MKTG Discussion Questions

V. Costs of marketing subsidiary are higher and are more long-term

a. Include fixed costs (real estate, inventory, employees)

b. Agents represent variable costs (commissions)

c. Distributors bear all the costs of establishing the business in a foreign country

VI. Factors which may call for the use of a marketing subsidiary:

a. When the exporter estimates that the market potential (sales, growth, or profit) is considerable

b. When the product is technologically driven, with substantial intellectual property content

c. When the product is rather complicated to sell

d. When the company expects to be in for the long run, with more products forthcoming

e. When the product requires sophisticated after-sale support

f. When the company expects to become a major player in the market

g. When the company can command premium prices

h. When the company does not want to relinquish control of its products and prices

4-3-5 Coordinating Direct Export Strategies

I. Two factors in exporter’s entry decision:

a. Market-driven

b. Company- or product-driven

c. Some firms have a specific strategy they follow for exporting

i. Advantages:

1. Simplifies export management

2. Provides united marketing front

3. Can develop similar standard for all of their import entities

a. Agents/sales subsidiaries: can coordinate prices and control after-sale policies

b. Distributors: can contractually control prices

ii. Disadvantages:

one-size-fits-all may result in poor match with market

1. Potentially good market may be given away to an agent

2. Establishing a sales subsidiary may be wasteful in a small market

3. Firm may miss market opportunities by waiting for enough resources to establish a subsidiary

4. Other firms decide their exporting strategy on a country-by-country basis

d. Some firms have different entry strategies in different countries

i. Advantage: best strategy is chosen for each country and profits usually will be higher

ii. Disadvantages:

1. Coordination of prices and after-sale service is more difficult to achieve

2. There is the possibility of parallel imports

e. Switching from agents or distributors to sales subsidiaries can cause serious problems

i. Agents/distributors have usually heavily invested to develop market

ii. Customers have loyalty to agents/distributors

iii. Changing to a subsidiary can cause a drop in sales

iv. Slighted distributor may successfully seek redress in court

4-3-6 Foreign Sales Corporation

I. Method for U.S. companies to reduce income tax on exports from 45 percent of profit to 30 percent

II. Export products must have at least 50 percent U.S. content

III. Exporter must incorporate subsidiary in pre-approved foreign location such as Virgin Islands, Barbados or Jamaica

IV. Does not include Export Trading Company, since those are domestic sales

V. Based on a European Union complaint, the World Trade Organization has ruled that Foreign Sales Corporations are prohibited subsidies to exports, but Congress does not want the tax break to go away

4-4 Production Abroad

I. Effective when manufacturing costs are lower

II. Effective when costs are prohibitive

III. Effective when domestic manufacturing capacity reached

IV. Effective when product has significant intangible content, such as services

4-4-1 Contract Manufacturing/Subcontracting

I. Company contracts with foreign producer to manufacture its goods

II. Not truly a means of entry, just a way to get the product manufactured in the foreign country

III. Product still must be marketed and distributed

a. Usually through distributor or marketing subsidiary

b. Sometimes local contractor uses their own marketing channels

IV. Contract manufacturing may be used to offset significant barriers to entry (high tariffs, quotas), but countries with such practices usually do not have manufacturing firms up to world standards

4-4-2 Licensing

I. Granting of rights of intellectual property from one company, the licensor to another, the licensee

II. Common in manufacturing

III. International licensing

a. Licensor “exports” intellectual property to licensee in a foreign country

b. Advantages:

i. Good solution to tariffs or other barriers

ii. Licensor does not need to risk a lot of capital

iii. Licensor can generate worldwide income fairly rapidly

c. Disadvantage: piracy

4-4-3 Franchising

I. Similar to licensing, except franchisor grants large number of intellectual property items to franchisee

II. Often used in retailing

a. Consumers like consistency

b. Entrepreneurs like proven business plan

c. Somewhat limited to low-skill service businesses like retailing

III. Generates substantial amounts of piggy-backing by franchisor’s equipment suppliers

4-4-4 Joint Venture

I. Exporter invests in foreign country with one or more partners to create a new corporation

II. Politically-connected local partner helps to prevent seizure of company by local government, as was common in some countries from the 1950s through the 1970s

III. Local governments not interested in nationalization, but in local ownership of capital have been advocates of joint ventures

IV. Problem is they are like a marriage where the spouses continually change: personnel and corporate ownerships do not remain static

V. Foreign investors find joint ventures less and less attractive

4-4-5 Subsidiary

I. Sometimes called Wholly-Owned Foreign Enterprise or Wholly Foreign-Owned Enterprise (WFOE, “Woofie”)

II. Advantages:

a. Firm retains control

b. Firm protects trade secrets

c. Firm does not have to share profits

d. Does not rely on any one else for information on customers

e. Can pull out when it wants

f. Creates jobs for host country

g. Favorable duty rates

III. Disadvantages:

a. High costs establishing it

b. High risk exposure

c. Managing in a foreign country with limited understanding of local customs and culture

4-5 Parallel Imports

I. Parallel imports, or gray market goods, are goods sold outside regular distribution channels of a company

II. Gray market sometimes develops when there is a price differential between one country and the next. Someone buys the goods in the lower-priced country and re-sells them in the higher-priced country in outlets outside the regular channel and at prices lower than those of the regular channel

III. Best defense is to avoid price discrepancies from country to country

IV. No legal recourse—when a company sells a product it can no longer control it

4-6 Counterfeit

I. Lots of consumer goods, and some industrial goods, can be counterfeited

II. The largest culprits are countries in which intellectual property rights are not well protected (China, India, Russia, …etc.)

III. The goods are made by an unauthorized manufacturer, and are frequently, but not always, of lower quality

IV. Counterfeit goods can represent problems for the owner of the brand, as warranty claims (and liability claims) are made

V. Perceptions of lower quality are also attributed to the owner of the brand and not the counterfeiter

4-7 Other Issues in Methods of Entry

4-7-1 Foreign Trade Zones

I. Although a FTZ is in a country, as far as Customs is concerned, the FTZ is considered to be “outside” the country

II. Goods can be imported duty-free into the FTZ, then transformed, assembled, repackaged and shipped elsewhere without ever having been considered to be in the country where the FTZ is located

III. Products from the FTZ sold to the host country are only subject to duty when they leave the FTZ

IV. They stimulate foreign investment and create local jobs

V. Attractive to manufacturers subject to tariffs on materials that are higher than on the finished product

VI. Good place to hold inventory while waiting on import quota

VII. WTO’s progress in securing lower tariffs may reduce future role of FTZs

4-7-2 Maquiladoras

I. Mexican countries with a Customs status similar to being in an FTZ in both Mexico and the United States

II. Companies can import goods duty-free from the United States, transform them, then re-export them to the United States where the duty is only for the value added in Mexico

III. North American Free Trade Agreement (NAFTA) has reduced attractiveness of the maquiladoras

4-7-3 Anti-Bribery Convention

I. Much international business is driven by bribery and corruption

II. U.S. Foreign Corrupt Practices Act prohibits Americans from engaging in bribery

III. The Organisation for Economic Co-operation and Development (OECD) wants an end to bribery, and as of May 2009, 38 countries have ratified it

Key terms

Anti-Bribery Convention

An OECD convention that requires countries to penalize companies engaging in bribery.

agent

An individual or firm, located in an importing country, that is allowed to represent an exporter in sales negotiations. The firm being represented is called the principal.

binding agent

An agent who can make decisions that are binding on the principal; the principal must abide by whatever statements the representative has made.

contract law

A set of laws that govern relationships established by contracts between two parties.

contract manufacturing

A situation in which an exporter that needs to manufacture a product abroad finds a corporation in the importing country to make the product for the exporter.

counterfeit goods

Goods that appear to have been produced by the legitimate manufacturer but that were actually produced by another company intent on deceiving customers and imitating the genuine goods. Counterfeit goods are generally sold for a much lower price than the authentic goods.

distributor

An individual or a firm, located in an importing country, that purchases goods from the exporter with the idea of reselling them for a profit.

duty

The amount of tax paid to Customs authorities in the importing country on imported goods

export management corporation

A company that puts suppliers in touch with potential buyers, and earns a commission if a sale is completed.

export trading company

A company that purchases goods in one country for the purpose of reselling them in another country at a profit.

sogo sosha

The Japanese term for a trading company.

Foreign Corrupt Practices ActA U.S. law that punishes severely U.S. companies engaging in bribery outside of the borders of the United States.

foreign sales corporation

A subsidiary, created for tax-reduction purposes only, that handles an exporter’s overseas sales.

foreign trade zone

An area that is physically within the borders of a country, but that is considered outside of its borders for Customs’ purposes.

franchisee

The party granted the right to use an array of intellectual property items owned by another party in exchange for payment of royalties.

franchising

A process by which a firm possessing an array of several intellectual property items (patents, copyrights, trademarks, trade secrets) grants another company the right to use these intellectual property items in exchange for royalties. In general, the firm that is granted the rights to use the items (called the franchisee) and the firm granting the rights to the use of the items (called the franchisor) are, in the eyes of their customers, indistinguishable

franchisor

The owner of an array of several intellectual property items that grants another firm (the licensee or franchisee) the rights to use that group of intellectual property items in exchange for the payment of royalties.

gray market goods

Goods purchased in one country by unauthorized intermediaries and sold to unauthorized retailers in another country.

intellectual property

A type of intangible good that an individual or a firm can own; it is either a copyright (the rights to a work of art, a musical piece, or a written article), a patent (the rights to a process, a material, or a design), a trademark (the rights to a commercial name or slogan), or a trade secret (a unique way to manufacture a particular product). Copyrights, patents, and trademarks are protected by governments, preventing non-owners from using intellectual property without authorization. Trade secrets are protected by being kept secret.

joint venture

An overseas company that is jointly owned by two or more companies.

labor law

A set of laws that govern relationships between employees and employers.

licensee

The party that is granted the right to use an intellectual property item owned by another party (the licensor) in exchange for payment of a royalty.

licensing

A process by which a firm possessing some intellectual property item (a patent, a copyright, a trademark, a trade secret) grants another company the right to use the intellectual property item in exchange for a payment, called a royalty.

licensor

The owner of an intellectual property item that grants another firm (the licensee) the right to use that intellectual property in exchange for the payment of a royalty.

maquiladora

A plant located in Mexico that have the same status as a foreign trade zone located both in the United States and Mexico.

marketing subsidiary

A firm, incorporated in the importing county and owned by the exporter, whose purpose is to sell the exporter’s products.

parallel imports

Goods purchased in one country by unauthorized intermediaries and sold to unauthorized retailers in another country.

piggy-backing

When a manufacturer goes overseas and asks its suppliers to continue doing business abroad with him, the suppliers are said to be piggy backing on that customer’s efforts.

permanent establishment

A fixed place of business abroad that subjects the exporter to tax liability in the importing country.

principal

The party represented by the agent in an international agency agreement; the exporter.

royalty

The amount of money paid by a licensee to a licensor for the right to use the licensor’s intellectual property. Royalty fees are generally determined in function of the number of times that the licensee or franchisee used the intellectual property.

subsidiary

A corporation entirely owned by another corporation.

wholly-owned foreign enterprise

Another term for a subsidiary.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· Entry Strategy Determinant Factors (4 slides)

· Indirect Exporting (6 slides)

· Active Exporting (10 slides)

· Production Abroad (11 slides)

·

Parallel Imports (2 slides)

· Counterfeit Goods (1 slide)

· FTZs and Maquiladoras (3 slides)

· Foreign Corrupt Practices Act (1 slide)

Additional Resources

Bello, Daniel C. and Ritu Lohtia, “Export Channel Design: The Use of Foreign Distributors and Agents,” Journal of the Academy of Marketing Science, Spring 1995, pp. 83–93.

Root, Franklin R., Entry Strategies for International Markets, Revised and Expanded Edition, Lexington Books, 1994.

Rosenbloom, Bert and G. Behrens Ulrich, Marketing Channels: A Management View, Sixth Edition, The Dryden Press, 1998.

“Country Descriptions of Tax Legislation on the Tax Treatment of Bribes,” Organisation for Economic Co-operation and Development, June 2006, http://www.oecd.org/dataoecd/42/43/37116153 , October 1, 2007.

“Foreign Corrupt Practices Act Antibribery Provisions,” United States Department of Justice—Fraud Division, and United States Department of Commerce—Office of the Chief Counsel for International Commerce, http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide , June 4, 2010.

Chapter 4
Methods of Entry in Foreign Markets

Methods of Entry into
Foreign Markets
Entering A New Market
Indirect Exporting
Active Exporting
Production Abroad
Other Issues

Entering a New Market
The determination of the appropriate method of entry in a new market depends on several factors:
Size and growth of the market
Potential market share of the exporter
Type of product and marketing strategy of the exporter
Willingness of the exporter to get involved
Characteristics of the importing country
Time horizon considered

Entering a New Market
The company must decide whether market factors favor
Manufacturing abroad
Manufacturing at home
Active Exporting
Indirect Exporting

Entering a New Market
Active Exporting
Exporter actively participates in finding potential markets abroad.
Best option for large firms or firms with international experience.

Indirect exporting
Exporter does not seek export sales.
Allows manufacturer to concentrate on domestic market and leave exporting to the experts.

Indirect Exporting
Export Trading Companies
Export Management Corporations
Piggy Backing

Export Trading Company
An Export Trading Company [ETC] is a firm with offices in multiple countries that purchases goods in one country and resells them in another.
For the “exporter” selling to the ETC, as well as for the “importer” buying from the ETC, the transactions are domestic transactions, even though the goods eventually travel internationally.
Historically, the first ETCs were created in Britain, France, and the Netherlands to facilitate trade with India and Indochina. They were then created in Spain and Portugal for trade in South America. Following World War II, ETCs became popular in Japan as the country began to trade with the outside world. Today, they are almost exclusively Japanese: Mitsui, Mitsubishi, Marubeni, Itochu, …

Tradco, a trading company, buys ceramics from a Turkish company and pays in Turkish liras.
Tradco then transports the ceramics onboard its own ships to Russia.
Tradco sells them to a Russian customer and collects Russian rubles.
As far as the Turkish seller is concerned, the sale is a domestic transaction with a Turkish customer. As far as the Russian buyer is concerned, the purchase is a domestic transaction with a Russian supplier.

Export Management Corporation
An Export Management Corporation [EMC] is normally located in the exporting country.
The EMC acts as a representative for the exporter abroad, but never takes title to the goods. It acts as a facilitator helping the exporter find buyers, and earns a commission on the sale.
A sale through an EMC requires more involvement by the exporter: It has to ship the goods, invoice the importer, carry the risk of non-payment, and have to manage parts of the transaction.

Expotech, an export management corporation finds out that a company in South Africa needs a forklift truck.
Expotech contacts a U.S. manufacturer, which agrees to sell the product to the South African customer if Expotech handles all aspects of the international transaction for a 5-percent commission.
The U.S. company ships the forklift to the customer in South Africa and sends him an invoice.
When the manufacturer is paid, it sends the commission to Expotech.

Piggy Backing
Piggy-backing refers to the possibility of a small firm piggy-backing on another firm’s efforts to enter a foreign market. For example:
A firm’s customer may open a manufacturing facility abroad and request that the firm continue to sell its products to that new facility. The firm ends up being an exporter, even though it never sought to enter that market.
A firm utilizes another company’s distribution channels abroad to sell its products. It uses another company’s experience to sell its products abroad.
In either case, the firm “piggy-backed” on the other’s strategy.

Canadian Motors Corp (CMC), a large Canadian manufacturer of automobile motors, builds a plant in Ukraine.
CMC tells to its Canadian supplier, V-Tech, that it needs to provide engine valves to the new plant.
V-Tech now supplies valves to the CMC plant in Canada as well as in Ukraine, a country to which it would not have exported without CMC’s request.

Active Exporting
Agent
Distributor
Marketing Subsidiary

Agent
An agent is typically a small firm or individual located in the importing country. The agent will act as a representative of the exporter. He or she will not take title of the goods and will earn a commission form the exporter.
The principal is the party (company) being represented by the agent.
An agent will represent multiple companies manufacturing products that complement the exporter’s products.

A French manufacturer of industrial machinery hires an agent in Australia to sell its products and represent the exporter in that market.
After the agent finds an Australian customer, the transaction is conducted between the exporter in France and the importer in Australia.
When the exporter is paid by the importer, he then sends the agent a commission.

Distributor
A distributor is typically located in the importing country. The distributor will purchase the goods from the exporter and therefore take title of them. It will then resell the goods for a profit.
In this relationship, there are two sets of invoices. One set of international invoices between the exporter and the distributor. The distributor is therefore the importer. The second set of invoices is between the distributor and its customer. The customer sees this as a domestic transaction.
A distributor may carry products from competitors in the same field. Oftentimes, it will also service products and carry replacement parts.

An Israeli manufacturer of irrigation equipment, Irridim, enters a contract with a Spanish distributor to sell its products in Western Europe.
The Spanish distributor purchases the parts from the Israeli manufacturer and places them in inventory.
The Spanish distributor then sells them to its own customers all over Europe.

Legal Issues
Agents are typically very small, sometimes even one person, and therefore fall under the protection of labor law in many countries. This puts certain limits on the way contracts between agents and exporters can be worded and enforced (see Chapter 5).
Distributors are typically much larger than agents and therefore fall under contract law.
Finally, certain countries have strict laws regarding the use of agents, sometimes even barring them altogether.

Marketing Subsidiary
A marketing subsidiary is a foreign office of a parent organization. The subsidiary is a separate entity incorporated in the foreign country. It is wholly owned by the parent company.
The parent company sells products to the subsidiary in an international transaction. The subsidiary in turn will sell these products to customers in the foreign country.
The costs (and risks) associated with creating a marketing subsidiary are but a subsidiary allows for greater control by the exporter.

A Swiss manufacturer of precision machinery, TechnoSwiss, establishes a marketing subsidiary in Brazil.
The Technoswiss subsidiary hires several employees whose role is to sell Technoswiss products to the South American continent.

Coordinating Direct Export Strategies (I)
A firm can use two strategies in entering foreign markets through exports, and both are appropriate:
A standardized approach, where it uses a single method of entry in all markets: agents, distributors, or sales subsidiaries. This uniformity simplifies the management of international sales.
A tailored approach, where an agent is used in some countries, a distributor in others, and a marketing subsidiary in the remainder. The decision depends on the characteristics of the market and resources.

Coordinating Direct Export Strategies (II)
Difficulties arise when a firm decides to change strategies in a particular market. These long-term relationships are very important and ending any one of them can be difficult and costly.

Manufacturing Abroad
Contract Manufacturing
Licensing
Franchising
Joint Venture
Subsidiary

Contract Manufacturing
A company enters into an agreement with a foreign company to manufacture its goods abroad. For example:
An American publisher may hire a British publisher to print books in Britain, instead of shipping them from the United States.
A French cement company may contract a Chinese cement manufacturer to sell cement under the French company’s name in China.
Contract manufacturing is a way for a firm to get its products in a foreign country, either when there are barriers to entry (quotas, for example), or when transportation costs are high.

