounding the

contract must first be investigated and reviewed. This theory suggests that it takes a lot of

time to review all the factors surrounding the contract.

Based on the theories outlined above, in relation to the purchase and purchase

agreement, I tend to use the theory called the most characteristic connection theory, when the

parties do not determine the law applicable to their agreement. This theory demands the

discovery of the most characteristic performance of an agreement. In relation to the purchase

of Indonesian products by foreign counterparties, it would appear that the most characteristic

performance is found in the Indonesian exporter. It is the Indonesian exporter who must

provide the products chosen by the foreign counterparty. It is also the Indonesian exporter

who undertakes to deliver them to the foreign counterparty; the foreign counterparty merely

makes payment. Knowing that the most characteristic performance is performed by the

Indonesian exporter, it follows that, if the parties do not determine for themselves the law

applicable to their agreement, Indonesian law applies. It is an advantage and convenience for

Indonesian parties to use Indonesian law in agreements between foreign counterparties and

Indonesian exporters to purchase Indonesian products. Are we not more familiar with and

understand our own laws than foreign laws? The chosen theory is supported by the reality

faced by developing countries, such as Indonesia. As is known, most developing countries

cannot be separated from developed countries, especially regarding their economy. This

attachment can be felt when there is a shock to the economic situation in developed countries.

If As a result, developing countries have felt the consequences, such as economic recession.

Developed countries began to practice protectionism and this caused difficulties for

developing countries. From this description, it can be understood that in international

agreements, developing countries try to use their national laws. This is logical because in

general, developing countries prioritize their national interests. In relation to the reciprocity

policy, it is reasonable to use the theory of the most characteristic connection, because by

using this theory, Indonesian law will be used if the parties (foreign counterparties and

Indonesian exporters) do not determine the choice of law for the purchase agreement of

Indonesian products. With the use of Indonesian law, the national interest will be more secure.

Barriers to the application of penalties As is well known, the provision of penalties is

contained in number 15 of the Principles of Linkage Provisions. During approximately three

years of implementation of the reciprocity policy, penalties have never been imposed on

foreign counterparties, even though it is not uncommon to find foreign counterparties shirking

their obligations to purchase Indonesian products. In relation to penalties, there are several

examples of cases of non-purchase of products by such counterparties. For example, the case

of International Commodities Export Company (hereinafter abbreviated as ICEC). The case is

positioned as follows.

The Indonesian government purchased fertilizer for the 1982/1983 planting season worth

US$24.5 million. The government appointed ICEC as the foreign counterparty, as well as PT

Dharma Niaga (hereafter abbreviated as DN) as the import executor. The contract between

DN and ICEC was signed on June 11, 1982. The contract stated that the fertilizer would be

transported in stages 16 times by ship to ports of destination in Indonesia. It turned out that of

the majority of the fertilizer that had arrived safely in Indonesia, there were two ships that did

not continue their journey to Indonesia and dropped anchor in the waters of Pireaus, Greece.

These ships were carrying 10,000 tons of fertilizer each. As a result of this bottleneck, a

dispute arose between DN and ICEC. Meanwhile, to prevent damage to the fertilizer, at the

end of January 1984 the fertilizer that was The bottleneck in Greece was transported at DN's

own expense. The subject of the dispute was a difference in interpretation of the term C&F

(Cost and Freight) whereby DM, under Indonesian law, interpreted that the term C&F as in

the contract meant that the seller's responsibility was only complete when the goods had

physically arrived to the buyer. In this connection, ICEC was responsible for all risks until the

fertilizer arrived in Indonesia. ICEC itself interprets C&F based on international trade law as

it is known in international trade practice. In this case, C&F means that the seller is only

responsible until the goods have been shipped and the buyer has received proof of shipment.

The dispute was originally to be resolved through the courts. DN sued ICEC for the

additional costs it incurred in the Central Jakarta District Court. In New York, through the

district court, ICEC sought to be found not liable for the transportation risk. After a long

period of time in which the courts had not rendered a final judgment, the parties agreed to

settle by international arbitration. Article 18 of the contract between DN and ICEC did not

specify which arbitration to choose. Finally, a panel of arbitrators led by Tun Mohammed

Sofian, former Chief Justice of Malaysia, was appointed. The tribunal questioned and would

first decide which law applied in the agreement. Finally, in mid-October 1985, it was decided

that ICEC's interpretation applied. From the judgment it was found that Indonesian law was

not applied and therefore DN's claim could not be met and DN was fully liable for the loss.

From the value of the fertilizer purchase contract as mentioned above, it is known that the

purchase of fertilizer is linked to a purchase consideration policy. It is also known that ICEC,

as a party to the contract, has an obligation to purchase the products. In connection with the

dispute, the foreign counterparty had delayed the purchase of the products. This delay resulted

in the lapse of the time limit given. In the end, ICEC was able to fulfill its obligations.

However, when there is a delay that results in the lapse of the time limit, it can be argued that

ICEC's obligation to fulfill its obligations was not fulfilled. It was discovered that the foreign

counterparty was unable to comply with the provisions contained in paragraph 14 of the Basic

Conditions of Linkage. The provision states that the purchase must be completed before the

expiration of the procurement contract entered into by the government. In this regard, ICEC

should be penalized. In another case, Trans-Continental Fertilizer (hereinafter TCF), United

States, TCF supplied fertilizer for the 1984/1985 planting season, in accordance with the

government's request. The supply of fertilizer was carried out until September 1984. The

obligation to purchase products that should have been carried out by TCF was

US$3,395,000.00. This obligation had not been carried out by TCF until October 1985, while

the time given to fulfill this obligation had passed. By looking at this lapse of time, it can be

seen that TCF was also unable to fulfill the provisions as contained in paragraph 14 of the

Basic Conditions of Association. As TCF was negligent, a penalty should have been imposed

on TCF.

