PE 425 – BASICS OF COMMERCIAL DIPLOMACY

Online/Distance Learning Course

SECTION 11

BASICS OF INTERNATIONAL TRADE:EXPORTING AND IMPORTING

ALAN L. WHITEBREAD

FREIGHT FORWARDER

At the beginning of a sale, they can provide the exporter with a quotation for regular or infrequent shipments for

• Freight costs • Port charges • Insurance costs• Freight forwarder's fees• And, if applicable

– Consular fees– Cost of special documentation

CUSTOMS BROKERhttp://www.itds.treas.gov/broker.html

“… a Customs Broker prepares and files the necessary Customs entries, arranges for the payment of duties found due, takes steps to effect the release of the goods in Customs custody, and represents their clients in custody matters. ”

This is in addition to all the duties of a freight forwarder.

INCOTERMS

• The 13 INCOTERMS fall into four different groups. Each group represents a category of shipment as shown below.

– Departure [E] – Main Carriage Unpaid [F] – Main Carriage Paid [C], and – Arrival [D]

• SPECIAL WARNING – If someone is ever asked to use an INCOTERM beginning with the letter “D” they should immediately find expert assistance only from someone that has successfully used a “D” term!

INCOTERMS

• 11 terms, 8 are common

• For all modes of transportation

• Part of the Buyer – Seller agreement

• Recognized by most nations

• Updated every 10 years by the International Chamber of Commerce [ICC]– The current version is INCOTERMS 2010

INCOTERMS 2010 – 4 Categorieshttp://www.i-b-t.net/incoterms.html

• Ex Works (EXW) • Free Carrier, Named Place (FCA)

– Seller's Premises or Named Place of Origin (FCA) • Free Alongside Ship, Named Port (FAS) • Free on Board, Named Port (FOB) • Cost and Freight, Port of Destination (CFR) • Cost, Insurance and Freight, Port of Destination (CIF) • Carriage Paid To, Named Place of Destination (CPT) • Carriage and Insurance Paid To, Named Place of Destination (CIP) • Delivered at Terminal, Named Place of Destination (DAT) • Delivered at Place, Named Place of Destination (DAP) • Delivered Duty Paid, Named Place of Destination (DDP)

INCOTERMS: E and F GroupsE Group: Seller makes goods available at its dock.

F Group: Seller arranges and pays for transportation to a named place in Seller’s country.

• EXW [ExWorks]– Title transfers at the Seller’s dock.

• FCA [Free Carrier]– Title transfers at the named place in the Seller’s country.

• FAS [Free Alongside Ship – water transport only]– Seller clears the goods for export and title transfers when the cargo

passes at the side of the vessel at the named departure port in Seller’s country.

• FOB [Free On Board – water transport only]– Seller clears the goods for export and title transfers when the cargo

passes the ship’s rail at the named departure port in Seller’s country and Seller pays the vessel loading fees.

INCOTERMS: C GroupSeller arranges primary transportation [and sometimes insurance] but

title transfers to the Buyer when the goods have passed the ship’s rail or been delivered to the destination port or place.

• CFR [Cost and Freight]– Title transfers at the ship’s rail while buyer incurs all costs and

inland freight from the destination port.

• CIF [Cost, Insurance, and Freight]– Title transfers at the ship’s rail although Seller arranges

transportation and insurance to the destination port. Buyer incurs all costs and inland freight from the destination port.

• CPT [Carriage Paid To]– Seller pays all carriage to a named place of destination.

• CIP [Carriage and Insurance Paid to]– Seller pays all carriage and insurance to a named place of

destination.

DOCUMENTATION

• The only acceptable way to complete international documentation is to dot every “i” and cross every “t”.

• The exporter must pay attention to every detail for the best results!

• Mistakes cost time, money, customer unhappiness, and potentially legal disputes.

• Several of the typical international documents will be examined.

DOCUMENTATION

• The Sarbanes-Oxley law requires publicly traded U.S. companies and their vendors to keep import and export documents for up to seven years.

• GUIDELINES FOR AMERICAN FIRMS: – [1] Keep all transaction records and correspondence. This will

help you if there is ever an issue about an illegal or questionable diversion, re-export, or transshipment of your product[s].