Util, a British manufacturer of home appliances, enters a contract with a manufacturer in Korea.
The Korean company produces the appliances for the British company.
The British company is responsible for marketing them worldwide, including in Japan.

Licensing
A company (the licensor) allows another firm (the licensee) to use its intellectual property in exchange for a fee (royalty).
The license can allow the use of a patented technology, trademark, brand name or trade secret. The licensor retains ownership of the intellectual property and the licensee must pay the licensor a fee every time it is used.
All intellectual property is at risk of being copied or “stolen” in countries where intellectual property is not well protected.
Having a licensing agreement does not increase that risk: companies intent on violating intellectual property do it without access to the licensor.

Cicero Books, the United States publisher of your International Logistics book, enters a licensing agreement with Tsinghua University Press in China.
Cicero Books allows Tsinghua to publish copies of the book in the Chinese market.
In exchange, Tsinghua University Press pays a royalty to Cicero Books.

Franchising
Franchising is similar to licensing but involves a “bundle” of intellectual property items. A firm (franchisor) will allow an entire business model to be used by another firm (franchisee) in exchange for royalties. The intellectual property includes a large number of related trademarks, copyrights, patents and know-how, training, and methods of operation.
Franchising works best for retail establishments requiring a uniform appearance for consumers, and is most popular with fast-food restaurants, such as McDonald’s or KFC, or small-business services such as UPS stores.

Ace Carwash, a British chain of do-it-yourself car washes, enters a franchising agreement with Australian investors.
Ace allows the Australian investors to use its name, designs, and brands, in exchange for the payment of a royalty.

Joint Venture
A joint venture (JV) is a firm created and jointly owned by two or three companies.
It is created when two or three exporters want to share the costs of investing in a facility abroad. Often the joint owners are companies manufacturing complementary product lines.
Sometimes, an exporter wants a local partner to provide capital and knowledge of the market. Some countries require local partnership for foreign investors.
Joint ventures work well while the relationship is strong. Unfortunately, the two entities will often grow in different directions over time and the joint venture will suffer.

A Swiss pharmaceutical company creates a joint venture with a local chemical manufacturer in India to produce a drug with substantial market potential on the Indian market.
The Swiss manufacturer chose its partner because the Indian management team had much experience navigating the country’s complex regulatory environment.

Subsidiary
A subsidiary (or wholly owned foreign enterprise [WOFE]) is an independent company established in a foreign country but owned entirely by the exporting company.
A subsidiary allows the foreign firm to retain complete control of its foreign investment.
This strategy is normally followed by a well-established large company, as the costs associated with creating a subsidiary are very high.

An Italian manufacturer of appliance parts purchases an existing appliance-part company and its plants in Argentina.
The plant now manufactures parts for the South American market.

Other Issues
Parallel Imports
Counterfeit Goods
Foreign Trade Zones
Foreign Sales Corporations
Maquiladoras
Foreign Corrupt Practices Act – Anti-Bribery Convention

Parallel Imports
For a variety of reasons firms will sell goods in different markets at different prices: different methods of entry, characteristics of the market, varying exchange rates.
Entrepreneurs will often buy the goods in the country with the lowest price, and then sell them in the country with the highest price. In order to do that, they buy from the normal distribution channel, but sell through alternative channels of distribution that are not the ones that the exporter would normally use.
This phenomenon is called “parallel imports,” or gray market.
It is difficult for companies to fight these parallel imports, as they are due to market characteristics rather than strategic choices.

A kitchen appliance sells at a lower price in Turkey than in Germany.
An entrepreneur buys the appliances at retail in Turkey, ships them to Germany, and sells them through a discount store.
The price of the Turkish version of the product ends up being lower than the price of the German version.

Counterfeit Goods
A counterfeit good is a copy of a legitimate good. The product is being produced to imitate a genuine good and deceive consumers. It is almost always of much lower quality and costs less than the genuine good.
Counterfeit goods can be tangible goods like watches, clothing, or car parts, but also intellectual property like films and software.
Western countries often accuse developing countries like China and India of ignoring blatant counterfeiting, but counterfeits can be found in every country.

Foreign Sales Corporations
Foreign Sales Corporations (FSCs) are not actually methods of entry but a method for U.S. companies to lower their income tax. The U.S. government allows companies to take a tax deduction when they create domestic subsidiaries that meet certain conditions:
The subsidiaries must have at least 95 percent of their assets and personnel devoted to export sales.
The exported goods must have at least a 50 percent U.S. content.
The World Trade Organization has ruled against FSCs, but as soon as a particular version is found illegal, they are resurrected under a different form.

Foreign Trade Zones
Foreign trade zones (or free trade zones [FTZ]) are areas of a country that have a special Customs status deeming them “outside” of the country. This means goods can be shipped to FTZs without paying duties or being subject to quotas.
It is only when the goods leave the FTZ and enter the country that they are subject to duty.
FTZs were created to encourage exporting and foreign investments.

Foreign Trade Zones
Exporter

Foreign Trade Zone

Country A
Country B
Duty free
Duty
Collected
Duty
Collected
Customers
Customers

Maquiladoras
A maquiladora is a company in Mexico with a Customs status similar to that of an FTZ.
Goods from the USA can be imported duty free into the maquiladora, transformed, and re-exported to the U.S. Duty is only charged on the value added, not on the goods themselves.
Maquiladoras are now obsolete because of the North American Free-Trade Agreement, which eliminated duty between Mexico, Canada, and the United States.

Foreign Corrupt Practices Act
Anti-Bribery Convention
In several countries, the bribing of government officials is a common and accepted form of conducting business.
The Foreign Corrupt Practices Act (FCPA) of the United States attempts to eliminate the practice of bribery, by punishing the companies and the individuals paying the bribes.
The Organisation for Economic Co-operation and Development (OECD) has implemented an Anti-Bribery Convention, which several countries have adopted, and that also criminalizes bribery practices.

Chapter 1
International Trade

International Trade
International Trade Growth
International Trade Milestones
Largest Exporting and Importing Countries
International Trade Drivers
International Trade Theories
International Business Environment

International Trade Growth
International Trade Growth 1953-2015.
Source: World Trade Organization

International Trade Milestones
Bretton-Woods Conference (1944)
Creation of the International Monetary Fund (1945)
First General Agreement on Tariffs and Trade (Geneva, 1948)
General Agreement on Tariffs and Trade
Multiple reductions on tariffs: GATT’s Kennedy Round (1964-67), Tokyo Round (1973-79), and Uruguay Round (1986-94). Currently in the Doha Round (started in 1998, stalled).
Treaty of Rome (1957)
World Trade Organization (1995)
The Euro’s creation (1999) and placement in circulation (2002)

Major Exporting Countries (2015)

Country Exports (US$ billions) Percentage
China 2,275 13.8%
United States 1,505 9.1%
Germany 1,329 8.1%
Japan 625 3.8%
Netherlands 567 3.4%
Korea, Republic of 527 3.2%
Hong Kong, China 511 3.1%
France 506 3.1%
United Kingdom 460 2.8%
Italy 459 2.8%
Canada 408 2.5%
Belgium 398 2.4%
Mexico 381 2.3%
Singapore 351 2.1%
Russian Federation 340 2.1%
Rest of the World 5,839 35.4%
World 14,482 100.0%

Major Importing Countries (2015)

Country Imports (in US$ billions) Percentage
United States 2,308 13.8%
China 1,682 10.1%
Germany 1,050 6.3%
Japan 648 3.9%
United Kingdom 626 3.7%
France 573 3.4%
Hong Kong, China 559 3.3%
Netherlands 506 3.0%
Korea, Republic of 436 2.6%
Canada 436 2.6%
Italy 409 2.4%
Mexico 405 2.4%
India 392 2.3%
Belgium 309 2.2%
Spain 280 1.8%
Rest of the World 6,361,028 35.9%
World 18,567,000 100.0%

International Trade Drivers
Cost Drivers
Companies increase their sales worldwide to recover their high investment costs.
Competition Drivers
Companies enter foreign markets to keep up with their competitors , retaliate against them, or enter a market first.
Market Drivers
Companies enter foreign markets because their customers expect them to be present in those countries.
Technology Drivers
Companies enter foreign markets because their customers use technology to make purchases from these markets

Cost Drivers
Companies in industries with high fixed costs try to spread these costs over many units, and therefore seek sales outside of their home markets.
Automobile companies were among the first to seek sales abroad:
Automobile production is dominated by 19 companies
(89 percent of all automobiles worldwide)
Automobile production is concentrated in 15 countries
(88 percent of worldwide production)
yet
Automobiles are sold in 143 countries.

Major Automobile Makers (2015)

Company Units Sold Worldwide Brands
Toyota Motors Corp. 10,475,000 Toyota, Lexus, Daihatsu, Hino
Volkswagen Group AG 9,895,000 Volkswagen, Audi, Porsche, Škoda, Scania, SEAT
General Motors Corp. 9,609,000 Chevrolet, Buick, Cadillac, GMC, Opel, Holden
Hyundai Motor Group 8,009,000 Hyundai, Kia
Ford Motor Company 5,970,000 Ford, Lincoln, Troller, Bedford
Nissan 5,098,000 Nissan, Dacia, Infiniti, Datsun
Fiat Chrysler Automobiles 4,866,000 Fiat, Chrysler, Dodge, Alfa-Romeo, Ferrari
Honda Motors 5,514,000 Honda, Acura
Suzuki 3,017,000 Suzuki, Maruti
Peugeot-Citroën SA 2,917,000 Peugeot, Citroën
Renault 2,762,000 Renault
BMW AG 2,166,000 BMW, Mini, Rolls-Royce
SAIC Motors 2,088,000 Wuling, Baojun
Daimler AG 1,973,000 Mercedes-Benz, Mitsubishi-Fuso, Setra
Chang’an 1,447,000 Chang’an,Chana
Mazda Motors 1,328,000 Mazda
DongFeng Motors 1,302,000 Dongfeng, Fengshen
Mitsubishi 1,262,000 Mitsubishi
Beijing Automotive Group 1,116,000 BAIC, BAW, Foton
Rest of the World
9,958,000
Tata, Jaguar, Land Rover, Geely, Emgrand, Englon, Gleagle, Subaru, Great Wall, Haval, FAW, Besturn, Hong Qi, Jilin, IKCO

Vehicle Production Countries (2015)

Country Vehicles Produced
China 24,503,000
United States 12,100,000
Japan 9,278,000
Germany 6,033,000
South Korea 4,556,000
India 4,126,000
Mexico 3,565,000
Spain 2,733,000
Brazil 2,429,000
Canada 2,283,000
France 1,970,000
Thailand 1,915,000
United Kingdom 1,464,000
Russia 1,458,000
Turkey 1,359,000
Rest of the World 10,862,000
Total 90,781,000

Competition Drivers
Companies that see themselves as global players seek to counter their competitors’ international moves in order to retain global market share.
Every move by one of the players is met with some retaliatory measure:
When Benetton—an Italian company—, entered the U.S. market, The Gap—an American company—, retaliated by entering the Italian market.
When Carrefour—a French retailer—enters a market, Walmart enters another. And when Walmart enters a market, Carrefour does as well.

Competition Drivers
The way Carrefour and Walmart split the world (2017)
Countries in which both are present Argentina, Brazil, China, India, Japan, Kenya, United Kingdom.
Countries in which only Carrefour is present Albania, Armenia, Austria, Bahrain, Belgium, Bulgaria, Cyprus, Egypt, France, Georgia, Greece, Indonesia, Iran, Iraq, Italy, Jordan, Kazakhstan, Kuwait, Lebanon, Macedonia, Monaco, Malaysia, Morocco, Oman, Pakistan, Poland, Portugal ,Qatar, Romania, Saudi Arabia, Spain, Slovakia, Slovenia, Syria, Taiwan, Tunisia, Turkey, United Arab Emirates.
Countries in which only Walmart is present Botswana, Canada, Chile, Costa Rica, Ghana, Guatemala, Honduras, Lesotho, Malawi, Mexico, Mozambique, Namibia, Nicaragua, Nigeria, South Africa, Tanzania, Uganda, United States, Zambia.

Market Drivers
Companies in industries where customers travel will follow these customers internationally:
Hotel chains were first to offer a standardized experience worldwide.
Fast-food restaurants followed their customers abroad (McDonald’s first foreign ventures followed U.S. military personnel in Germany and Japan).

Market Drivers
Number of countries in which selected companies are present*
McDonald’s Restaurants 121
Hilton Hotels 91
Benetton Stores 120
Cartier Jewelry Stores 125
Accor Hotels 92
Exxon-Mobil Gas Stations 100+

* Some companies have a very “broad” definition of countries, counting
Puerto Rico, Martinique, and Jersey as separate countries. The tallies in
this table are self reported.

International Trade Theories
Adam Smith’s Theory of Absolute Advantage
David Ricardo’s Theory of Comparative Advantage
Eli Hecksher and Bertil Ohlin’s Factor Endowment Theory
Raymond Vernon’s International Product Life Cycle Theory
Michael Porter’s Cluster Theory
Yossi Sheffi’s Logistics Cluster Theory

Theory of Absolute Advantage
If a country can produce a certain good more efficiently than other countries, it will trade with countries that produce other goods more efficiently.

In this case, both countries are using the same amount of labor to produce these alternatives. France will specialize in making wine, and Germany will specialize in making machinery.
Wine Machinery
France 20,000 2
Germany 15,000 3

Theory of Comparative Advantage
Nations will trade with one another as long as they can produce certain goods relatively more efficiently than one another

The UK has an absolute advantage in both machinery and wheat. However, in the UK, the relative price of 1 unit of machinery is 5 tons of wheat, and in Brazil, it is 7 tons of wheat.
The nations will trade: If the UK sells 1 unit of machinery to Brazil for 6 units of wheat, both the UK and Brazil are better off. The UK has a comparative advantage in producing machinery, Brazil in growing wheat.
Tons of Wheat Units of Machinery
UK 25 5
Brazil 21 3

Factor Endowment Theory
A country will enjoy a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production.

Country Abundance Advantage
Argentina Grazing Land Beef
India Educated Labor Call centers
USA Economic system where entrepreneurship is rewarded Innovation & development of intellectual property

Factors of Economic Production
1. Land
2. Labor
3. Capital
4. Entrepreneurship

International Product Life Cycle Theory
Over its life, a product will be manufactured in different types of countries, in stages, generating trade between these countries.
Stage 1
Product is created in developed country, using new technology and serving a market need.
Stage 2
As sales grow, competitors start to make similar products in other developed countries, responding to local needs.
Stage 3
Manufacturing of product has become routine and costs need to be reduced, and production moves to developing countries.

Cluster Theory
Competitive clusters form when companies in the same industry, as well as their suppliers, concentrate in one geographic area. When this happens, the companies “feed” on each other’s know-how, pushing them to innovate faster. They become so efficient and innovative that they become world-class suppliers.
Cluster Examples
Silicon Valley, California, U.S. – Information technology
Sassuolo, Italy – Ceramic tiles
Genève, Switzerland – Watches
Yiwu, China – Socks & hosiery

Logistics Cluster Theory
Logistics clusters form when logistics companies concentrate in one geographic area. When this happens, the companies allow manufacturers to operate more efficiently, since all the services they need to ship are located in one area. The logistics suppliers, even though they are competitors, actually help each other attract new customers.

Logistics Cluster Examples
Singapore
Memphis, United States
Rotterdam, The Netherlands
Zaragoza, Spain

International Business Environment
To be successful in international logistics, not only is it important to have an understanding of logistics, but it is also fundamental to understand the international environment.
This can be achieved by learning a foreign language, taking classes in international economics, international finance, intercultural communication, and international marketing, but also by traveling frequently, meeting foreign nationals, and making an effort to understand what is happening in foreign countries.

23

7-16

Chapter 7

:

Terms of Payment

Chapter 7: Terms of Payments 7-

17

Chapter 7
Terms of Payment

lEARNING oBJECTIVES

At the end of this chapter, YOU SHOULD:

1 Identify alternative terms of payment in international trade.

2 Understand the advantages/disadvantages of securing payment through cash in advance.

3 Understand the advantages/disadvantages of securing payment through the use of open accounts.

4 Understand the advantages/disadvantages and procedures of securing payment through letters of credit.

5 Understand the procedures in documentary collection in international trade.

6 Understand the procedures in the use of purchasing cards, procurement cards, credit cards, trade cards, and bank guarantees in international trade.

7 Understand the strategic advantages of using the proper method of payment.

Preview

This chapter helps exporters achieve a major goal: getting paid for an international shipment. It focuses on the strategic dimensions of payment terms—for instance, how demanding cash in advance for a product can put an exporter at a competitive disadvantage. We will look at law applying to payment terms and will direct considerable focus to the processing of a letter of credit as a term of payment.