As early as April 1985, it was noted that foreign counterparties from the countries of

Mexico, Yugoslavia, and Belgium had not purchased any products at all. They did not fulfill

their obligations until the end of August 1985. From the actions of these foreign

counterparties, it can be understood that they were not responsible for the implementation of

the contract to export Indonesian products, which was their obligation as a party to the

contract, and they should have been penalized.

From the examples above, it can be seen that there are foreign counterparties who neglect

their obligations as parties to the contract to purchase Indonesian products. Based on point 15

of the Basic Terms of Association, it can be seen that foreign counterparties who neglect their

obligations can be subject to penalties.

In practice, penalties are never applied. Foreign partners who neglect their obligations are

only warned with a reprimand, with the hope that foreign partners will immediately fulfill

their obligations. This warning is given three times. If the foreign counterparty continues to

fail to fulfill its obligations, the Department of Trade blacklists the foreign counterparty.

Subsequently, the foreign counterparty is no longer allowed to do so to participate in tenders

organized in Indonesia. From the description above, it can be seen that the provisions on

penalties, as contained in number 15 of the Principal Terms of Association, can be said to

have never been applied. In this regard, from the existing provisions, it is possible to identify

the factors that have resulted in the inapplicability of the penalty provisions. As mentioned in

the Department of Trade's Implementation Guidance on Linkage, it is known that the

Department of Trade will give discretionary consideration to foreign counterparties that are

unable to fulfill their obligations due to the following matters: the unavailability of certain

products to be purchased, a product does not meet export quality, and certain products are less

competitive in the international market. In this case, an extension of time may be granted to

the foreign counterparty to fulfill its obligations. From these provisions, it appears that the

legal regulations relating to the purchase consideration itself provide an opportunity for the

foreign counterparty not to fulfill its obligations. Thus, penalties cannot be applied. The

provision in the implementation guidance is reasonable given the conditions in Indonesia in

certain cases. It is not uncommon for the government to favor the domestic market when there

is a shortage of supply of a product. This results in the unavailability of certain products to be

exported to meet the demands of foreign counterparties. This has also been understood.

Most of the products are less competitive in the international market, hence the need for

this trade-off policy. The provisions of the ministerial letter do not mention which agency will

impose penalties on foreign partners. Especially in the Letter of Undertaking submitted by the

foreign partner at the time of submitting the bid. This is not impossible because the

government is hesitant. If the Department of Trade itself were to impose penalties on foreign

counterparties, it would at least raise the question of the Department of Trade's authority in

this regard, given that the Department of Trade is not a judicial body. From another point of

view, it can be said that the legal regulations on trade-offs do not yet have definite strength

and provisions. As a result, the penalty provisions are not effective in their implementation.

The buyback policy has been implemented for more than three years, but the penalty

provisions have arguably never been applied. Several juridical factors have influenced the

inapplicability of penalties, as a legal sanction in buyback. For example, there are provisions

that would give discretionary consideration to foreign counterparties that do not fulfill their

obligations due to the absence of products and so on. Another factor is that it has not been

further regulated regarding the agency that will apply the penalty. If this has been regulated,

the government will not face any hesitation to apply penalties. Purchase returns are still

promotional, so it is understandable that there are products that cannot compete in the

international market, as well as products that do not meet quality requirements. The large

percentage of penalties has no effect on foreign partners who want to and have participated in

tenders in Indonesia. This can be seen from the fact that there are foreign partners who do not

fulfill their obligation to purchase Indonesian products. It turns out that there are also those

who still do not purchase Indonesian products, even though the penalty has been set at 50% of

the residual value that is not imported by foreign partners. There is actually a conflict of

interest in the reciprocity policy. On the one hand, the government wants to embrace as many

foreign counterparties as possible, so that more non-oil and gas exports can be made, given

that the main objective of this policy is to increase non-oil and gas exports. On the other hand,

the government wants to safeguard its interest in the purchase price, so it makes provisions for

penalties. In this case, it seems that the main objective is too dominant, so that if there is a

failure of the foreign counterparty to fulfill its contractual obligations, the government will

think twice about applying the penalty. The promotional nature of the purchase consideration

is one of the factors that the penalty cannot be applied.

Buyback policy is essentially a policy that concerns government policy in general. For

this reason, the provisions on buyback should be further regulated. This can be done by

putting it into a higher regulation, such as a ministerial regulation or presidential decree.

The main concern is the provision on penalties. As is well known, the amount of the

penalty percentage does not affect the smooth purchase of Indonesian products by foreign

counterparties. Therefore, it is recommended that the existing percentage be retained with a

note that other provisions support the provisions on penalties. For example, the provision on

discretionary considerations against foreign counterparties if they do not fulfill their

obligation to purchase Indonesian products. This provision should be removed, as it is not

impossible for foreign counterparties to deliberately utilize it in bad faith. This discretionary

consideration can be removed if Indonesian products are sufficiently available, quality

assured, and can compete in the international market. This can be done by standardizing the

quality of these products, for example. This effort is expected to overcome the difficulty of

applying penalties. Buyback policy concerns foreign counterparties. Foreign counterparties

can also be said to play a role in increasing non-oil and gas exports, in accordance with the

basic policy of reciprocity. However, it is also known that there are foreign counterparties that

do not fulfill their obligations. In this regard, the agency authorized to impose penalties

should also be determined.

ECN 736_ASU_ASSIGNMENT_2024_WEEK 4_PAYMENT SYSTEMS IN INTERNATIONAL TRADE TRANSACTIONS

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