– [2] Having properly executed Export Reseller [EAR] Questionnaires can be very useful. See Section 8C to review this READING.

BILL OF LADING [B/L][Straight B/L; Shipper’s Order B/L; or Air Waybill]

• This form differs by mode of transportation and provides – [1] a receipt for the items, – [2] detailed content of the shipment, and – [3] title to the items under certain circumstances.

BILL OF LADING TYPES

• Signed– If negotiable copies are signed [endorsed] by the

master of the vessel or its agent, the signed copies carry title to the goods.

• Unsigned– Signed non-negotiable copies are used as proof of

shipment. [Also called a Straight Bill of Lading.]– These are used by the shipper, consignee, the

steamship company, insurance company, bank, and potentially others involved in the transaction.

BILL OF LADING TYPES

• Straight Bill of Lading– This is made out to a specific consignee at

the destination—the only entity authorized to take delivery of the goods.

• Order Bill of Lading– This is made out to the order of the shipper,

bank, agent, or “to order”. Whoever possesses the document can take delivery of the goods.

OCEAN [MARINE] BILL OF LADING

• This negotiable document [unless specifically marked “non-negotiable”] serves as

1. a receipt for goods,

2. an evidence of the contract of carriage, and

3. a document of title to the goods.

• “Full Set 3/3” means 3 out of 3 Bills of Lading must be originals.

DOCK OR WAREHOUSE RECEIPTS

• May be required by the shipper or exporter if the shipment lands at one port and then goes on to a further destination.

• If that further destination is in another country, it is a transshipment and the American firm must be sure to comply with U.S. law for that product / nation shipment.

PRO FORMA INVOICE

• The Pro Forma invoice states an offer to sell at the prices, terms, and conditions listed on the document. It looks like a Commercial Invoice and acts as a quote for goods from Seller to Buyer. The Buyer needs this invoice to prove intent to purchase and arrange payment by Letter of Credit or similar financial instrument.

• Be sure to include a statement about compliance with U.S. laws and regulations on this document.

• The Commercial Invoice looks like the Pro Forma invoice but acts as a Bill for Goods from Seller to Buyer. The Buyer needs this invoice to prove ownership and arrange payment. Customs examines the Commercial Invoice at the time of delivery and may use it to assess import tariffs based on the transaction value. It is signed and must provide the following.

• Letter of Credit number [if applicable]• Waybill number• Voyage number• Bill of Lading number • Container number• Seal number

• Be sure to include a statement about compliance with U.S. laws and regulations on this document.

COMMERCIAL INVOICE

COMMERCIAL INVOICE

• The American firm’s pro forma and commercial invoices must have the following.

• An antidiversion clause [strongly recommended].– “U.S. law prohibits disposition of these items to …”

choose either the Sanctions List or ECCN controls.

• Letter of Credit numbers and names [if applicable].• Any certification and/or inspection that may be required by

the foreign country / Buyer.• It may need to be signed and / or notarized.• The U.S. Department of Commerce may provide specific

requirements especially if the American firm is shipping to a country for the first time.

• EXAMPLE: – A customer asks an American firm to provide

two different Commercial Invoices. One is to go with the shipment and the other one is to be with a smaller value is to be mailed to the customer.

• WARNING:– The customer knows the mail copy will arrive

before the shipment. So they can use the mailed copy to pay less duty.

– This is illegal. Never provide invoices at different amounts for the same goods!

COMMERCIAL INVOICE TRAP

• This is similar to a Commercial Invoice but in foreign form. It is for foreign inspectors and frequently written in the language of the foreign destination. The Buyer will usually provide this in the necessary language.

FOREIGN CUSTOMS INVOICE

EXPORT LICENSE

• Most U.S. exporters work under “no license required” [NLR]. Others need a general “distribution license” [DL].

– If the item falls under U.S. DOC jurisdiction and is not listed on the Commerce Control List [CCL] it is designated as EAR99 and generally does not require an export license.

– However, if the proposed export of an EAR99 item is to an embargoed country, to an end-user of concern, or in support of a prohibited end-use, the exporter may be required to obtain a license.

EXPORT LICENSE

• If the company deals in products considered "controlled" under U.S. or foreign laws, you must obtain a “Individual Validated License” also called an IVL.