Chapter Outline

Introduction

I. Exporter wants to get paid

7-1 Characteristics of International Payment Issues

I. International payments are more complicated and risky than domestic payments:

a. Lack of credit information

b. Lack of personal contact

c. Difficult, expensive collections

d. No easy legal recourse

e. Higher litigation costs

f. Mistrust

7-2 Alternative Terms of Payment

I. Cash in advance

a. Traditional method

b. High probability of losing business due to payment choice

c. No loss due to non-payment

II. Letter of credit

a. Traditional method

b. Fairly high probability of losing business due to payment choice

c. Very little chance of loss due to nonpayment

III. Documentary collection

a. Traditional method

b. Low probability of losing business due to payment choice

c. Low probability of loss due to nonpayment

IV. Open account

a. Traditional method

b. No chance of losing business due to payment choice

c. Relatively high chance of loss due to nonpayment

V. TradeCard

a. Newer method

b. Low probability of losing business due to payment choice

c. Almost nil chance of loss due to nonpayment

7-3 Risks in International Trade

7-3-1 Country Risk

I. Political issues

a. Customs, tariff issues

b. Tendency toward strikes

c. Payment terms should be more secure

II. Economic health

a. High unemployment may mean policies against imports that steal jobs

b. High inflation may mean price controls

c. If country’s balance of payments are in high deficit, there may be restrictions on imports

III. Social system of country

a. Culture which condones fraud

b. Biased justice system

7-3-2 Commercial Risk

I. May be difficult to obtain information

II. Sources of information:

a. Credit report companies

b. Factoring houses

c. Some accounting firms

d. Insurance companies

e. Banks

7-3-3 Exposure

I. Risk of non-payment is probability of not getting paid or of getting paid late

II. Consequences of expensive loss is more hurtful to small exporter than to large exporter

III. Greater the exposure, the more secure terms of payment should be

7-4 Cash in Advance

7-4-1 Definition

I. Payment before shipment takes place

II. Electronic Society for Worldwide Interbank Financial Telecommunication (SWIFT) fund transfer

III. Risk-free

7-4-2 Applicability

I. Recommended:

a. In countries where fraud is rampant

b. In countries with political instability

c. In countries without convertible currency

II. Unworkable in developed countries

a. Sophisticated business procedures

b. Competition will offer more liberal terms

c. Can cause resentment

7-5 Open Account

7-5-1 Definition

I. Complete opposite of cash in advance

II. Exporter acts as though it were a domestic transaction

7-5-2 Aplicability

I. Established customers

II. Customers with whom an ongoing relationship is expected

III. Large customers with established credit

IV. Almost required in European Union

7-5-3 Commercial Credit Insurance

I. Used to compete in markets where the rule is open account

II. Can be blanket coverage of export transactions up to a limit

III. Can be on a per-sale basis

7-5-4 Factoring

I. More complicated than domestic factoring

II. Exporter deals with factoring firm in exporting company then deals with factoring firm in importing country

III. Following agreement by both factoring firms, sale is on an open account basis

IV. Exporter sells receivable to factoring house minus fees and interest

7-6 Letter of Credit
7-6-1 Definition

I. Document by which importer’s bank promises to pay exporter if importer does not pay

II. Promise is made on documents of transaction, not on quality of transaction

III. Almost as good as cash in advance, but is complicated and requires banking fees

7-6-2 Process

I. Issuance:

a. Negotiation between exporter and importer and exporter sends pro-forma invoice to importer, estimating terms of transaction

b. Importer (called in this case the applicant) requests its bank (the issuing bank) to open a letter of credit on its behalf, naming the exporter as the beneficiary

i. Bank may insist importer freeze a percentage or all of the amount of the letter of credit in an account or on a line of credit

ii. Frozen money represents a cash flow constraint which may discourage importer from using a letter of credit

c. Issuing bank sends letter of credit to exporter’s bank which is the advising bank

i. Checks that letter of credit is from legitimate bank

ii. Checks that letter’s content meets requirement of exporter

II. Shipment:

a. Exporter ships merchandise to importer

b. Exporter sends documents to its bank (the advising bank):

i. Invoice

ii. Certificate of origin

iii. Export license

iv. Packing list

v. Shipper’s Export Declaration (U.S.)

vi. Other documents as required

c. Advising bank examines documents against letter of credit

d. Advising bank sends documents to importer’s bank (issuing bank)

e. Issuing bank determines if documents conform to letter of credit

f. If documents are in order, issuing bank conveys bill of lading or air waybill (acting as certificate of title) to importer on receipt of payment by importer

g. Importer then clears Customs in importing country

h. Extreme care must be taken with paperwork

III. Payment:

a. Importer pays issuing bank

b. Importer wires payment to advising bank

c. Advising bank credits exporter’s account

7-6-3 Additional Information

I. Advising bank

a. When the exporter’s bank is unsure about its ability to advise a letter of credit, it asks a more experienced bank to advise the L/C

b. The advising bank is often a larger bank, in a large metropolitan banking center

II. Confirming bank

a. Exporter may not trust issuing bank

b. Has a bank—usually the advising bank—in effect co-sign for the transaction

III. Correspondent bank

a. Banks develop international relationships with each other in that they become correspondent banks to each other

b. Exporter may deal with an importer whose issuing bank has a relationship with a bank in the exporter’s country (that is not the exporter’s advising bank)

c. Issuing bank may prefer to deal with its correspondent bank in the exporting country, so transaction may go from advising bank to correspondent bank to issuing bank

IV. Irrevocable letter of credit

a. Irrevocable letter of credit cannot be cancelled by issuing bank for any reason, unless approved by beneficiary

b. Revocable letter of credit can be changed by importer or issuing bank without prior approval of beneficiary

c. Most letters of credit are irrevocable

V. UCP 600

a. Universal Customs and Practice for Documentary Credit, 2007 revision, Publication 600 of the International Chamber of Commerce

b. Details responsibilities of banks involved in letters of credit, and responsibilities of the applicant and beneficiary

c. Given accumulated jurisprudence with UCP 600 it is wise to make letters of credit subject to it

I. URR 725

a. International Chamber of Commerce has published Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits

b. Outline responsibilities of banks involved in an international transaction under the UCP 600

VI. Discrepancies and amendments

a. Often letter of credit and corresponding documents do not match (discrepancy)

b. Amendment to the letter of credit is a change authorized by both parties

i. May get complicated if documents are involved in government regulation issues (import licenses, for instance)

VII. Yet more complications

a. Exporter’s bank may feel unqualified to deal with letters of credit

b. Larger, more experienced bank may become the advising bank

c. Advising bank and confirming bank may be in different countries and it may result in two correspondent banks being involved

VIII. Drafts

a. Can be attached to letter of credit

b. Legally binds importer to pay within a certain time

c. Is a grant of credit by exporter to importer

7-6-4 Applicability

I. Letter of credit is recommended when:

a. Exporter is risk-averse

b. Exporter is new to exporting

c. Exporter has substantial exposure in transaction

d. There is uneasiness about creditworthiness of importer

II. Letter of credit is disadvantageous:

a. Because it is costly and cumbersome

b. It puts exporter at competitive disadvantage when competitors offer open accounts backed by insurance

7-7 Additional Types of Letters of Credit
7-7-1 Stand-By Letters of Credit

I. Much longer time validity

II. Usually applies to more than one shipment

III. Allows exporter to extend open account to importer with letter of credit “called” only if importer is not meeting obligations

IV. Tool of choice for dealing with distributors or in making series of shipments to a customer

7-7-2 Transferable Letters of Credit

I. A letter of credit that the beneficiary uses to convey that its own supplier will be paid

II. Allows exporter to obtain credit from its supplier

III. Bank must issue L/C as transferable, and issuing bank is the only entity that can allow transfer

7-7-3 Back-to-Back Letters of Credit

I. Exporter secures an L/C using the importer’s L/C as collateral

II. The primary L/C is the one issued by the importer’s bank

III. The secondary L/C is issued by the exporter’s bank with the exporter’s supplier as the beneficiary

7-8 Documentary Collection
7-8-1 Definition

I. Process by which exporter asks bank to protect its interests in importing country by not releasing documents (specifically bill of lading which is certificate of title to the goods) until importer meets certain requirements:

a. Importer pays exporter or

b. Importer signs a draft or bill of exchange promising to pay exporter within a specific amount of time

II. Allows exporter to retake possession of goods

7-8-2 Process

I. Exporter can set up documentary collection through its own bank which in this case is called the remitting bank which collects documents from exporter and sends them to presenting bank in importing country

7-8-3 Drafts

I. Importer incurs domestically-based debt to exporter

II. Exporter can request a protest in the event of non-payment, which results in serious domestic legal problem for importer

III. Sight draft

a. Bank in importing country, the presenting bank, delivers title documents to importer after the bank has collected payment

b. Exporter retains title until payment is made

IV. Time draft

a. Importer promises to pay within a certain time of endorsement of draft

b. Presenting bank delivers titling documents.

Importer incurs domestically-based debt to exporter.

c. Exporter can request a Protest in the event of non-payment, which results in serious domestic legal problem for importer.

V. Date draft

a. Similar to time draft, except promise to pay is from shipping date instead of draft endorsement date

b. Gives exporter more control over date that debt begins since importer can delay endorsement of a time draft

7-8-4 Instruction Letter

I. Exporter, through remitting bank, gives presenting bank instructions on how to conduct transaction

II. Presenting bank follows instruction letter and does not look for instructions among other documents in the documentary collection

7-8-5 Acceptance

I. Trade acceptance

a. Upon arrival of documents at presenting bank and notification of importer, the importer then can make trade acceptance, that is it can choose to accept or reject the draft

b. Exporter still has title, but importer can haggle over terms while goods are at risk in an unknown foreign port

I. Banker’s acceptance and aval

a. Importer’s delay of trade acceptance can be offset by a banker’s acceptance in which the presenting bank immediately endorses the draft on behalf of the importer

b. An aval is a promise by the presenting bank that the importer will honor the draft

i. Default results in presenting bank making payment

ii. In effect, the presenting bank co-signs for the importer

7-8-6 URC 522

I. International Chamber of Commerce publishes guidelines for documentary collections in Uniform Rules for Collections (URC 522)

II. Outline responsibilities of remitting bank and presenting bank

7-8-7 Applicability

I. Documentary collections are good because they are less cumbersome and expensive than letters of credit

II. Documentary collections are safe because title remains in hands of exporter

III. Documentary collections are riskier than letters of credit because:

a. They are dependent upon contract of sale

b. Importer can delay signing draft

IV. Good if there is a fair amount of trust but an open account or letter of credit are unworkable

7-9 Forfaiting

I. International forfaiting is method of extending credit longer than what exporter wants

II. Importer provides series of drafts which importer’s bank has given an aval

III. Exporter sells drafts at a discount to a forfaiting firm

7-10 Procurement Cards

I. Banks offer purchasing cards to corporate accounts which act like credit cards for incidental purchasing

II. Procurement cards allow a department in a firm to make purchases directly from a vendor without going through paperwork of a purchase order. Functions like a consumer credit card.

7-11 TradeCard

I. TradeCard, created in 1994, combines advantages of letters of credit and procurement cards

a. No payment made until documents are in order

b. Buyer is obligated to pay if documents are in order

c. System is expedient

d. Inexpensive

e. Combines document handling and payments

II. Electronic transmission of documents

III. Checks credit-worthiness of customer

IV. Guarantees payment to exporter if documents conform

V. Can automatically settle invoices after documents are determined to be in order

7-12 Bank Guarantees
7-12-1 Definition

I. Instrument to secure performance of seller, rather than buyer

II. Used when seller is a contractor to construct something

III. Usually only for a fraction of the total value of the contract

7-12-2 Guarantee Payable on First Demand (at First Request)

I. Issuing bank must pay at first request by beneficiary that indicates contractor is not meeting obligations

II. No proof is needed

III. Most common bank guarantee

7-12-3 Guarantees Based upon Documents—Cautions

I. Issuing bank must pay at request by beneficiary that indicates contractor is not meeting obligations

II. Some documentation of contractor’s default may be required, such as a court ruling

7-12-4 Stand-By Letters of Credit

I. Based on prohibition by U.S. law against bank guarantees

II. Functions same way, except beneficiary must present document before collecting from bank (simple statement of contractor default is usually sufficient)

7-12-5 Types of Bank Guarantees

I. The tender guarantee or bid guarantee ensures contractor is bidding in good faith

II. Performance guarantee ensures contractor will finish project

III. Maintenance guarantee ensures contractor will provide post-completion project maintenance and service

IV. Advance payment guarantee or repayment guarantee ensures that advance payments beneficiary pays to contractor will be reimbursed if contractor does not start project

V. Payment guarantee is used in a very different context to cover obligations of buyer toward exporter. Usually involves distributors

7-13 Terms of Payment as a Marketing Tool

I. Flexibility is primarily important

II. Open account is preferred by importers, and can be protected through credit insurance

Key terms

advising bank

In a letter of credit transaction, the bank that determines whether the issuing bank is a legitimate bank, and whether the terms of the letter of credit offered by the issuing bank on behalf of the importer are appropriate. Generally, the advising bank is the exporter’s regular bank, but in some cases the exporter’s bank will delegate this role to another bank which is more experienced in international trade.

amendment

A change to a letter of credit to which all parties to the letter of credit agree: the exporter, the importer, the issuing bank, and the advising bank. In general, amendments are made only if there are discrepancies, as every amendment costs the exporter and importer money.

applicant

The firm asking the issuing bank for a letter of credit. Usually, the applicant is the importer.

arbitration

A process by which parties to a contract choose to settle a dispute. An arbitration decision is binding on both parties.

aval

In a documentary collection transaction, the fact that a presenting bank is willing to sign the draft on behalf of the importer. An aval’s existence is based on the creditworthiness of the importer.

back-to-back letter of credit

A letter of credit issued using another letter of credit as a payment guarantee.

bank guarantee

A contract from a bank whereby the bank guarantees that an exporter will perform as required by its contract with the importer. If the exporter does not so perform, the bank pays a compensation to the importer. Bank guarantees are illegal in the United States.

banker’s acceptance

A contract from a bank whereby the bank guarantees that an exporter will perform as required by its contract with the importer. If the exporter does not so perform, the bank pays a compensation to the importer. Most bank guarantees are not documentary, which means that the bank must pay without specific evidence. In other words, it pays first, and argues with the firm to which it provided a guarantee later. Bank guarantees are illegal in the United States.

beneficiary

The firm named in a letter of credit as the firm to which the bank is insuring payment if the importer does not pay. Usually, the beneficiary of a letter of credit is the exporter.

bill of exchange

In a documentary collection transaction, another term for a draft.

cash in advance

A method of payment in which an importer has to pay the exporter before the exporter ships the goods.

commercial risk

The probability of not getting paid by a certain creditor, because this creditor does not have the funds to pay the debt or because the creditor refuses to pay the debt.

confirmed letter of credit

A payment alternative in which the exporter asks a bank to provide an additional level of payment security to a letter of credit; should the importer not pay and should the issuing bank not pay, the confirming bank will pay.

confirming bank

The bank providing an additional level of payment security to the beneficiary of a letter of credit; the confirming bank certifies that it will pay the letter of credit if the importer and the issuing bank do not pay.

contractor

When used in the context of a bank guarantee, a company fulfilling a large construction contract, usually the construction of a substantial infrastructure work or a major project.

Convention on Contracts for the International Sale of Goods

A United Nations’ treaty that acts as international sales law.

correspondent bank

A foreign bank with which a domestic bank has a preferred business relationship.

country risk

The probability of not getting paid by a certain creditor, because the creditor’s country does not have the funds to pay the debt (insufficient foreign exchange reserves) or because the creditor is not legally allowed to pay the debt (political embargo). Country risk can also mean the probability of nationalization of a firm’s subsidiary by the host country. Country risk is also known as political risk.

credit insurance

An insurance policy under which commercial risk is covered; in exchange for a premium paid by the exporter, the insurance company will bear the risk of nonpayment by the importer, deducting a slight percentage of the receivable. Credit insurance does not cover political risks, unless the exporter has explicitly asked for additional political coverage, which is obtained through the Export-Import Bank.

date draft

In a documentary collection transaction, a date draft is a promissory note that the importer has to pay a number of days (30, 60, 90, or 180 days) after the exporter ships the goods. The exporter controls the date at which the goods are shipped, so the draft is called a “date” draft, since the date the payment is due is known ahead of time. This is in contrast to a time draft, for which the importer controls the date of payment by controlling the date at which it signs the promissory note. A date draft is used in the documentary collection called documents against acceptance (D/A).

discrepancy

A difference between the documents required by the letter of credit and the documents provided by the exporter. A discrepancy can be as simple as a misspelling and as significant as a change in the invoice amount. Since letters of credit are documentary, any discrepancy is, in theory, a violation of the terms of the letter of credit and therefore invalidates it. In practice, however, 50 percent of letters of credit have discrepancies, which are resolved through amendments.

documentary collection

A method of payment in which an exporter enlists the help of a bank in the importer’s country to collect payment from the importer.

draft

A promissory note in which the importer formally recognizes its debt to the exporter.

exposure

The relative consequences of a particular risk for an exporter; the risk of a $50,000 loss would represent a greater exposure for a small exporter than for a large exporter.

factoring

A means of financing international receivable accounts, by which a firm asks a factoring company to advance funds on the receivable.

forfaiting

A means of financing an international sale in which an exporter collects a series of drafts from the importer, and then sells them.

guarantor

The bank that provides a bank guarantee. If the party to which it provides a guarantee does not perform, the bank pays a compensation to the injured party. Most bank guarantees are not documentary, which means that the bank must pay without specific evidence. In other words, it pays first and argues with the firm to which it provided a guarantee later. Bank guarantees are illegal in the United States.

instruction letter

A document sent by an exporter to a presenting bank that spells out the exporter’s instructions regarding how it expects the bank to handle the documents and how it expects the bank to handle an importer that does not accept the draft sent.

international factoring

A means of financing international receivable accounts. The firm can ask a factoring company to advance funds on a receivable account. The factoring firm can provide the funds with recourse, where the owner of the account receivable is still responsible for collecting it, or without recourse, where the collection responsibility shifts to the factoring house.

international forfaiting

A means to finance an international transaction in which an exporter collects a series of drafts from the importer, all with fairly long-term due dates. The exporter sells these receivables to a forfaiting firm that buys them without recourse, which means that the forfaiting firm is responsible for collecting the funds from the importer.

irrevocable letter of credit

A letter of credit is a document whereby a bank promises that it will pay the beneficiary (the exporter) a predetermined amount of money, should the beneficiary present a certain set of documents (bill of lading, invoice, and miscellaneous certificates) to the bank. It substitutes the creditworthiness of the importer for that of the bank. A letter of credit is irrevocable when it cannot be altered without the express consent of all parties involved (exporter, importer, issuing bank, and advising bank). Virtually all letters of credit are irrevocable, as required by the International Chamber of Commerce.

issuing bank

The bank providing the letter of credit to the importer. It is that bank that, should the importer be unable to pay, and should the exporter provide all the necessary documents, has the contractual obligation to pay the beneficiary (the exporter).

letter of credit

A method of payment in which a bank promises to pay the beneficiary (the exporter) on behalf of the applicant (the importer), as long as the exporter has provided the documents requested in the letter of credit.

litigation

The final process by which parties to a contract have to settle a dispute, in a court of law.

mediation

A process by which parties to a contract choose to find a compromise in a dispute. A mediation recommendation is not binding.

open account

A method of payment in which the exporter sends an invoice to the importer along with the goods and expects the importer to pay within a reasonable amount of time.

political risk

The probability of not getting paid by a certain creditor, because the creditor’s country does not have the funds to pay the debt (insufficient foreign exchange reserves) or because the creditor is not legally allowed to pay the debt (political embargo). Political risk can also mean the probability of nationalization of a firm’s subsidiary by the host country. Political risk is also known as country risk.

presenting bank

In a documentary collection transaction, the bank that interacts with the importer on behalf of the exporter. The presenting bank is the one receiving the documents from the exporter or from the remitting bank and that holds them until the importer either signs a draft or pays the exporter.

protest

In a documentary collection transaction, if the drawee (importer) does not pay a draft that it has signed, the presenting bank will file a protest, a legal document that notifies other parties that the drawee is not honoring its debts. In many countries, the filing of a protest effectively cuts the drawee’s ability to have access to any credit.

purchasing cards

Credit cards used by companies to make small purchases, and that can be used in international transactions.

remitting bank

In a documentary collection transaction, the bank that interacts with the exporter and with the presenting bank in the importing country. The remitting bank is the one that receives the documents from the exporter and then sends them to the presenting bank. It has no obligation to render judgment or advice on the quality of the packet of documents; it just transmits them to the presenting bank.

sight draft

In a documentary collection or a letter of credit transaction, a sight draft is a promise by the importer that he will pay immediately, “at sight.” A sight draft is used in the documentary collection called documents against payment (D/P).

stand-by letter of credit

A type of letter of credit that covers more than one shipment; for example, a large transaction would normally necessitate a letter of credit for each shipment, since a separate bill of lading is generated for each shipment. A stand-by letter of credit allows for multiple bills of lading, issued on different dates. A stand-by letter of credit can also be used to secure the performance of the seller. Upon evidence that the seller is not performing according to the terms of the contract it has with the importer, the issuing bank has to pay the importer; this latter type of stand-by letter of credit is often used in large construction projects involving U.S. firms, since U.S. banks cannot legally provide bank guarantees.

