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When overland trade between China and Europe began booming last decade, importers and exporters hit a snag: banks weren’t willing to finance the trade without being the lawful owners of the cargoes during their long inter-continental rail journeys.

So, in 2019, the Chinese government asked the UN Commission on International Trade Law (UNCITRAL) to consider developing a global legal instrument to make rail consignment notes negotiable documents of title.

Such a law would give banks comfort to use the cargo documents as security for trade finance lending, transforming the documents into equivalents of the widely used maritime bill of lading.

Five years later, the UNCITRAL efforts sparked by China’s appeal is in the final stages of developing an international treaty that, if adopted, will create a new negotiable document encompassing cargo shipments by sea, air, rail and land.

The treaty will accommodate digital versions of the negotiable cargo documents, by taking a similar approach to the Model Law on Electronic Transferable Records, which is being used to help digitise bills of lading.

Advocates say the easier financing enabled by negotiable cargo documents should boost international trade, for example in regions such as Sub-Saharan Africa, where intra-regional trade is mostly inland and intercontinental exports often involve some land transport.

“Currently, land and air transport consignment notes are non-negotiable transport documents and do not permit transfer of title to third parties. They cannot be taken by the banks as collaterals and are less flexible than negotiable transport documents,” says Jun Xu, a vice-chair of the International Chamber of Commerce (ICC) Banking Commission.

“If the new instrument is adopted, negotiable cargo documents covering road, rail or air shipment can be used as documents of title and taken as security to provide finance to clients,” Xu, also a general manager for transaction banking at Bank of China, tells GTR.

In its 2019 submission, China complained that under current rules “buyers have to make advance payment for goods under huge financial pressure while sellers are unable to receive payment in time”.

“The growth of reliable long-distance transport in the form of rail and road deserves equal treatment, and banks would appreciate closing this gap in their security,” says Sean Edwards, chair of industry group the International Trade and Forfaiting Association.

But he adds that it is “unlikely that the volume of finance would increase as the current position has been managed for some time”.

An as yet undetermined minimum number of countries will need to ratify the treaty, which will be binding on states that adopt it, before it can come into force.

Proponents of the treaty will seek to make the minimum number of ratifying countries as low as possible to avoid the same fate as the Rotterdam rules of carriage of goods by sea, which were adopted by the UN General Assembly in 2008 but have still not come into force because the minimum threshold of 20 ratifying states has not been met.

GTR understands the UNCITRAL working group developing the treaty expects to finalise the draft for consideration at UNCITRAL’s next annual session in 2025. If adopted, it will be transmitted to the UN General Assembly for approval later that year.

 

New opportunities, new risks

While the proposed treaty would give widespread legal footing to non-maritime negotiable cargo documents, a document of title covering multiple transportation types has been available since the late 1960s.

The Multimodal Transport Bill of Lading, developed by the International Federation of Freight Forwarders Associations (Fiata), is compliant with rules such as those developed by the ICC covering the issuance of letters of credit. Fiata’s legal services director Andrea Tang tells GTR the instrument is “widely used” by the industry.

But it is used by agreement between the parties in a transaction, rather than having a legal basis.

James Hookham, director of advocacy group the Global Shippers Forum, says the mooted treaty “gives the banks in particular… confidence that everyone’s working to the same legal framework”.

The proposals are likely to be of interest to exporters and financiers of commodities, such as large commodity traders. China’s original submission to UNCITRAL pointed out that under current law, buyers are also unable to resell goods while they are still in land transit, a common practice for seaborne commodity trading.

Hookham says the opportunity to sell goods during land transport “might well be of interest or advantage to the buyer that’s recently acquired the goods if they suddenly find that either they can get a better price for them and they want to sell them on, or demand has changed”.

The proposals have been of particular interest in West African states, says Hookham, as they potentially create opportunities to finance exports of commodities from inland regions, instead of only when they reach a warehouse or vessel.

But extending financing to cargoes on trucks, trains and planes also comes with new risks.

The longevity of the maritime bill of lading means there are well-established practices for collateral management and monitoring the status of financed goods, such as vessel tracking providers and trade intelligence vendors that scoop up detailed information from port agents.

But the ICC’s Xu points out that “there is no such comprehensive supporting infrastructure for land or air transport documents”.

She says it will be “necessary to establish such supporting systems going forward to achieve the same benefits as those in negotiable maritime bills of lading”.