• The IVL license allows shipment of a specific item, to a specific named consignee, to a particular country, sometimes to a specific location, for a specific end-use.

• Contact the BIS Exporter Counseling Staff at U.S. Department of Commerce at 202-482-4811 for individual assistance.

ITEMS NEEDING A VALIDATED EXPORT LICENSE [IVL]

• Defense articles and services – National security items, all firearms

• Dangerous drugs and narcotics• Endangered plants and wildlife• Chemicals

– Precursors– Fertilizers– Other

• Radioactive materials• Explosives

• This document is usually countersigned by the local Chamber of Commerce and on rare occasion by the Consulate / Embassy of the destination foreign country. It can save money when it certifies preferential duty rates in countries offering favorable trade agreements to U.S. exports.

• This document is often the one used for determining lower import duty rates.

• WARNING - This is a simple Certificate of Origin—do not get it confused with any specific one for a trade area.

CERTIFICATE OF ORIGIN

EXPORT PACKING LIST

• This document itemizes your product in imperial and metric weights, unit of measure, quantity of each package, and how it is carried; i.e., box, crate, drum, etc.

• Units of measure on all international documents should always be the same. Never use a mixture like one pallet and one pallet of twenty-five cases!

• It may be duplicated in the foreign language of your destination. Your Buyer should be able to determine the total shipping weight, volume, and the contents of the cargo from this document.

INSURANCE CERTIFICATE

• The Insurance Certificate is negotiable as soon as it is signed. It certifies the amount of insurance coverage provided on the shipped goods. The minimum is usually of 110% of CIF.

• The insurance certificate must be – negotiable in the same currency as the transaction

and – it must specifically identify the insurance coverage

concerning all risks of the credit it covers.

• The Inspection Certificate is requested by the Buyer and usually certified by [1] an independent third-party or [2] the affidavit of the Seller.

• It specifies that the goods either conform to the order and / or indicates where discrepancies exist.

• A Complete Report of Findings usually accompanies the certificate.

INSPECTION CERTIFICATE

BOYCOTT REGULATION LAWS PROHIBIT

http://www.bis.doc.gov/ComplianceAndEnforcement/oacrequirements.html • Agreements to refuse [or furnish information] or the

actual refusal [or furnishing of information] to do business with Israel or in Israel with blacklisted companies.

• Agreements to discriminate [or furnish information] or the actual discrimination [or furnishing of information] against persons based on race, religion, sex, national origin or nationality.

• Implementing Letters of Credit containing prohibited boycott terms or conditions.

BOYCOTT REGULATIONS

• “Tax Reform Act (TRA) requires U. S. persons to report– With the Export Administration Regulations (EAR)

quarterly requests they have received to take certain actions to comply with, further, or support an unsanctioned foreign boycott.

– The TRA requires taxpayers to report "operations" in, with, or related to a boycotting country or its nationals and requests received to participate in or cooperate with an international boycott. The Treasury Department publishes a quarterly list of "boycotting countries.”

BUREAU OF INDUSTRY AND SECURITY [BIS] ACTIVITIES

• “regulating the export of sensitive goods and technologies in an effective and efficient manner;

• enforcing export control, antiboycott, and public safety laws;

• cooperating with and assisting other countries on export control and strategic trade issues;

• assisting U.S. industry to comply with international arms control agreements;

• monitoring the viability of the U.S. defense industrial base;

• and promoting federal initiatives and public-private partnerships to protect the nation's critical infrastructures”

SOURCE: http://www.bis.doc.gov/about/index.htm

SECTION 11: REVIEW 1

• You should now have knowledge of– Roles and responsibilities of export

intermediaries• Freight Forwarder and Customs Broker

– A thorough understanding of • The three main categories within INCOTERMS

[E, F, and C], and• The key components of the 8 main

INCOTERMS.

SECTION 11: REVIEW 2

• You should now have knowledge of key document types and requirements including – Bill of Lading [B/L]

• Many types and conditions

– Invoices• Pro Forma, Commercial, and Foreign Customs

– Export license types• NLR, DL, and IVL,

– Certificate of Origin [simple]

SECTION 11: REVIEW 3

– Export Packing List

– Insurance Certificate

– Labeling

– Boycott regulations– Export regulations [ECCN] and BIS activities