SWIFT-Society for Worldwide Interbank Financial Telecommunications

An interbank electronic network for the secure transfer of funds and documents.

time draft

In a documentary collection transaction, a time draft is a promissory note that the importer has to pay a number of days (30, 60, 90, or 180 days) after it accepts the draft by signing it. A time draft is different from a date draft because the importer controls the date at which it will sign the note, whereas in a date draft, the exporter controls the date of payment by controlling the date at which the goods are shipped. A time draft is used in the documentary collection called documents against acceptance (D/A).

trade acceptance

In a documentary collection transaction, the alternative whereby the exporter expects the importer to readily accept signing a draft after being notified by the presenting bank that the documents have arrived. The importer (trader) “accepts” the draft.

TradeCard

A proprietary process that combines payment and documents and facilitates international transactions.

transferable letter of credit

A letter of credit that the beneficiary can use as a means to insure its creditors that they will be paid.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· Characteristics of International Payment / Issues (2 slides)

· Risks in International Trade (2 slides)

· Alternative Terms of Payment: (1 slide)

· Cash in Advance (1 slide)

· Open Account (1 slide)

· Credit Insurance (1 slide)

· Letter of Credit (15 slides)

· Documentary Collection (6 slides)

· Forfaiting (1 slide)

· Procurement Cards (3 slides)

· TradeCard (2 slides)

· Bank Guarantees (3 slides)

· Terms of Payment as a Marketing Tool (2 slides)

Additional Resources

Exporters’ Encyclopedia 2009/09, Dun & Bradstreet, August 2008.

“Report on the Use of Export Letters of Credit 2001/2002,” dated April 11, 2003, Sitpro, Simplifying International Trade, http://sitpro.org.uk/reports/lettcredr, June 1, 2006.

Uniform Customs and Practice for Documentary Credits: 1993 Revision [UCP 500], 1993, publication No. 500 of the International Chamber of Commerce, ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, 156 Fifth Avenue, New York, NY 10010.

Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits [URR 725], 2008, publication No. 725 of the International Chamber of Commerce, ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, 156 Fifth Avenue, New York, NY 10010.

Uniform Rules for Collection [URC 522], 1995, publication No. 522 of the International Chamber of Commerce, ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, 156 Fifth Avenue, New York, NY 10010.

6-12

Chapter 6

: Terms of Trade or Incoterms

Chapter 6: Terms of Trade or Incoterms 6-

13

Chapter 6

Terms of Trade or Incoterms® Rules

lEARNING oBJECTIVES

At the end of this chapter, YOU SHOULD:

Understand how Incoterms® rules are used to split the responsibilities of the exporter and the responsibilities of the importer.

Be able to identify the eleven terms of international trade, or Incoterms® rules.

Understand how Incoterms® rules can be used for strategic advantage.

Have a basic understanding of the concept of electronic data interchange (EDI).

PReview

Since 1936, a set of standardized terms of trade has been offered by the International Chamber of Commerce. Using part of the Chamber’s name, they are known as Incoterms® rules and have gone through some revisions over the years. This is a highly technical chapter, and there are no shortcuts to examining each of the Incoterms® rules and their relationship to the obligations of exporters and importers in shipping products. There is a handy summary of Incoterms® rules in Table 6-3 (found in Section 6-15, p. 209), and Tables 6-4 and 6-5 (found in Section 6-16, pp. 211-212).

Please note that Incoterms 2010 replaced Incoterms 2000 as of 01/01/2011. At this point (2013), there is still a significant percentage of students who are not familiar with the new Incoterms® rules, and do not know that four Incoterms® rules have been eliminated:

· DAF (Delivered at Frontier)

· DES (Delivered Ex-Ship)

· DEQ (Delivered Ex-Quay)

· DDU (Delivered Duty Unpaid)

and two new ones created:

· DAT (Delivered at Terminal)

· DAP (Delivered at Place)

In addition, the definition of the FOB point has been radically changed from “crossing the ship’s rail” to “on board the ship.”

Finally, the 2010 Incoterms® rules require a precise address for the responsibility transfer, unlike previous versions of Incoterms, which were OK with just a city or general location. So the syntax has become “FCA Bâtiment B, 46 Allée Corbière, F-81000 Castres, France, Incoterms® rules 2010,” rather than the previous “FCA Castres, France, Incoterms 2000.” The “Bâtiment B, 46 Allée Corbière” is the address, and “F-81000” is the postal code of that address.

Chapter Outline

6-1 International Commerce Terms

I. Standardize set of eleven terms of trade called Incoterms® rules: acronym for International Commerce Terms. The registered trademark and the word “rules” were added in the 2010 version, and are mandatory.

6-2 Understanding Incoterms® rules

I. Incoterms® rules determine which tasks will be performed by the exporter and by the importer

II. Incoterms® rules determine which activities will be paid for by the exporter and by the importer

III. Incoterms® rules determine when the transfer of responsibility will take place:

a. Different from transfer of title, which usually is when the exporter gets paid

b. Transfer of responsibility is usually earlier than transfer of title

6-3 Incoterms® rules Strategy

I. Incoterms® rule is determined by strategy of exporting firm. Also constrained by:

a. Type of product sold

b. Method of shipment

c. Ability of either party to perform tasks involved in shipment

i. Exporter may facilitate sale by assisting importer in the shipment

ii. Importer may get price break if it agrees to perform all or most tasks of shipment

iii. Importer in effect always pays for transportation either as an add-on or by it being reflected in the exporter’s price

d. Amount of trust parties have toward one another

II. Choice of Incoterms® rule is almost always exporter’s decision

a. It is usually based upon its strategy instead of on conditions of making a specific sale

b. Since it involves strategy, it is a critical decision for the exporter

6-4 Ex-Works (EXW)

I. Used with any merchandise

II. Used with any form of transportation

III. Syntax: “EXW 2400 Progressive Drive, Poughkeepsie, NY 12601, USA, Incoterms® 2010” = the address in Poughkeepsie where exporter will hold merchandise for importer (usually in the exporting country)

IV. Easiest Incoterms® rule for exporter, most difficult for importer

V. Basically, exporter says: “Here is the product, come get it”

VI. EXW term makes exporter vulnerable to competitors who may offer more importer-friendly terms of trade

6-4-1 Delivery under Exw

I. Nothing specific regarding delivery

II. Mutually convenient pickup time for exporter and importer

6-4-2 Exporter’s and Importer’s Responsibilities under exw

I. Exporter’s responsibilities limited to most basic functions:

a. Making goods available to buyer

b. Packaging goods for export

c. Assisting in export clearances

d. In United States, providing correct Export Commodity Classification Number (ECCN) and any required export license information

e. Providing information to clear Customs in importing country

II. Importer responsible for all aspects of shipment:

a. Clearing goods for export

b. Arranging for transportation

c. Clearing Customs

in importing country

d. Purchasing insurance

e. Providing domestic insurance in importing country

6-5 Free Carrier (FCA)

I. For goods shipped through multimodal transportation without handling

a. Oriented toward containerization

b. In 1990, replaced three other terms:

i. Free on Rail (FOR)

ii. Free on Truck (FOT)

iii. Free on Board airport (FOB Airport)

II. Syntax: “FCA Bâtiment B, 46 Allée Corbière, F-81000 Castres, France, Incoterms® rules 2010” = address in Castres where delivery takes place (usually in exporting country or a neighboring country)

III. Exporter delivers goods to the carrier importer selects

6-5-1 Delivery under FCA

I. If the named point in the Incoterm refers to the exporter’s plant, delivery takes place when the goods are loaded by the exporter and at its expense, unto the carrier’s vehicle (FCA exporter’s premises)

II. If the named point in the Incoterm refers to the carrier’s premises, then delivery takes place when goods are made available to the carrier (FCA carrier’s premises)

a. Goods arrive at carrier’s dock

b. Goods are unloaded from exporter’s vehicle by the carrier and at the carrier’s expense

III. Document signifying transfer of responsibility is receipt by carrier to exporter

6-5-2 Exporter’s and Importer’s Responsibilities under fca

I. Exporter responsible for:

a. Packing merchandise for export

b. Possibly loading merchandise into carrier’s container, loading container on carrier’s vehicle, or delivering merchandise to carrier’s facilities

c. Clearing merchandise for export

d. Providing information for importer to clear Customs in importing country

e. Obtaining insurance

f. In United States, filling out Shipper’s Export Declaration

g. Providing pre-shipment inspection, if required

II. Importer responsible for:

a. Arranging contract of carriage

b. Arranging insurance

c. Clearing Customs in importing country

d. Paying for pre-shipment inspection, if required

6-6 Carriage Paid to (CPT)

I. For goods shipped by any means of transportation, but mostly designed for goods not traveling by ocean

a. For goods handed to a carrier that will take the goods to their destination in the importing country

b. For goods shipped by sea, but not handed over the ship’s rail

i. Roll-on-roll-off cargo

ii. Multimodal containerized cargo

II. Syntax: “CPT Graacher Strasse 20, Köln, Germany D-50969, Incoterms 2010” = address in Köln where importer takes control of goods, usually in importing country or neighboring country

III. The exporter pays for transportation to the destination (importer’s place of business)

IV. The point at which the responsibility for the goods shifts from exporter to importer is when the goods are loaded onto the means of conveyance in the exporting country

6-6-1 Delivery under CPT

I. When exporter hands over goods to the carrier

II. Exporter is given bill of lading or equivalent document (air waybill, sea waybill, multimodal bill of lading)

6-6-2 Exporter’s and Importer’s Responsibilities under cpt

I. Exporter is responsible for:

a. Packing goods for export

b. Shipping them to the carrier

c. Pre-paying shipping costs to city of destination

d. In the United States, filling out Shipper’s Export Declaration

e. Paying for pre-shipment inspection, if required

II. Importer is responsible for:

a. Goods at time seller delivers them to carrier

b. Unloading goods from carrier’s vehicle

c. Clearing Customs

d. Paying inland transport if any

e. Paying for pre-shipment inspection if importing country requires it

6-7 Carriage and Insurance Paid To (CIP)

I. For goods shipped by any means of transportation but mostly meant for goods traveling by means other than ocean transport

a. For goods handed to a carrier that will take the goods to their destination in the importing country

b. For goods shipped by sea, but not handed over the ship’s rail
i. Roll-on-roll-off cargo
ii. Multimodal containerized cargo

II. Syntax: “CIP Ulitsa Poruchik Nedelcho Bonchev, Sofia, Bulgaria, Incoterms 2010” = address in Sofia (the city of destination) at which the importer takes control of goods. City is in importing country or neighboring country. A variant is possible: add “maximum cover” to increase insurance coverage to Coverage A of the Institute Cargo Clauses.

III. The exporter pays for transportation to the destination (importer’s place of business) + minimum-cover insurance

IV. The point at which the responsibility for the goods shifts from exporter to importer is when the goods are loaded onto the means of conveyance in the exporting country

6-7-1 Delivery under cip

I. When exporter hands over goods to the carrier
II. Exporter is given bill of lading or equivalent document (air waybill, sea waybill, multimodal bill of lading)

6-7-2 Exporter’s and Importer’s Responsibilities under cip

I. Exporter is responsible for:
a. Packing goods for export

b. Transporting them to port of departure

c. Minimum insurance costs

d. Clearing goods for export

e. In United States, filling out Shipper’s Export Declaration

f. Paying for pre-shipment inspection, if required

II. Importer is responsible for:

a. Unloading carrier’s vehicle

b. Clearing Customs in importing country

c. Transportation costs beyond city of destination

d. Paying for pre-shipment inspection, if required by importing country

6-8 Delivered At Terminal (DAT)

I. For goods shipped by any means of transportation, but mostly meant for goods not traveling by ocean

II. Syntax: “DAT Paranagua Container Terminal, Avenida Portuaria, Paranagua, Parana 83206-410, Brazil, Incoterms 2010” = address of the terminal in the Port of Paranagua in which the importer takes control of goods. The terminal can be in the exporting country, the importing country, or a neighboring country

III. Delivery takes place where exporter delivers goods to the terminal, unloaded from the means of conveyance (truck, train, or ship)

6-8-1 Delivery under DAT

I. When exporter delivers the goods, unloaded from the means of conveyance to the terminal

II. Exporter is given terminal receipt that documents that the goods were delivered

6-8-2 Exporter’s and Importer’s Responsibilities under DAT

III. Exporter is responsible for:

a. Packing goods for export

b. Transporting them to the terminal, whether in the exporting country, the importing country or somewhere else

c. Clearing goods for export

d. In United States, filling out Shipper’s Export Declaration

e. Paying for pre-shipment inspection, if required

IV. Importer is responsible for:

a. Clearing Customs in importing country

b. Transportation costs beyond terminal

c. Paying for pre-shipment inspection, if required by importing country

6-9 Delivered At Place

I. For goods shipped by any means of transportation, but mostly meant for goods not traveling by ocean

II. Syntax: “DAP 97 Brisbane Street, Sydenham 8023, New Zealand, Incoterms 2010” = the address in Sydenham (the city of destination) in which the importer takes control of goods. City is in importing country or neighboring country

III. Delivery takes place where exporter delivers goods to the location agreed upon with importer. The goods are still loaded on the means of conveyance

6-9-1 Delivery under DAP

I. When exporter delivers the goods to the importer, still loaded on the means of conveyance

II. There is no formal delivery document; however the goods have arrived, and the importer “sees” them on the means of conveyance

6-9-2 Exporter’s and Importer’s Responsibilities under DAP

V. Exporter is responsible for:

a. Packing goods for export

b. Transporting them to city of destination

c. Clearing goods for export
d. In United States, filling out Shipper’s Export Declaration
e. Paying for pre-shipment inspection, if required

VI. Importer is responsible for:

a. Unloading carrier’s vehicle
b. Clearing Customs in importing country
c. Transportation costs beyond city of destination
d. Paying for pre-shipment inspection, if required by importing country

6-10 Delivered Duty Paid (DDP)

I. Any merchandise and for any means of transportation (although if by ocean correct Incoterms are DES and DEQ)

II. Syntax: “DDP Kopparsbergsgatan 226, Malmö 14 44, Sverige/Sweden, Incoterms 2010” = address in Malmö (city of destination) where importer takes control of goods

III. Ultimate in customer service on part of exporter, who handles everything in shipment

IV. For importer it’s equivalent to receiving a domestic shipment from a domestic supplier

V. Importer only handles unloading

6-10-1 Delivery under ddp

I. Delivery takes place when exporter places goods at disposal of importer in city of delivery

II. No corresponding transportation document although bill of lading is usually used

6-10-2 Exporter’s and Importers Responsibilities under ddp

I. Exporter assumes all costs and responsibilities for shipment

II. Importer only has to receive goods and unload them

6-11 Free Alongside Ship (FAS)

I. For any merchandise, but is limited to ocean transportation

II. Syntax: “FAS Waalhaven Noordzijde 2089, Roterdam, 3089KM, The Netherlands, Incoterms 2010” = the dock in the port in which the delivery takes place. Port is usually located in the exporting country or in a neighboring country

III. Exporter brings goods to port designated by importer

IV. At port responsibility for goods shifts to importer

6-11-1 Delivery under FAS

I. Delivery occurs when exporter brings goods “alongside” ship

II. Exactly when and where delivery takes place is hard to determine and is a deterrent to use of FAS

a. Goods are rarely delivered “alongside” a ship

b. Goods usually go to a holding area, are then brought to the ship, and are stevedored aboard the ship

c. No transport document corresponding to delivery to holding area or quay alongside ship

d. Ocean carrier will not issue bill of lading until goods have been received in good condition aboard vessel

6-11-2 Exporter’s and Importer’s Responsibilities under fas

I. The exporter is responsible for:

a. Packing the goods for export

b. Transporting them to the port

c. Unloading them unto quay or holding area in port

d. Clearing goods for export

e. Providing assistance in clearing Customs in importing country

f. Obtaining insurance

g. In United States, filling out Shipper’s Export Declaration

h. Providing pre-shipment inspection, if required

II. The importer is responsible for:

a. Port handling charges

b. Stevedoring

c. Ocean transport costs

d. Insurance

e. Unloading at port of arrival

f. Customs duties in importing country

g. Payment for pre-shipment inspection, if required

6-12 Free on Board (FOB) Port of Departure

I. Used for any merchandise, but is limited to ocean transport.

II. Syntax: “FOB Breakbulk Terminal, 660 Duncan Road, Cape Town, South Africa, Incoterms 2010” = the terminal in the port in which the delivery takes place. Port is usually located in the exporting country or in a neighboring country

III. Exporter responsible for goods until placed on board the ship, then importer is responsible

IV. FOB (sometimes called Freight on Board) is one of the oldest maritime terms of trade

a. Meaning somewhat dependent upon individual port—exporter may be responsible for loading costs

b. “FOB stowed”

c. “FOB stowed, trimmed, secured”

d. Syntax: “FOB FOB Breakbulk Terminal, 660 Duncan Road, Cape Town, South Africa, Incoterms 2010, stowed”

6-12-1 Delivery under fob

I. Centuries of maritime tradition said FOB point is the ship’s rail. The 2010 Incoterms changed that to “on board” the ship

II. Freight is “on board” the ship, but not stowed or trimmed

III. Documentation of delivery: ocean bill of lading or sea waybill

6-12-2 Exporter’s and Importer’s Responsibilities under fob

I. Exporter is responsible for:

a. Packing goods for export
b. Transporting them to the port

c. Loading them onto the ship

d. Clearing goods for export
e. Providing assistance in clearing Customs in importing country
f. Obtaining insurance
g. In United States, filling out Shipper’s Export Declaration
h. Providing pre-shipment inspection, if required
II. Importer is responsible for:

a. Arranging and paying for ocean transportation

b. Customs clearance in importing country

c. Arranging and paying for insurance

d. Paying for pre-shipment inspection, if required

6-13 Cost and Freight (CFR)

I. Any merchandise, but limited to ocean transportation

II. Syntax: “CFR ENL Multi-purpose Terminal, Apapa Wharf, Lagos, Nigeria, Incoterms 2010” = port of destination where importer takes control of goods, usually in importing country or neighboring country

III. Transfer of control takes place in the port of departure

IV. Exporter responsible for goods until they are on ship

V. Importer responsible for them when they are on ship

VI. Exporter pre-pays ocean freight

6-13-1 Delivery under CFR

I. Point of shift in responsibility is “on board” the ship in the port of departure

II. Documentation is ocean bill of lading or a sea waybill

6-13-2 Exporter’s and Importer’s Responsibilities under cfr

I. Exporter is responsible for:
a. Packing goods for export
b. Transporting them to the port
c. Loading them onto the ship
d. Clearing goods for export
e. Providing assistance in clearing Customs in importing country
f. Obtaining insurance
g. In United States, filling out Shipper’s Export Declaration
h. Providing pre-shipment inspection, if required
II. Importer is responsible for:
a. Arranging and paying for ocean transportation
b. Customs clearance in importing country
c. Arranging and paying for insurance
d. Paying for pre-shipment inspection, if required

6-14 Cost, Insurance, and Freight (CIF)

I. Any merchandise, but is limited to ocean transportation

II. Syntax: “CIF Naigai Lines, 176 Higashi-Machi, Chuo-Ku, Kobe 650-0031, Hyogo, Japan, Incoterms 2010” = the terminal in the port of destination in importing country in which importer takes control of goods

III. CIF Incoterm is similar to CFR term, except exporter pre-pays for Marine Cargo Insurance until port of destination

6-14-1 Delivery under CIF

I. Point of delivery, or shift in responsibility is “on board” the ship in the port of departure

II. Documentation is ocean bill of lading or a sea waybill

6-14-2 Exporter’s and Importer’s Responsibilities under cif

I. Exporter is responsible for:
a. Packing goods for export

b. Shipping costs and minimum insurance costs to destination

c. Paying minimum insurance cost

d. Clearing goods for export
e. In United States, filling out Shipper’s Export Declaration
f. Paying for pre-shipment inspection, if required
II. Importer is responsible for:

a. Clearing Customs in the importing country

b. Inland transportation after taking delivery

c. Paying for pre-shipment inspection, if required by importing country

6-15 Summary of the Division of Responsibilities between Exporters and Importers

I. Table 6-3 on page 209 gives a summary of the responsibilities of exporters and importers under each of the 11 Incoterms.

6-16 Common Errors in Incoterms Usage

I. Incoterm confusion with domestic terms of trade

II. Incoterm confusion with older Incoterm versions

III. Improper use of correct Incoterms

6-17 Incoterms as a Marketing Tool

I. Flexible policy

II. Quotes with several Incoterm alternatives

Key terms

container terminal

A location where containerized cargo changes mode of transportation.

delivery

In an international voyage, the point at which the responsibility for the goods switches from the exporter to the importer.

FCL (full containerload) shipment

An international shipment that uses, by weight or volume, the entire capacity of a container.

Incoterm

An International Commerce Term, or a formalized international term of trade, which specifies the responsibilities of the exporter and of the importer in an international transaction. Incoterms were first codified by the International Chamber of Commerce in 1953, and the latest revision is dated 2010.

Incoterms® Rules

A series of eleven international terms of trade standardized by the International Chamber of Commerce.

International Chamber of Commerce (ICC)

The largest business organization in the world. Its goal is to champion international business growth and its members are the national chambers of commerce.

LCL (less than containerload) shipment

An international shipment that is combined with other shipments in a single container.

main carriage

The portion of an international shipment that takes place between the exporting country and the importing country.

on-carriage

The portion of an international shipment that takes place in the importing country.

pre-carriage

The portion of an international shipment that takes place in the exporting country.

ship’s rail

An imaginary rail that circles the entire hull of a ship. Should a cargo item fall from a crane onto the ship while it is being loaded, the determination of whose responsibility it is hinges on which side of the ship’s rail it falls on. Under CIF, for example, if the cargo falls on the outside of the ship’s rail, it is the exporter’s responsibility; if it falls on the inside, it is the importer’s.

transfer of responsibility

In an international voyage, the point at which the exporter ceases to be responsible for the goods. At that point, the importer becomes responsible for the goods.

transfer of title

The point in time at which the ownership of the goods changes from the exporter to the importer.

secured

Once goods are stowed and the vessel trimmed, the goods are tied to the vessel by means of ropes or chains.

stevedore

A company or a person whose responsibility is to load and unload ships in a port.

stowed

Goods are considered stowed when they are aboard the ship and placed in the position in which they will be transported.

trimmed

A ship is considered trimmed when the cargo aboard the ship is balanced side-to-side and front-to-back.

variant

A modification to one of the Incoterms codified by the International Chamber of Commerce. Variants are generally used to further clarify the responsibilities of the exporter and of the importer in a given transaction. For example, the variant “EXW loaded” clarifies that the exporter agrees to load the goods on the vehicle provided by the importer when the official Incoterm is silent on that specific point.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· Incoterm Definition (7 slides)

· Each Incoterm (2-4 slides each = 30 slides)

· Incoterms in domestic trade (1 slide)

·

Electronic Data Interchange (1 slide)

· Errors in Incoterms (3 slides)

· Using Incoterms for Strategic Advantage (1 slide)

Additional Resources

Reynolds, Frank, Incoterms for Americans (Completely rewritten for Incoterms 2011), 2011, published by International Projects, Inc., P.O. Box 352650, Toledo, Ohio 43635-2650, USA.

Ramberg, Jan, ICC Guide to Incoterms 2010, 2011, International Chamber of Commerce Publication No. 720E, ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, Inc.,156 Fifth Avenue, Suite 417, New York, NY 10010, USA.

Incoterms 2010, ICC Rules for the Use of Domestic and International Trade Terms, 2011, International Chamber of Commerce Publication No. 715E, ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, Inc., 156 Fifth Avenue, Suite 417, New York, NY 10010, USA.

Debattista, Charles, Editor, ICC Guide to Incoterms 2010 , 2011, International Chamber of Commerce Publication No. 720(E), ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, Inc., 156 Fifth Avenue, Suite 417, New York, NY 10010, USA.

Chapter 5
International Contracts

International Contracts
Lex Mercatoria
International Sales Contracts
Agency vs. Distributorship
Distribution Contracts
Termination
Arbitration
Mediation

Lex Mercatoria
Lex Mercatoria is the sum total of all the international agreements, international conventions, and other international trade customs that complement the domestic laws of any given country, and to which all international trade transactions are subject.
It is difficult to comprehensively grasp Lex Mercatoria because it can include agreements from many different areas, such as the United Nations, World Trade Organization, multinational conventions, free trade agreements, and any number of bi-lateral agreements.

Convention for the International Sale of Goods
The United Nations’ Convention for the International Sale of Goods (CISG) was adopted in 1980 as a way to oversee international contracts.
The CISG allows parties from different countries to enter into contracts with reasonable assurance that the provisions of the contract will be enforced.
More than 60 countries have ratified this agreement. Trade between these countries represents 80 percent of all word trade.

Uniform Commercial Code
The Uniform Commercial Code (UCC) is the commercial law of the United States. This is the law that is used to form contracts in domestic transactions.
The UCC and the United Nations’ Convention for the International Sale of Goods (CISG) differ in several respects.
For several reasons, including the fact that its provisions are different from the UCC, the United States has only partially ratified the CISG.

CISG vs. UCC
CISG
A positive response asking for change is considered a rejection.

A contract is not been accepted until both parties agree to all terms. An offer is open until a certain date and cannot be withdrawn until said date.
The buyer is allowed to unilaterally apply a price reduction to the amount in the contract for nonconforming or damaged goods.
UCC
A positive response asking for change is considered an acceptance.
Offer can be withdrawn at any time.

The buyer cannot change the terms of the contract unless the seller performs
a fundamental breach.

Contract Formation (CISG)
Offer
Initial step in the formation of the contract when one party contacts another and offers to sell or purchase something.
Acceptance
If the second party accepts all the terms of the offer, the contract is formed.
Rejection
If the second party does not accept all the terms of the original offer, it is a rejection of the initial offer.
Counter-offer
If the second party reject the first offer, it may make a
counter -offer with new terms.

Distribution Contract
The contract between an exporter and its representatives abroad is called a distribution contract. It is a contract between the exporter and an agent or a distributor.
There is no uniform international agreement mandating how these relationships should work. However the parties often agree to abide by the model contracts of the International Chamber of Commerce.

Contract Law and Labor Law
An important point to note when entering into a contact with a foreign distributor or agent is whether this relationship will be considered a “contract between equals” or a “contract between unequal partners” by the courts of the country in which the agent or distributor is located.
In the first case, the contract will fall under contract law. Under the second, it will fall under labor law.
The way this relationship is viewed could have a significant impact on the way a court will resolve a dispute. Under contract law, the court will settle disputes by following the terms of the contract. Under labor law, the court will protect the agent.

Home Government Restrictions
Some governments make special efforts to ensure agents or distributors working in their countries are protected from deals that are not fair or equitable, and generally place all distribution contracts under labor law. Others use contract law in all cases, but most treat agent under labor law, and distributors under contract law.
Some countries may require the agent or distributor to be a national of the home country and/or register with the government.
Some countries also do not allow distributors, or agents, at all. The company must have a sales subsidiary.

Termination of a Contract
A contract can be terminated under two scenarios:
Just cause
One of the parties to the contract did not perform what it was expected to do under the terms of the contract.
Convenience
One of the parties to the contract wants to end the contract for reasons other than non-performance. Most often, it is the exporter/principal who wants to end the contract.

Termination for Just Cause
Termination for “just cause” is triggered when either of the parties is not honoring the terms of the contract.
It is generally quite easy to end a contract this way.
However, if the contract had been renewed under similar circumstances in the past (inadequate performance), there is a possibility that a court will consider that the contract is evergreen, which means that there was an expectation it would never be cancelled.
It is therefore important for either party to notify the other than the contract is renewed despite the non-performance, and to include a warning that future non-performance will result in termination.

Termination for Convenience
A contract is terminated for “convenience” when it is for any reason other than just cause. It can be initiated by any of the parties (but it is normally the exporter that seeks to terminate the agreement in such a way).
This is typically a painful way to end a contract, as the opposite party feels slighted.
In most instances, the opposite party should be given some form of compensation by the party seeking the termination, despite the terms of the contract that may call for no compensation. Otherwise, it is possible that courts will side with the slighted party, and impose significant compensation under the terms prescribed by labor law.

Arbitration (I)
Arbitration is a form of dispute resolution in which a panel of arbitrators is asked to reach a decision on the facts of the dispute. The decision of the arbitration panel is binding on the parties to the contract.
Many arbitration panels are made up of three arbitrators: one selected by each of the party, and one selected by another party, such as the International Chamber of Commerce.
Arbitration is perceived as fair, even-handed and independent.
It is also much quicker and more efficient than litigation through the courts, by using a more flexible process to accept evidence, for example.

Arbitration (II)
Arbitration has other advantages as well:
It is more “creative”
Arbitrators can find solutions to the dispute that a court would not be allowed to use.
It is very efficient
Arbitrators are professionals who know the industry and are able to quickly understand a situation.
It is private
Unlike court proceedings, arbitration decisions are not open to the public, and the facts of the dispute are not made public.

Mediation
Mediation is a process by which an independent mediator will attempt to find a middle ground between the parties who are having a dispute.
Mediation is less formal that court proceedings or arbitration, and its recommendations are not binding on the contract parties, unlike court decisions or arbitration outcomes.
Mediation is more practical for small disputes that have arisen from a misunderstanding, or when parties are interested in keeping a business relationship.
Mediators tend to be trade professionals with a wealth of experience in solving such disputes and who can quickly determine a solution acceptable to both parties.

Elements of a Contract

Choice of Law

Choice of Venue

Force Majeure

Contract Language

Scope of Appointment

Good Faith

Territory

Corporate Accounts

Term of Appointment

Arbitration Clause

Mediation Clause

Profitability or Commission

A number of other clauses

Elements of Contract
Choice of Law
This clause specifies which country’s laws will be used in the case of a dispute between the exporter and the agent or distributor.
Choice of Venue (Choice of Forum)
This clause specifies the location of the court that will be used to render a judgment in the case of a dispute. It is generally in the country whose laws are specified in the “Choice of Law” clause.

Elements of Contract
Force Majeure
A French expression meaning roughly “overwhelming power.” This is a clause releasing all parties from their obligations due to events outside of their control.
Contract Language
The contract is signed by parties who speak different languages. This clause specifies the official language of the contract. If a copy of the contract exists in the other language, it is considered a translation.

Elements of Contract
Good Faith
A contract is entered into under “good faith” and assumes that neither of the parties has an ulterior motive. This clause states that both parties entered the agreement in good faith: neither party will attempt to distort the terms of the agreement.
Scope of Appointment
This clause defines the functions that the representative will perform; it is the clause that spells out whether it will be an agency or a distributorship agreement.

Elements of Contract
Territory
This clause defines the geographical limits within which the agent or distributor is authorized to sell. It can be a region, a country, or a group of countries.
Corporate Accounts
This clause specifies which customers will remain corporate clients, customers to which the exporter will continue to sell directly, and to which agents or distributors are not allowed to sell.

Elements of Contract
Term of Appointment
This clause defines the period for which representative will be appointed. This must be a specific time period and is generally renewable, as long as the agent or distributor performs adequately.
Profitability or Commission
This clause spells out the amount of commission that the agent will earn or the price at which the distributor is expected to sell the product.
Some countries do not allow the exporter to dictate the prices or profitability of a distributor.

Elements of Contract
Arbitration
This clause identified the process of arbitration. Arbitrators are empowered by the parties involved in a contract dispute to reach a decision on the facts of a dispute. Their decisions are binding.
Mediation
This clause identifies the process by which the parties to a contract can attempt to settle a dispute, generally involving a third independent party, a mediator, who can suggest a compromise solution.

Elements of Contract
Facilities and Activities
A clause that spells out what specific facilities an agent or a distributor will maintain (buildings, store, inventory) , and what specific activities each (exporter and agent or distributor) is authorized and expected to perform.
Competing Lines
This clause outlines which competing products the agent or the distributor is allowed to represent or sell.

Elements of Contract
Confidentiality
A clause that binds all parties to promise not to reveal what is learned about the other’s business practices for the duration of the business relationship and often after the relationship is terminated.
Ownership of Customers’ List
This clause outlines who owns the customers’ list, which is considered an asset. Generally, the exporter is aware of the customers’ list of an agent, but does not know who the distributor’s customers are.
.

Elements of Contract
Trademarks, Patents, and Copyrights
In the event that an agent or distributor creates intellectual property, this clause determines the ownership of that intellectual property.

5-14

Chapter 5

: International Contracts

5-13

Chapter 5: International Contracts 

Chapter 5

International Contracts

lEARNINg oBJECTIVES

At the end of this chapter, YOU SHOULD:

1 Know about international sales contracts and the United Nations Convention on Contracts for the International Sale of Goods (CISG).

2 Know about legal issues regarding agency vs. distributorships.

3 Know elements of an agency or distributor contract.

4 Be able to determine the rights, responsibilities, and hazards of terminating foreign agents or distributors.

Preview

As will be seen throughout the course, there are complexities relating to international commerce. One of these is in the area of contracts. Given the misunderstandings that can result over the wording of and traditions surrounding domestic contracts, the problems can increase exponentially on an international basis when the potential for confusion is aggravated by different languages and legal systems and by discrepancies between the Uniform Commercial Code (UCC) of the United States and the United Nations Convention on Contracts for the International Sale of Goods (CISG).

Chapter Outline

Introduction

I. Firms in international business are involved in contracts

II. Contracts in a country governed by laws of that country

5-1

I. No specific law governing contracts between parties from two or more different countries except Lex Mercatoria, trade law

a. Lex Mercatoria is complex

b. Includes varied international agreements, treaties

5-2 International Sales Contracts and the CISG

I. Sometimes difficult to tell when a contract is “international”

II. Courts look at two criteria to see if a contract is international

a. Economic criterion:

i. Transfer of goods from one country to another

ii. Transfer of funds back to first country

b. Judicial criterion: is the transaction linked to laws of different countries?

i. Is then no longer under domestic law

ii. Is under the Vienna Convention also known as the United Nations Convention on Contracts for the International Sale of Goods (CISG)

1. Ratified by more than 74 countries (more than 80 percent of all world trade)

2. United States has not ratified all of the convention

3. CISG is substantially different than U. S. Uniform Commercial Code (UCC)

5-2-1 Contract Formation

I. UCC and CISG differ on terms:

a. Although there may be minor disagreement over terms of the sale (schedule of delivery or payment), the UCC says that when a seller makes an offer, and the buyer agrees to it, that is considered to be an acceptance, despite the minor differences

b. The CIGS says that when there are such minor differences between the seller and potential buyer, it results in a rejection of the offer and a counteroffer by the buyer

II. UCC and CISG differ on use of business forms:

a. Under UCC, standard pre-written contract forms between seller and buyer may not exactly match, but that is not relevant if they do not significantly affect the terms of the contract—courts can settle conflicts

b. Under CISG, terms of contract determined by business form of party “firing the last shot”

5-2-2 Creation of the Contract

I. Length of time an offer is outstanding:

a. Under UCC seller can withdraw an offer at anytime

b. Under CISG seller cannot withdraw an offer until an agreed-upon date that offer is good for

II. Written vs. oral contracts:

a. UCC requires written contracts

b. CISG allows for oral contracts, especially if witnesses can attest to the oral agreement

5-2-3 Breach of Contract

I. UCC applies “perfect tender” principle: goods and their delivery must conform exactly to terms of contract

II. CISG says buyer is obligated to contract unless nonconforming performance substantially denies the buyer that which was contracted for

a. Buyer may make price reduction in the case of nonconforming performance

b. There is a high threshold before the buyer can make such a price reduction and it must be timely

c. Issue is moot if a letter of credit (see Chapter 7) is involved

5-3 Agency versus Distributorship Legal Issues

I. There is no international agreement concerning relationships between exporters and their agents or distributors

II. Applicable law generally is that of the country where the agent or distributor is located

5-3-1 Contract Law versus Labor Law

I. In the absence of specifics, agreements between an exporter and an agent or distributor are called distribution contracts

II. Assuming an equality between the exporter and agent or distributor, courts will apply contract law to determine meaning of the contract in the event of a dispute

III. If the country’s laws assume an inequality between the exporter and an agent or distributor, labor law will be applied

a. Laws of country, not terms of contract, apply

b. Most countries protect agents, not distributors, although Belgium protects distributors, but not agents

5-3-2 Home Government Restrictions

I. Governments often feel a need to regulate agents and distributors in order to protect them from inequitable contracts with exporters

II. Many governments also want to regulate agents and distributors operating within their borders. They may require:

a. Agents and distributors to register with the government

b. Agents and distributors to be nationals of the country (typical in the Middle East)

c. Contracts to be inspected by the government

d. Commissions to be regulated

e. Exclusive agents and distributors in specific geographic areas

f. That there only be distributors, no agents allowed at all

g. That there be no agents or distributors, that exporters must establish a subsidiary that can be taxed for income

5-3-3 Other Issues in Agency and Partnership Agreements

I. Specific to U.S. exporters: since the agent or distributor acts as a representative of the U.S. exporter, the agent or distributor has to abide by the Foreign Corrupt Practices act

II. All exporters: an agency or distributor agreement should never be presented as a “partnership” agreement: some courts may interpret that each partner assumes the other’s liabilities

5-4 Elements of an Agency or Distributor Contract

5-4-1 Contract Language

I. Given the difficulties of accurate translations between languages, especially in a legal environment, one language in a distribution agreement is usually designated as the primary contract language and others are deemed to be translations

II. International agreements such as the CISG and the International Chamber of Commerce’s Incoterms are written in several languages. For political reasons each language is equally considered to be the original contract language

5-4-2 Good Faith

I. Distribution agreements contain a “good faith” clause

II. Operating in good faith, signers of the contract agree not to attempt to thwart the contract by seeking loopholes in it

5-4-3 Force Majeure

I. French term loosely translated as “overwhelming power” contained in all contracts

II. Exempts parties from requirements of contract in the event of some unforeseen catastrophe or major problem (ship sinking, strike, hurricanes)

5-4-4 Scope of Appointment

I. Usually first clause of contract which spells out if the distribution agreement involves an agent or distributor

II. Indicates products involved

III. Refers to territory of the agreement and corporate accounts

5-4-5 Territory

I. Defines geographical limits in which agent or distributor is authorized to sell

II. Designates whether agent or distributor is an exclusive representative in that territory

III. European Union has caused problems with assignments of territory

a. While an agent or distributor may by contract be limited to a single country, under EU anti-trust law it is difficult. The EU says a firm operating in one country may sell in another

b. It is difficult to grant exclusive rights to a territory when neighboring representatives also can sell there

5-4-6 Corporate Accounts

I. Corporate accounts are very large accounts of the exporter with negotiated terms that apply to all their purchases worldwide

II. Often an agreement with an agent or distributor will spell out the relationship of the exporter and the agent/distributor with corporate accounts in the territory of the agent/distributor

a. Too many corporate accounts in the agent/distributor’s territory may discourage the agent/distributor’s efforts to develop business

b. A policy that requires an account to switch from the agent/distributor to becoming a corporate account after it reaches a certain sales level can be counter-productive, as the agent/distributor, in order to keep the account, will not allow it to grow to the corporate sales level

5-4-7 Term of Appointment

I. Duration of appointment of representative

a. Must always be a definite period, usually dictated by market conditions, type of product sold

i. Time needs to be long enough to develop the market

1. “Pioneer sales” of new products need longer time

2. Market characterized by personal contacts and long-term relationships requires longer time to develop

ii. Time needs to be short enough to terminate ineffective performers

b. Must have possibility of renewal if performance criteria are met

i. Termination of contract is usually a bad solution

1. Need to find new representative

2. Ill will on the part of the old representative can cause problems for new representative

3. Customers can be alienated because they do not think exporter is committed to market

ii. Better solution is to renew contract, but indicate the terms of the original had not been met. Failure to include this language may result in a court considering the contract as an evergreen:

1. A contract of unlimited duration

2. Since the exporter earlier renewed the contract although performance was bad and did not point out the bad performance, the evergreen contract cannot be terminated for nonperformance

5-4-8 Choice of Law

I. Every international contract has a clause indicating which country’s laws will govern the contract

a. Usually the exporter chooses this rather than the agent or distributor

b. Sometimes courts in the importing country may override this and subject the agreement to the laws of their country

II. International Chamber of Commerce (ICC) “Model Contracts for Agency and for Distributorship” give the contract writer two choices:

a. Traditional choice of a specific country’s laws

b. Generally recognized international trade laws or Lex Mercatoria

5-4-9 Choice of Forum or Venue

I. Both parties agree on the location of the court to rule and the laws to apply in a dispute

a. Exporter prefer familiar courts, generally within the exporting country

5-4-10 Arbitration Clause

I. Increasing numbers of contracts call for use of an arbitration panel rather than a court to settle disputes

a. Decisions are binding

b. Arbitration panel can be decided at outset of contract or by following the “Rules of Conciliation and Arbitration of the International Chamber of Commerce”

5-4-11 Mediation Clause

I. There is also the possibility of a mediator stepping in to offer a solution in the form of a non-binding compromise

5-4-12 Profitability or Commission

I. Spells out amount of commission the agent earns:

a. Usually about 5 percent, although it depends on the industry

b. Agents usually get paid their commission when the buyer pays the exporter

II. Spells out price for which the distributor is expected to sell the product or the margin that it is expected to add to its costs

a. If distributor can set its own prices, it may result in different prices in different countries, resulting in parallel imports (see Chapter 4)

b. If exporter attempts to control distributor’s prices, it may be construed as “price fixing” in an attempt to reduce competition

i. Some companies set same price worldwide

ii. Some companies provide advertising and other support if distributors keep prices in line

iii. Some companies make threats about things like delaying deliveries if distributors do not keep prices in line

5-4-13 Intellectual Property

I. There will usually be a clause regulating the use of trademarks, patents, and copyrights, and a clause on confidentiality of trade secrets and strategic information

5-4-14 Miscellaneous Other Clauses

I. The facilities and activities clause spells out what the agent or distributor will have in terms of retail establishment size, inventory, training of employees, and handling of customer complaints

II. Advertising clause spells out obligations of both parties regarding advertising, trade show attendance, ownership of advertising/promotional ideas, and how promotional activities will be paid for

III. Competing lines clause spells out how agent or distributor will be allowed to handle competitor’s products

a. Usually agent cannot carry competing lines

b. Usually distributor can carry competing lines

IV. Ownership of customers’ list can be a sensitive issue between the exporter and the distributor

a. Some exporters demand to know who the distributor’s customers are

i. This is in the event the relationship with the distributor does not work out or if the exporter eventually wants to start a subsidiary in the future

ii. This usually does not represent a good way to start the exporter-distributor relationship

b. Some exporters choose not to know who the distributor’s customers are, although they often learn the identities through warranty registrations

c. This is not an issue with agents since the exporter ultimately bills the customer

5-5 Termination

5-5-1 Just Cause

I. Exporter may not be fulfilling contract (this tends to be rare)

a. Not providing prompt pro-forma invoices

b. Not shipping diligently

II. Importing agent or distributor may not be fulfilling contract

a. Not meeting sales performance objectives

b. Not spending enough on advertising

c. Not maintaining the required type of establishment

d. Selling competitor’s products

e. Applying for patents on improvements it has made on the exporter’s products

f. Keeping secret the customer list

III. Despite the breach and the fact the “guilty party” may not be contractually entitled to it, there may be a statutorily required minimum notice period and a minimum compensation to the offender

5-5-2 Convenience

I. A termination for “convenience” is a termination for any other reason than non-performance

II. Usually exporter seeks termination for convenience

a. Agent or distributor may be earning “too much” and exporter wants to replace them with its own subsidiary

b. Exporter may be changing strategy, including retrenching to its domestic market

III. To avoid litigation, convenience termination should include a lengthy notice of termination and a generous goodwill compensation package

5-6 Arbitration

I. Arbitration is fast becoming the preferred way of resolving disputes between international partners

II. Venues for arbitration:

a. International Chamber of Commerce Rules of Conciliation and Arbitration

b. United Nations Conference on International Trade Law (UNCITRAL) Rules of Conciliation and Arbitration

c. London Court of International Arbitration

d. The Stockholm Chamber of Commerce

e. The World Intellectual Property Organization

f. The American Arbitration Association

g. Individual law firms, many of which are in Switzerland

Key terms

acceptance

The second step in the formation of a contract. After an offer has been made by one of the parties, the contract is formed if the other party accepts the terms of the offer. Under the Convention on Contracts for the International Sale of Goods (CISG), the second party must completely agree with all the terms presented in the offer; otherwise, it is a rejection of the offer. Under the U.S. Uniform Commerce Code (UCC), however, the second party is considered to have accepted the offer if it generally agrees with its terms, even if it wants amendments to the quantity of the goods purchased, the delivery dates, and so on.

advertising

A marketing term that includes all of the techniques that a firm uses to promote its products by using communication media, such as television, radio, and print. In advertising, the company retains total control over the content of the communication.

arbitration

A process by which the parties to a contract can settle a dispute, involving a panel of arbitrators who will follow most of the rules of a court of law, but will render a decision in a short period of time. In an international contract dispute, the arbitrators will follow the laws specified in the “Choice of Law” clause. Arbitration tends to be much cheaper than litigation.

arbitration panel

A group of (generally) three arbitrators who are empowered by the parties involved in a contract dispute to reach a decision on the facts of the dispute and whose decision is binding on all parties. Generally, each of the parties chooses one arbitrator, and the third is chosen by a neutral party.

breach

In the event that one of the parties to a contract does not meet its obligation, that party can be found to have broken the terms of the contract, or to be in breach of the contract. If the party did not fulfill its obligations because of an event beyond its control, the nonperformance can be excused under the force majeure clause.

choice of forum

The court in which disputes regarding the contracts will be resolved.

choice of law

The national laws that govern the terms of the contract.

competing lines

In a contract between a principal and an agent or distributor, competing lines are products manufactured by a company other than the principal that compete with the products manufactured by the principal.

confidentiality

In a contract between two parties, the promise by each of the parties to not divulge what it has learned about the other party’s customers, manufacturing processes, and business practices.

contract language

The language in which a contract is written. If the contract exists in other languages, those versions are considered translations, and not the original contract.

contract law

The set of a country’s laws that govern relationships and disputes between the parties that have signed a contract. Contract law essentially dictates that the courts must settle the dispute by using the terms of the contract.

Convention on Contracts for the International Sale of Goods

A United Nations’ treaty that acts as international sales law.

copyright

Ownership of an intangible good (intellectual property) by an individual or a firm. A copyright can be held on a work of art, a musical piece, or a written article. Copyrights, patents, and trademarks are protected by governments, preventing non-owners from using intellectual property without authorization.

corporate accounts

The customers to which the agent or distributor is not allowed to sell. These accounts are handled directly by the exporter.

counteroffer

An intermediary step in the formation of a contract. After an offer has been made by one of the parties, the other party may not agree with all of the terms of the offer and may want to modify them. Under the Convention on Contracts for the International Sale of Goods (CISG), this response is construed as counteroffer. Under the U.S. Uniform Commerce Code (UCC), however, it is an acceptance of the offer.

customers’ list

The list of the customers to which the agent or distributor sells the principal’s products.

distribution contracts

Agreements between exporters and intermediaries that can take the form of either agency or distributorship agreements.

evergreen contract

A contract that, by design or by default, does not have a specific term of appointment. If a contract lapses but both parties continue acting as if the contract were still in place, the contract then can be considered “evergreen.”

exclusive representative

An agent or a distributor that has been granted the right to be the sole representative of the exporter in a given territory.

facilities and activities

In a contract between a principal and an agent or distributor, a clause that spells out what specific facilities each will maintain (retail store, warehouse, repair facilities) and what specific activities each will engage in (trade show participation, after-sale service, promotion).

force majeure

An event beyond the control of any of the parties in an agreement that prevents one of the parties from fulfilling its commitment. The affected party is then not considered to be in breach of the contract.

good faith

The assumption that both parties signing an agreement want to enter that agreement and have no ulterior motives. Almost all contracts have a clause specifying that the parties are entering the contract in good faith.

labor law

A set of a country’s laws that govern relationships and disputes between employers and employees; it assumes that one of the parties (employee) needs to be protected from the other (employer). Labor law can be used in settling disputes between exporters and agents, at the discretion of the courts in the country in which the agent is located, regardless of the terms of the contract between the exporter and the agent. On occasion, labor law can be used to settle disputes between exporters and distributors.

Lex Mercatoria

The sum total of all the international agreements, international conventions, and other international trade customs that complement the domestic laws of any given country and to which all international trade transactions are subject. Since some countries are signatories of some treaties but not of others, the complexity associated in determining which elements of Lex Mercatoria apply to a given transaction can be substantial.

litigation

A process by which the parties to a contract can settle a dispute, involving the courts of the country chosen in the “Choice of Forum” clause of an international contract. Litigation is considered a “last resort” option, when mediation fails and when the parties in dispute cannot agree to arbitration.

mediation

A process by which the parties to a contract can attempt to settle a dispute, generally involving a third, independent party who can suggest a compromise solution, acceptable to all concerned. Mediation is often preferred over litigation, which is an expensive and time-consuming process in which all judicial rules must be followed and which cannot offer compromise solutions.

offer

The initial step in the formation of a contract. When one of the parties to a potential sale contacts the other party, it does so with an offer to enter into a contract. Under the Convention on Contracts for the International Sale of Goods (CISG), the offer made by one of the parties is valid until its stated expiration date. Under the U.S. Uniform Commercial Code (UCC), however, an offer can be withdrawn at any time before its expiration date, without prejudice.

ownership of customers’ list

The list of the customers of a particular company is considered a business asset. A contract between a principal and a distributor spells out which of the two parties owns that asset.

patent

An intangible good (intellectual property) that an individual or a firm can own. A patent protects the rights to a process, material, or design. Copyrights, patents, and trademarks are protected by governments, preventing non-owners from using intellectual property without authorization.

ratification

The process by which a state fully accepts to be bound by an international treaty. It makes it part of its national legislation by having its Congress vote on it.

registration

A process whereby an agent or a distributor has to notify the government of the importing country that it has entered into an agency agreement or a distributorship agreement with a foreign manufacturer.

rejection

An intermediary step in the formation of a contract. After an offer has been made by one of the parties, the other party may not agree with all of the terms of the offer and may want to modify them. Under the Convention on Contracts for the International Sale of Goods (CISG), this response is construed as a rejection of the original offer, to which a counteroffer can be made.

scope of appointment

The scope [products, territory, customers] to which the contract applies.

full signatory

The acceptance of a treaty by a state. It signs it to indicate that it agrees with its premises, without further ratification.

simple signatory

The first step in the acceptance of a treaty by a state. It signs it to indicate that it agrees with its premises, but it will need to ratify it before it is bound by it.

term of appointment

The initial duration of the distribution contract, and the duration of its eventual renewal periods.

termination for “convenience”

The unilateral decision, by one of the parties to a contract, to end a contract before its term of appointment expires, for reasons unrelated to the performance of the contract by the other party(ies). The term is also used when one party decides not to renew the contract even if the preset criteria for renewal have been met by the other party(ies).

termination for “just cause”

The unilateral decision, by one of the parties to a contract, to end a contract before its term of appointment expires, because the other party has not met some of the terms of the contract that it had agreed to perform. The term is also used when one party decides to not renew the contract because the preset criteria for renewal have not been met.

territory

The geographical area in which the agent or distributor is restricted/expected to sell.

trademark

An intangible good (intellectual property) that an individual or a firm can own. A trademark represents the rights to a commercial name or slogan. Copyrights, patents, and trademarks are protected by governments, preventing non-owners from using intellectual property without authorization.

Uniform Commercial Code

The set of federal laws that govern commercial contracts in the United States.

Vienna Convention

Another name for the Convention on Contracts for the International Sale of Goods.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· Lex Mercatoria (1 slide)

· International Sales Contracts and the CISG (4 slides)

· Agency versus Distributorship Legal Issues (3 slides)

· Elements of an Agency or Distributor Contract (10 slides)

·

Termination (3 slides)

· Arbitration and Mediation (3 slides)

Additional Resources

Lookofsky, Joseph M., Understanding the CIGS in the USA: A Compact Guide to the 1980 United Nations Convention on Contracts for the International Sale of Goods, 1995, Klumer Law International, Boston, The Hague, London.

The ICC Model Commercial Agency Contract, 1991, publication No. 496 of the International Chamber of Commerce, ICC Publishing, 156 Fifth Avenue, New York, NY 10010, USA and ICC Publishing SA, 38, Cours Albert 1er, 75008 Paris, France.

The ICC Model Distributorship Contract, 1993, publication No. 518 of the International Chamber of Commerce, ICC Publishing, 156 Fifth Avenue, New York, NY 10010, USA and ICC Publishing SA, 38, Cours Albert 1er, 75008 Paris, France.

Schaffer, Richard, Beverley Earle, Filiberto Agusti, International Business Law and Its Environment, South-Western, Cincinnati, Ohio, 2009, 7th Edition.

Chapter 3
International Logistics Infrastructure

International Infrastructure

Infrastructure is a collective term that refers to all of the elements in place (publicly or privately owned goods) to facilitate transportation, communication, and business exchanges.

International Infrastructure
Transportation Infrastructure
Communication Infrastructure
Utilities Infrastructure
Services Infrastructure
Legal and Regulatory Infrastructure

International Infrastructure
The Transportation Infrastructure allows goods to move efficiently within a country and between countries. This requires well-maintained seaports, airports, railways, and roads.
The Communication Infrastructure allows businesses to communicate clearly and quickly. This requires reliable phone lines, cell phone networks, internet service, and mail delivery.
The Utilities Infrastructure allows businesses to sustain their daily operations. This requires reliable electricity, energy (natural gas), water, and sewer services.

International Infrastructure
The Banking Infrastructure allows businesses to move funds and documents quickly and reliably, both within a country and between countries. This requires a network of bank branches and well-trained bank employees.
The Business Services Infrastructure allows businesses to find additional competent logistics help quickly. This includes freight forwarders, couriers, carriers, delivery services, packing services, and so on.
The Distribution Infrastructure allows businesses to find agents and distributors, to develop wholesale and retail channels, and promote their products.

International Infrastructure
The Court Infrastructure allows businesses to settle disputes quickly and fairly. This includes not only an efficient court system, but also a network of mediators and arbitrators, and the existence of clear jurisprudence.
The Intellectual Property Infrastructure allows businesses to protect their intellectual property (copyrights, patents, and trademarks) with law enforcement services intent on enforcing intellectual property laws.
The Standard Infrastructure allows businesses to determine the requirements that their products and operations must meet. This includes safety, design, and performance standards.

Transportation Infrastructure
Ocean and Water Transportation
Air Transportation
Railroad Transportation
Road Transportation
Other Means of Transportation

Port Infrastructure (I)
Water Draft
The depth of water determines the size of ships that can call.
Air Draft
Bridge clearances also determine which ships can call.
Cranes
Post-Panamax ships need wider/taller cranes than Panamax ships.
Port Operations
Many ports have strong unions which limit operations.

Port Infrastructure (II)
Space Limitations
The location of most ports limit their ability to expand.
Warehouse Space
Availability of reliable storage space for goods in transit.
Connection to land-based Transportation
Ports need to have reliable access to roads and/or rail lines to keep cargo moving.

The port of YangShan, China

A Panamax ship

A Post-Panamax Ship

The Alameda Corridor between the Port of Los Angeles and the U.S.

Canals and Waterways
Maritime transportation is dependent on the existence of reliable canals.
The Suez Canal in North Africa and the Panama Canal in Central America are particularly important. The current trend of building ships too large to fit through these canals is creating new challenges for the industry.
Other key waterways include the Bosporus Strait in Turkey which connects the Black Sea with the Mediterranean and the Saint Lawrence Seaway in North America which connect the Great Lakes with the Atlantic Ocean.
Other canals are less frequently used, such as the Corinth Canal in Greece.

The New Locks on the Panama Canal.

The New Locks on the Panama Canal.

The Suez Canal.

The Corinth Canal.

The Bosporus Strait.

Airport Infrastructure
Runways
The lengths of runways determines whether an airport can handle large cargo planes, and the number of runways determines its capacity.
Space
Most airports are landlocked and cannot expand.
Hours of operation
Airports need to be located away from of major cities if they are going to operate at night. Many airports do not meet this requirement.
Warehouse space
Storage facilities protect cargo from the elements.

The Kai Tak Airport in Hong Kong (now closed).

The Kobe Airport in Japan.

Railroad Infrastructure
Gauge
When railroads were first built, countries installed unique railroad track gauges to prevent rival armies from using them. Today, these gauge differences prevent trains from traveling quickly between multiple countries.
Multi-modal
Cargo rail transport has shifted from traditional railcars to multi-modal cars, carrying either containers or truck trailers.
Land bridges
Containers are shipped from Asia to Europe through the U.S. railroad network; they arrive in a port on the west coast, and are transported to an east-coast port by rail.

A dual-gauge track in Thailand.

A double-stack train in the United States.

Road Infrastructure
Quality
The existence of high quality roadways is important to the continuous flow of goods.
Congestion
In many countries traffic congestion is stifling and prevents goods from moving quickly.
Civil engineering structures
Structures such as bridges and tunnels need to be built in many places in order to conveniently navigate the landscape.

The Lena “highway” in Russia.

Traffic Congestion on the Road to the Port, in Karachi, Pakistan.

The Italian Autostrade, a Succession of Bridges and Tunnels.

Communication Infrastructure
(Mail)
Speed
In some countries, mail delivery is quick. In others, very slow.
Reliability
In some countries, not all mail is delivered: it is lost, abandoned, or sometimes pilfered.
Delays
In some countries, postal unions have a lot of power and strikes can delay the delivery of important documents.
Competition
Firms such as FedEx, UPS, and DHL are very reliable, but they are generally much more expensive than the public postal services.

A high-speed postal train in France.

Communication Infrastructure
(Telecommunications)
Land lines
While some countries have reliable, inexpensive phone lines, others do not have good landline telecommunication networks.
Cellular phones
Some countries built cellular phone networks quickly, often because they did not have a good landline network. They leapfrogged the landline technology, often offering better cellular access than developed countries with reliable landline networks.
Internet
Access to the internet is still limited or cost prohibitive in
some areas. In others, internet access is fast and inexpensive.
Leapfrogging
Some countries never build infrastructure in one technology, and “leapfrog” into the next one. Gabon in the next tables.

Landline Penetration
Country Landlines/person
1 Hong Kong 61.8%
2 Taiwan 59.9%
3 Germany 58.2%
4 France 58.1%
5 South Korea 57.9%
6 Switzerland 53.4%
7 United Kingdom 51.6%
8 Japan 50.2%
9 Greece 48.5%
10 Belarus 47.0%
19 United States 39.9%
28 United Arab Emirates 35.4%
60 China 18.2%
49 Panama 15.9%
128 Gabon 1.0%

Countries with a population of more than 1,000,000.
Source: CIA’s World Fact Book

Cellphone Penetration
Country Cell phones /person
1 United Arab Emirates 283.4%
2 Kuwait 268.3%
3 Hong Kong 242.8%
4 Gabon 207.1%
5 Saudi Arabia 187.1%
6 Oman 184.8%
7 Panama 167.3%
8 Estonia 166.9%
9 Bahrain 166.8%
10 Uruguay 164.1%
44 Taiwan 129.6%
51 Germany 123.3%
53 Japan 120.5%
96 United States 98.0%
102 China 94.6%

Countries with a population of more than 1,000,000.
Source: CIA’s World Fact Book

Internet Access
Country Internet Access/person
1 Denmark 96.5%
2 The Netherlands 95.2%
3 Bahrain 94.3%
4 Norway 93.1%
5 Qatar 93.0%
6 Finland 92.8%
7 Canada 91.6%
8 New Zealand 89.4%
9 United Kingdom 88.9%
10 South Korea 88.1%
14 Germany 87.1%
16 Japan 86.3%
53 United States 85.4%
72 China 45.6%
125 Gabon 9.5%

Countries with a population of more than 1,000,000.
Source: CIA’s World Fact Book

Utilities Infrastructure
Electricity
Unreliable electricity grids and insufficient production capacity can cause blackouts or brownouts, limiting productivity.
Water and sewer
Access to clean water (and sewer) is fundamentally important for many manufacturing processes.
Energy
Reliable pipelines have to be available to deliver natural gas or oil products to the locations where they can be used.
Theft
In some areas, theft of utilities is common, making it difficult for utility companies to earn a profit and invest in new infrastructure.

Tangled Wires in New Delhi, India.

Offshore Wind Farm, the Netherlands.

Banking Infrastructure
Foreign currency payments
The ability to quickly purchase and sell foreign currencies, either through wire transfers or currency purchases, is important to firms engaged in international trade.
Methods of payment
The ability of the banking partners to support alternative means of payment and to provide assistance to firms engaged in international trade is very important.
Document exchanges
Banks play a fundamental role in the exchange of trade documents between an exporter and an importer.

Business Services Infrastructure (I)
Freight forwarders
Freight forwarders provide significant assistance to firms engaged in international trade by helping determine the best shipping alternatives.
Customs brokers
Brokers provide assistance to importers when clearing Customs.
Couriers
Couriers allow firms to ship documents and small parts using the “next available flight.”

Business Services Infrastructure (II)
Packing services
Packing services allow exporters to rely on professionals to pack goods destined for export.
Multiple other services
Carriers, delivery services, etc. are fundamental to implement good international trade practices, and must exist for exporters to be successful.

Distribution Channel Infrastructure
Agents and distributors
A strong network of agents and distributors allows an exporter to enter new markets and expand abroad.
Retail distribution
Efficient access to consumers is important to a manufacturer of consumer goods, and is not available in all countries.
Advertising and promotion
Advertising agencies and media allow promotional activities critical to the success of many products and services.
Trade shows
For most industries, trade shows present an unequaled opportunity to reach potential customers and trade partners.

Court Infrastructure
Speed
Speedy resolution of lawsuits allows businesses to “move on.” Some countries have slow and cumbersome court processes.
Arbitration
Disputes can be resolved faster through arbitration. The existence of experienced arbitrators is important to the conduct of business.
Mediation
Disputes can also be resolved through mediation, and therefore a group of mediators is often useful to resolve disputes.
Fairness
In some countries, the court system is perceived as corrupt or unfair, and that hinders good business relationships.

Intellectual Property Infrastructure
Protection
Businesses with intellectual property (patents, copyrights, trade secrets) want to make sure that the countries in which they operate will protect intellectual property. In some countries, competitors, police, and courts do not respect nor protect intellectual property, often considering that intellectual property laws favor big foreign corporations over the local entrepreneur trying to earn a living.
International Agreements
Some countries have not ratified international agreements on intellectual property and therefore do not recognize some aspects of foreign patents and copyrights.

Standards Infrastructure
Countries have different standards for products and services offered for sale; these standards are specific and must be followed.
Safety
Safety requirements often differ from country to country. Such is the case for vehicles, appliances, and hotels, for example.
Design
Product designs are often dictated by local conventions (electrical supply and plugs, plumbing sizes and pressures, and telecommunication standards, for example).
Performance
Several countries have performance standards for products, dictating what can be called “natural,” “organic,” “premium,” and so forth.

Chapter 7
International Terms of Payment

International Terms of Payment
Characteristics of International Payments
Risks in International Trade
Different Methods of Payment
Methods of Payment as a Marketing Tool

Characteristics of International Payments (I)
Credit information
It is much harder to find credit information on a person in a foreign country.
Lack of personal contact
Due to the different physical locations, communication is typically not done face-to-face. This can make it hard to get to know a person, which is particularly important is certain cultures.
Collections are difficult and expensive
If a customer fails to pay it is difficult and expensive to collect on the past due account.

Characteristics of International Payments (II)
No easy legal recourse
Due to the nature of international transactions, there is no single court that has direct jurisprudence over an international trade dispute between an exporter and an importer.
Higher litigation costs
If legal proceedings are required, there are much more expensive and complicated than for a domestic case.
Because of all of these issues, a climate of mistrust is often created.

Risks in International Trade
Risk
The risk of non-payment is the probability of not getting paid or of being paid late, and it dictates the terms of payment chosen by the exporter.
There are commercial and country risks.
Exposure
The consequence of a loss to a particular firm is the exposure. A small firm has more exposure in a $50,000 transaction than a large firm.

Risks in International Trade
Country Risk
Different issues affect the risk that a country represents. It includes the possibility of not being paid because a customer’s country does not have the foreign currency to pay the debt, or the customer is not allowed to pay. Political unrest, chances of a strike, and variations in interest and exchange rates should also be taken into account.
Commercial Risk
An individual firm may not be able (or willing) to pay for a number of reasons. It is difficult to find reliable credit information on international firms.

Methods of Payment

Traditional Methods

Cash in Advance

Open Account

Alternative Methods

Purchasing Cards

TradeCard

Letter of Credit

Documentary Collection

Bank Guarantees

Cash in Advance
The exporter requests that the customer provide payment in advance, before shipment of the goods can take place. This method is totally “risk free” to the exporter—no collections worries, no foreign exchange fluctuations exposure, no cash-flow problem, and only nominal fees to pay to banks.
Only recommended for doing business in very few countries; those in which fraud is rampant, where there is political instability, where the currency is non-convertible or where there is the possibility of foreign exchange “freezes.”
Not recommended for business conducted in developed countries and in countries in which there is some level of sophistication in international business.

Open Account
The exporter conducts international business in a manner similar to the way it conducts business domestically. The exporter sends an invoice to the customer and expects the customer to pay it promptly (or within a certain pre-arranged period).
This method presents many risks for the exporter.
This method should be used with well-established customers or with customers the exporter expects to have a long term relationship. The customer’s credit should be checked before this method is used.

Credit Insurance
It is possible to sell internationally on an open-account basis and still take little risk, by transferring the risk of non-payment to an insurance company.
Insurance companies sell credit insurance, a policy that will cover non-payment by the importer.
This method was subsidized by some European countries in the 1980s, and exporters from the EU frequently use credit insurance when selling on open account.

Letter of Credit
A letter of credit is a document in which the importer’s bank essentially promises to pay the exporter if the importer does not pay. The credit worthiness of the bank is substituted for that of the importer, and the exporter is protected.
Letters of credit are not paid until the exporter supplies the importer with a specified set of documents, agreed in advance. The importer is therefore also protected.
Therefore letters of credit are also called “documentary credit.”

Letter of Credit
Letters of Credit are frequently used in international transactions, especially in those cases in which the exporter has no pre-existing business relationship with the importer, or when the importer is located in a country that is considered to be risky.
They are also used when the importer is risk averse.
It is important to realize that letters of credit are documentary; the bank is only obligated to pay upon presentation of certain documents by the importer.

Letter of Credit (Issuance)
1. The exporter and the importer agree to conduct business on a letter of credit basis. The exporter sends a pro forma invoice to the importer.
2. The importer asks his bank, called the issuing bank, to provide him a letter of credit, naming the exporter as the beneficiary.
3. The importer’s bank sends the letter of credit to the exporter’s bank, called the advising bank.
4. The exporter’s bank reviews (“advises”) the letter of credit, making sure that it is conform to the terms to which the exporter agreed.

Letter of Credit (Issuance)
Exporter’s Bank – Advising Bank
Exporter
Importer’s Bank –
Issuing Bank
Importer
1
2
4
3

Letter of Credit (Shipment)
5. The exporter ships the goods to the importer. By doing so, it collects some documents from the carrier (which documents depend on the Incoterm chosen), and sends all these documents (including invoice and so on) to the advising bank.
6. The advising bank checks the documents against the letter of credit, and then notifies the importer’s bank that all documents are in order. The exporter’s bank then sends the documents to the issuing bank.
7. The issuing bank sends the documents to the importer.

Letter of Credit (Shipment)
Exporter’s Bank – Advising Bank
Exporter
Importer’s Bank –
Issuing Bank
Importer

6
7
5
Documents
Goods

Letter of Credit (Shipment)
Discrepancies & Amendments
When the advising bank checks the documents against the letter of credit, and notices that there are differences (called discrepancies) between the documents submitted by the exporter and the documents requested by the letter of credit, it asks the issuing bank to amend the letter of credit.
It is only after the letter of credit has been amended (with the agreement of all parties) that the advising bank forwards the documents to the issuing bank.
About 50 percent of all letters of credit transactions necessitate an amendment.

Letter of Credit (Payment)
8. After receiving the documents, the importer pays the importer’s bank.
9. The importer’s bank transfers the funds to the exporter’s bank.
10. The exporter’s bank pays the exporter.

Letter of Credit (Payment)
Exporter’s Bank – Advising Bank
Exporter
Importer’s Bank –
Issuing Bank
Importer
8
9
10

Letter of Credit (Entire Process)
Exporter’s Bank – Advising Bank
Exporter
Importer’s Bank –
Issuing Bank
Importer
2
9
10
8
1
3
4
5
6
7

Letter of Credit (Other Issues)
Advising Bank
On occasion, the exporter’s bank does not have the ability (or is not willing) to advise a letter of credit issued by a bank with which the exporter’s bank is not familiar.
In that case, the exporter’s bank asks an additional bank to advise the letter of credit.
In those cases, the exporter’s bank and the advising bank are two separate entities.

Letter of Credit (Other Issues)
Correspondent Bank
On occasion, there is a bank in the importer’s country with which the exporter’s bank has an established relationship. Such a bank is called a correspondent bank.
It is also possible that there is a bank in the exporter’s country with which the importer’s bank has a prior relationship. This is the correspondent bank for the importer’s bank.
It is therefore possible to have as many as two correspondent banks involved in a letter of credit transaction, one for the exporter’s bank, and one for the importer’s bank.

Letter of Credit (Other Issues)
Confirming Bank
On occasion, the exporter may be unsure about the credit worthiness of the bank that issued the letter of credit.
It can then ask a bank (often the advising bank) to confirm the letter of credit; should the issuing bank renege on the payment, the confirming bank will pay the exporter.
Although routinely used by some exporters, confirmed letters of credit are a reflection of an excessively cautious mindset. Almost no letter of credit ever goes unpaid.

Letter of Credit (Other Issues)
Stand-By Letter of Credit
A stand-by letter of credit is similar to an ordinary letter of credit, but it is valid for multiple shipments and allows for bills of lading issued on multiple dates. Under such a system, the exporter will make shipments on an open-account basis and will “call” on the letter of credit only if the importer is not meeting its obligations.
Transferable Letter of Credit
A letter of credit that the beneficiary uses to secure its own payment to others. A transferable letter of credit is used when the exporter needs to purchase raw materials before it can produce what it sold to the importer.

Letter of Credit (Other Issues)
Back-to-Back Letter of Credit
A letter of credit issued by the exporter, naming its supplier as beneficiary, and that uses the letter of credit issued by the importer’s bank as evidence of credit worthiness.
Red-clause Letter of Credit
In some cases, the exporter may not have enough working capital to finance the manufacturing of the goods that it is selling to the importer. In that case, it is possible to ask the importer to issue a red-clause letter of credit, with which the importer provides the exporter with a cash down payment, prior to shipment, to finance the production of the goods.

Documentary Collection
A process by which an exporter asks a bank located in the importing country to safeguard its interests by not releasing the documents until the importer satisfies certain requirements.
The exporter gives the foreign bank very specific directions on the way it wants the transaction handled, by supplying the foreign bank with a “letter of instruction.”
Documentary collection is less cumbersome and cheaper than a letter of credit. The exporter keeps control of the documents (and therefore title) until the importer accepts the draft or makes payment.

Documentary Collection
1. The exporter and the importer agree to conduct business on a documentary collection basis. The exporter sends the goods to the importer, but sends the documents to the exporter’s bank, which acts as the remitting bank.
2. The remitting bank sends the documents to a bank in the importing country, called the presenting bank.
3. Upon receipt of the documents, the presenting bank notifies the importer that the documents are available.

Documentary Collection
Once it has received the documents sent by the exporter, the presenting bank follows the letter of instruction given by the exporter.
It can give the documents to the importer in exchange for payment. This type of transaction is called “documents against payment” or D/P.
It can give the documents to the importer in exchange for a signature on a draft. This type of transaction is called “documents against acceptance” or D/A.
A draft is a promissory note (also called a bill of exchange) with which the importer promises to pay the exporter within a defined timeframe.

Documentary Collection
Exporter
Exporter’s Bank – Remitting Bank
Importer
Presenting Bank
2
3
D/P
or
D/A

1
Documents
Goods

Types of Drafts
Sight Draft
Once the importer accepts the draft by signing it, the importer has to pay the exporter immediately. The draft is payable “at sight.”
Time Draft
Once the importer accepts the draft by signing it, the importer has to pay the exporter a certain number of days (30, 60, 90, or 180) after the date of acceptance.
Date Draft
Once the importer accepts the draft by signing it, the
importer has to pay the exporter a certain number of days
(30, 60, 90, or 180) after the date of shipment for the
goods.

Acceptance
The exporter can specify in the letter of instruction whether it wants trade acceptance or banker’s acceptance:
In requesting a trade acceptance (or trader’s acceptance), the exporter expects the importer to accept (sign) the draft in a reasonable amount of time after being notified that the presenting bank has the documents in its possession.
In a banker’s acceptance, the exporter asks the presenting bank to accept the draft “on behalf” of the importer.
A presenting bank will only agree to a banker’s acceptance if it can be sure that the importer will honor the bank’s commitment. It will therefore only sign if it can aval the importer’s commitment.

Forfaiting / Factoring
An exporter can sell the draft it collected from the importer to a forfaiting firm who buys them, without recourse.
An exporter can also sell international receivables to a factoring house (also called a factor) who can buy them with or without recourse.
If a receivable is bought “without recourse,” it means that the factor cannot turn to the exporter if the importer does not pay.
If it is bought “with recourse,” the factor can hold the exporter responsible for the debt.

Purchasing Cards
Purchasing cards (also called procurement cards or p-cards) are conceptually similar to consumers credit cards and are managed by the big credit card networks (Amex, Visa, …) . Each department of a corporation with a purchasing card is given:
A certain credit limit, imposed on each purchase, and on total monthly purchases
A list of authorized suppliers from which it can purchase goods
At the end of the month, the corporation gets a single invoice, itemized for each department. Suppliers are paid right away, but collect only about 97 percent of the invoice. The difference is the banks’ fees.

P-Cards Advantages (I)
Purchasing cards present several advantages for international purchases:
The exporter is essentially paid “in advance,” because it is paid almost immediately after the goods have shipped.
The importer does not have to pay until the monthly purchasing card bill is due, or about 30 days after the purchase is made.
The non-payment issue is transferred to the bank that issued the card and granted the credit to the importer. The exporter bears no risk of non-payment.

P-Cards Advantages (II)
The currency exchange rate on the transaction is the best one can get; it is the inter-bank exchange rate for very large transactions.
The company purchasing the goods can de-centralize its small purchases so that the central purchasing department can concentrate on big items.
Purchasing cards make a lot of sense for small transactions, for which a letter of credit or a documentary collection would be too cumbersome.

TradeCard
TradeCard is a proprietary electronic system that combines payment and document handling:
TradeCard makes no payment to the exporter until TradeCard has received all the documents, and they are in order.
The importer does not have to pay TradeCard for about 30 days.
The system is efficient: documents are transmitted electronically, and payments are made at the inter-bank exchange rates.

TradeCard
TradeCard has tried to gain wider acceptance in the trade community because it is extremely inexpensive, charging only $150 for a transaction up to $100,000, in contrast to 1 to 3 percent for letters of credit and 2 to 3 percent for purchasing cards.
However, it has not been as successful as its advantages would lead to anticipate.
In 2013, TradeCard was purchased by GT Nexus, which has incorporated it in its Global Trade Management software package. It does not report on the number of transactions conducted under TradeCard.

Bank Guarantees
A bank guarantee is another instrument used in international trade, but is used in different situations: A bank guarantee is usually requested to secure the performance of the seller (exporter), rather than to ensure that payment will be made by the buyer (importer).
Because United States law prohibits bank guarantees, American banks instead offer the same type of financial instrument through their stand-by letters of credit.

Bank Guarantees
Guarantee payable at first demand
A bank guarantee in which the beneficiary does not have to provide any evidence that the terms of the underlying contract between the contractor and the beneficiary have not been met; the issuing bank has to pay at the first request of the beneficiary.
Guarantee based upon documents (caution)
A bank guarantee made conditional upon presentation of certain documents rather than “on first demand.” The beneficiary must present documents that demonstrate that the contractor is not meeting its obligations.

Stand-By Letter of Credit
A stand-by letter of credit covers more than one shipment; it allows for multiple bills of lading, issued on different dates. The bank is obligated to pay if the exporter presents the documents required by the letter of credit and the importer has not paid.
In a similar fashion, stand-by letters of credit can also be used to secure the performance of the exporter. The bank that issues the letter of credit is obligated to pay the importer, if the importer provides documents showing that the exporter has not performed its obligations.

Terms of Payment as a Marketing Tool
An exporter has several alternatives from which to choose in negotiating terms of payment with the importer.
Although the choice of the term of sale is dependent on the level of experience of both the exporter and the importer and on the level of confidence that the exporter has in the ability of the importer to make the payment, there are some alternatives that are definitely preferable and will increase an exporter’s probability to clinch the sale.

Terms of Payment as a Marketing Tool
Method of Payment Probability of Losing the Sale Because of the Choice of Method of Payment
Cash in advance High
Open account Nil
Letter of credit Fairly high
Purchasing card Low
TradeCard Low

Chapter 2
International Logistics

International Logistics
Historical Development
Logistics & Supply Chain Management
Elements of International Logistics
Economic Importance of Logistics
International Reverse Logistics

Historical Development

The early “slow” days

The move toward speed

Customer satisfaction

A strategic advantage

The Early “Slow” Days
The first international logisticians were traders on the Silk Road, a well-traveled trade route, in use for over 3,000 years, stretching from Europe to Asia and passing through the Middle East.
Early modern logisticians were concerned primarily with ensuring goods arrived at their destination in good condition and at the lowest possible cost.
Following World War II, logistics began to incorporate the techniques used by the military.
Logistics began to refer to not just the movement of goods but also to sales, the procurement of supplies, and the management of supplier and customer relationships.

The Move Toward Speed
The introduction of containers (or “boxes”) in the late 1950s, and their eventual widespread adoption, made shipping much more efficient as well as cheaper and faster.
In the 1970s, new companies, like FedEx and DHL, introduced time-defined air shipping services, and gained a large market share in domestic shipments.
In the 1980s, international air shipments grew as costs came down and the number of destinations increased. Air transport became cost-competitive with ocean transport for many products.

The Emphasis on Customer Satisfaction
The very high interest rates of the 1980s led companies to reduce inventory levels.
New inventory management techniques were created to reduce inventory costs. Those techniques included:
Just-in-time (JIT)
Materials Requirement Planning (MRP)
Manufacturing Resources Planning (MRP II)
Distribution Resources Planning (DRP)
Since these techniques relied on rapid and reliable deliveries, logistics firms provided reduced shipping times and time-defined deliveries.

Just-In-Time Techniques
Just-in-time manufacturing is a process that plans for parts to arrive on the assembly line just before they are needed. The goal of this technique is to reduce or eliminate the need for inventory.
It now includes the delivery of parts to the assembly plant just before they are needed, and the delivery of finished goods just as the retail store is running out.
JIT has become part of standard operations management practices in most manufacturing facilities.
JIT involves a risk if the supply chain is disrupted as production may have to shut down due to lack of materials.

Computer-Based Tools
Materials Requirement Planning (MRP) and Manufacturing Resources Planning (MRP II) are tools that allow manufacturing firms to determine what to produce (or order from suppliers), and in which quantity, in function of their sales forecasts and pending customer orders.
Distribution Resources Planning (DRP) is a tool that allows a retail firm to determine what to order from its suppliers, in which quantity, and when, in function of what it sells to retail customers.
These tools are dependent on the reliable, efficient delivery of relatively small shipments.

The Transformation into a Strategic Advantage
International Logistics management has become a strategic advantage for the firms that are capable of:
Containing the costs of shipping, in view of increased fuel costs
Providing “visibility” in the supply chain, or the ability to determine where a particular shipment is located, at any time
Providing reliable, dependable deliveries
Ensuring the security of the goods while they are in transit
Engaging in sustainable practices

The Current State of Affairs
To manage the complexity of international trade, companies have adopted Global Trade Management software that allows them to ensure:
Compliance with export rules, import rules, multilateral agreements and other requirements of international trade
Visibility of the supply chain: determining where goods and documents are at any point in time
Optimization of the supply chain: determining where problems exist and the means to resolve them

Sustainable Practices
Implementation of green practices by region of the world.
Source: IBM

Definitions
Logistics
Supply Chain Management
Evolution of Logistics
Relationship between Logistics and Supply Chain Management
International Logistics
Logistics, International Logistics and Supply Chain Management

Logistics
“Logistics is the part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements.”
Source: Council of Supply Chain Management Professionals

Supply Chain Management
“Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.”
Source: Council of Supply Chain Management Professionals

Evolution of Logistics

Source: Alfred Battaglia

Logistics, International Logistics, and SCM

Elements of International Logistics (I)
The environment in which international logisticians operate is quite different from the domestic environment.
The decisions regarding international transportation are much more complicated than those regarding domestic transportation.
The number of intermediaries involved in an international transaction is greater than in a domestic transaction.
The inherent risks and hazards of international transportation are much greater.

Elements of International Logistics (II)
International insurance is much more complex.
.International means of payment are more complicated.
Terms of trade are more challenging.
The crossing of borders represents specific challenges in documentation and requirements.
Warehousing decisions involve more variables.
Inventory management includes greater risks.
Quality management is more demanding.

Economic Importance of Logistics in the U.S.
Percentage of GDP Spent on Logistics Activities
Source: State of Logistics Annual Reports 2000-2012

Economic Importance of Logistics in the World
Source: Supply Chain Brain

Reverse Logistics
Source: Lora Skarman

Reverse Logistics

The German approach: requiring that
companies recycle all packaging, and
creating a post-consumer recycling program.
The Curitiba approach:
using recycling as an
anti-poverty program.

Fragmentation 1960 Evolving Integration 1980 Total Integration 1990 2000
Demand Forecasting
Purchasing
Requirements Planning
Physical
Distribution
Materials
Management
Logistics

Supply Chain Mgmt.
Production Planning
Manufacturing Inventory
Warehousing
Materials Handling
Industrial Packaging

Finished Goods Inventory
Distribution Planning
Strategic Planning
Customer Service
Transportation
Order Processing
Sales
Marketing
Information Technology
(
Fragmentation 1960 Evolving Integration 1980 Total Integration 1990 2000
Demand Forecasting
Purchasing
Requirements Planning
Physical
Distribution
Materials
Management
Logistics
Supply Chain Mgmt.
Production Planning
Manufacturing Inventory
Warehousing
Materials Handling
Industrial Packaging
Finished Goods Inventory
Distribution Planning
Strategic Planning
Customer Service
Transportation
Order Processing
Sales
Marketing
Information Technology
)

Domestic
Suppliers
Domestic
Customer s
Foreign
Customer s
Foreign
Suppliers

Company
International Logistics
Logistics
Supply Chain Management
(
Domestic
Supplier
s
Domestic
Customer
s
Foreign
Customer
s
Foreign
Supplier
s
Company
International Logistics
Logistics
Supply Chain Management
)

Domestic

Supplier
s

Domestic

Customer
s

Foreign

Customer
s

Foreign

Supplier
s

Company

International Logistics

Logistics

Supply Chain Management

Domestic
Suppliers
Domestic
Customers
Foreign
Customers
Foreign
Suppliers

Company
International Logistics
Logistics
Supply Chain Management

Chapter 6
International Terms of Trade

International Terms of Trade—
Incoterms® Rules
International Commerce Terms
Understanding Incoterms® Rules
Overview of all 11 Incoterms® Rules
Electronic Data Interchange
Common Errors in Incoterms® Rules Usage
Incoterms® Rules as a Marketing Tool

International Terms of Trade
For each international sale, it is important to determine, who — of the exporter or the importer — is responsible for:
Pre-carriage, the domestic transportation in the exporting country
Main carriage, the international transportation between the exporting country and the importing country
On-carriage, the domestic transportation in the importing country
The risks involved in international transportation
Customs clearance in the importing country

International Commerce Terms Incoterms® Rules
In 1936, the International Chamber of Commerce developed International Commerce Terms rules (or Incoterms® rules) that formalized these responsibilities. Incoterms rules were revised in 1953, 1967, 1980, 1990, and 2000.
The latest version of Incoterms® rules is dated 2010, and was implemented 01/01/2011.
Incoterms rules follow international trade practices and are always reflecting the way shipping is conducted. The changes implemented in 2010 were significant, but were designed to facilitate the division of responsibilities between the exporter and the importer.

Incoterms® Rules 2010
Incoterms® rules formally define the following aspects of an international sale:
Which tasks will be performed by the exporter
Which tasks will be performed by the importer
Which activities will be paid by the exporter
Which activities will be paid by the importer
The exact point at which the responsibility for the goods transfers from the exporter to the importer
There are 11 different Incoterms® rules, all abbreviated with a 3-letter acronym, such as EXW, DAP, FOB, and so on.

Choice of an Incoterms® Rule
Choosing the correct Incoterms® rule depends on which export strategy a company is following. The following factors are particularly important:
The type of product being sold (weight, volume, perishability, value, sensitivity to temperature changes, and so on)
The method of shipment
The ability and willingness of either of the exporter and importer to perform the tasks involved
The amount of trust placed by either of the parties in the other party

Incoterms® Rules
The International Chamber of Commerce specifies that there are two groups of Incoterms rules:
Seven Incoterms rules that can be used for any means of transportation (ocean, road, air, train).
Four Incoterms rules that can only be used for ocean transportation (these are the oldest terms of trade).

Incoterms® Rules
Any mode of Transportation
Ocean Transportation

EXW

Ex-Works

FCA

Free Carrier

CPT

Carriage Paid To

CIP

Carriage and Insurance Paid To

DAT

Delivered At Terminal

DAP

Delivered At Place

DDP

Delivered Duty Paid

FAS

Free Alongside Ship

FOB

Free On Board

CFR

Cost and Freight

CIF

Cost, Insurance and Freight

Incoterms® Rules
Each Incoterms rule has:
A scope — The type of products for which it can be used
A modality — The mode of transport for which it can be used
A syntax — The way it has to be stated on invoices and paperwork
Each Incoterms rule defines:
The responsibilities of the exporter
The responsibilities of the importer
A specific transfer point at which the responsibilities for the goods shifts from the exporter to the importer

Ex-Works (EXW)
Scope
Ex-Works can be used for any type of goods. However, in the Incoterms® rules 2010, the International Chamber of Commerce clearly wants EXW to be used for small packages that are picked up by express packages services, such as FedEx or DHL.
Modality
Ex-Works can be used for any mode of transportation.
Syntax
EXW [Address in the City of Departure where goods are made available], Incoterms ® 2010.
EXW · 2400 Progress Drive, Poughkeepsie,
New York 12601, USA, Incoterms® 2010.

Ex-Works (EXW)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage and provide the importer with the documents necessary to clear the goods for export in the exporting country and to clear customs in the importing country.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter makes the goods available to the importer.

The ICC recommends that EXW be used only for small packages

Free Carrier (FCA)
Scope
Free Carrier can be used for any type of goods.
Modality
Free Carrier can be used for any mode of transportation.
Syntax
FCA [Address in the City of Departure where goods are delivered to carrier], Incoterms ® 2010.
FCA · Bâtiment B, 46 Allée Corbière, F-81000 Castres, France, Incoterms® 2010

Free Carrier (FCA)
Under the FCA Incoterms® rule, there are two choices regarding the delivery of the goods. The exporter and importer can agree on:
FCA Exporter’s Premises
The exporter loads the goods at its place of business on a truck (means of conveyance) provided by the importer.
FCA Carrier’s Premises
The exporter loads the goods on its own truck and delivers them to the carrier’s place of business, still loaded on the truck. It is the responsibility of the carrier to unload them from the truck.

Free Carrier (FCA)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear customs in the importing country, and deliver the goods on the truck either at its own place of business or the carrier’s place of business.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the goods are delivered to the carrier, loaded on the truck.

Carriage Paid To
Scope
Carriage Paid To can be used for any type of product.
Modality
Carriage Paid To can be used for any mode of transportation.
Syntax
CPT [Address in the City of Destination where goods are delivered], Incoterms ® 2010.
CPT · Graacher Straße 20, Köln,
Deutschland D-50969, Incoterms® 2010.

Carriage Paid To (CPT)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage, main carriage and on-carriage to the city of destination.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods to the first carrier in the exporting country.

Carriage Paid To (CPT)
Scope
Carriage Paid To can be used for any type of product.
Modality
Carriage Paid To can be used for any mode of transportation.
Syntax
CPT [Address in the City of Destination where goods are delivered], Incoterms ® 2010.
CPT · Graacher Straße 20, Köln,
Deutschland D-50969, Incoterms® 2010.

Under CPT, delivery takes place when goods are loaded in the first means of conveyance

Carriage Paid To (CPT)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage, main carriage and on-carriage to the city of destination.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods to the first carrier
in the exporting country.

Carriage and Insurance Paid To (CIP)
Scope
Carriage and Insurance Paid To can be used for any type of product.
Modality
Carriage and Insurance Paid To can be used for any mode of transportation.
Syntax
CIP [Address in the City of Destination where goods are delivered], Incoterms ® 2010.
CIP · Ulitsa Poruchik Nedelcho Bonchev,
Sofia, Bulgaria, Incoterms® 2010

Carriage and Insurance Paid To (CIP)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage, main carriage, on-carriage and insurance to the city of destination.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods to the first carrier in
the exporting country.

Carriage and Insurance Paid To (CIP)
Insurance under CIP
Under the CIP Incoterms® rule, the exporter must provide insurance for the goods, but it is minimum insurance (coverage C of the Institute Cargo Clauses).
The amount of insurance is always 110 percent of the value of the goods.
Incoterms® rule Variant
It is possible for the exporter and the importer to agree to a higher level of insurance (coverage A). In this case, the Incoterms syntax changes to:
CIP · Ulitsa Poruchik Nedelcho Bonchev,
Sofia, Bulgaria, Incoterms® 2010, maximum cover

Delivered at Terminal (DAT)
Scope
Delivered At Terminal can be used for any type of product, but it is designed for containerized cargo.
Modality
Delivered At Terminal can be used for any mode of transportation.
Syntax
DAT [Address of the Terminal where goods are delivered], Incoterms ® 2010.
DAT · Paranaguá Container Terminal, Avenida Portuária, Paranaguá, Parana 83206-410, Brazil,
Incoterms® 2010.

Delivered At Terminal (DAT)
The Delivered At Terminal Incoterms® rule was created in 2010. It is meant to be used for containerized cargo delivered to a port, and to replace the maritime cargo terms (FCA, FOB, CFR, CIF), which the International Chamber of Commerce wants to reserve for non-containerized cargo.
Under the DAT Incoterms® rule, the exporter and the importer can agree on a terminal that is located in the exporting country, or one located in the importing country, or yet one located in a country through which the goods will transit.
The DAT Incoterms® rule reflects the practices followed by companies that utilize containers in international trade. They deliver containers to terminals in the country of export and collect containers at terminals located in the country of import.

Delivered At Terminal (DAT)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for transportation to the terminal at which the goods are to be delivered.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods, unloaded from the mode of transportation, to the terminal.

Under DAT, delivery takes place when goods are unloaded in the terminal.

Delivered At Place (DAP)
Scope
Delivered At Place can be used for any type of product.
Modality
Delivered At Place can be used for any mode of transportation.
Syntax
DAP [Address in the City of Destination where goods are delivered], Incoterms ® 2010.
DAP · 97 Brisbane Street, Sydenham 8023,
New Zealand, Incoterms® 2010.

Delivered At Place (DAP)
The Delivered At Place Incoterms® rule was created in 2010. It was meant to replace the Delivered Duty Unpaid (DDU) Incoterms® rule that had been in existence until 2010.
Under the DAP Incoterms® rule, the exporter and the importer generally agree to use a location in the importing country. However they could agree on a location in the exporting country, or one in a country through which the goods will transit.

Delivered At Place (DAP)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage, main carriage and on-carriage to the city of destination.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer.
When the exporter delivers the goods to the place of delivery, still loaded on the mode of transportation.

Delivered Duty Paid (DDP)
Scope
Delivered Duty Paid can be used for any type of product.
Modality
Delivered Duty Paid can be used for any mode of transportation.
Syntax
DDP [Address in the City of Destination where goods are delivered], Incoterms ® 2010.
DDP · Kopparbergsgatan 226, Malmö 214 44, Sverige/Sweden, Incoterms® 2010.

Delivered Duty Paid (DDP)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, arrange and pay for pre-carriage, main carriage and on-carriage to the city of destination, and clear Customs in the importing country.
Responsibilities of the Importer
The importer must unload the goods from the means of conveyance.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods to the delivery location, still loaded onto the mode of transportation.

Free Alongside Ship (FAS)
Scope
Free Alongside Ship can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.
Modality
Free Alongside Ship can only be used for ocean transportation.
Syntax
FAS [Address of the dock in the Port of Departure where the goods are delivered], Incoterms ® 2010.
FAS · Waalhaven Noordzijde 2089, Rotterdam,
3089KM, The Netherlands, Incoterms® 2010.

Free Alongside Ship (FAS)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage to the port of departure.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods to the port of departure, unloaded from the mode of transportation.

Under FAS, delivery takes place when goods arrive alongside the ship in the port of departure

Free On Board (FOB)
Scope
Free On Board can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.
Modality
Free On Board can only be used for ocean transportation.
Syntax
FOB [dock (or ship) in the Port of Departure where the goods are delivered], Incoterms ® 2010.
FOB · Breakbulk Terminal, 660 Duncan Road,
Cape Town, South Africa, Incoterms® 2010.

Free On Board (FOB)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, arrange and pay for pre-carriage to the port of departure and loading onto the ship.
Responsibilities of the Importer
The importer must handle everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods onboard the ship in the port of departure.

Cost and Freight (CFR)
Scope
Cost and Freight can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.
Modality
Cost and Freight can only be used for ocean transportation.
Syntax
CFR [Address of the dock in the Port of Destination where goods are delivered], Incoterms ® 2010.
CFR · ENL Multi-purpose Terminal, Apapa Wharf,
Lagos,Nigeria, Incoterms® 2010.

Cost and Freight (CFR)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage and main carriage to the port of destination.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods onboard the ship in the port of departure.

Under CFR, delivery takes place when goods are placed onboard the ship

Cost, Insurance and Freight (CIF)
Scope
Cost Insurance and Freight can be used for any type of product. However, the International Chamber of Commerce would like FAS to be used only for non-containerized cargo.
Modality
Cost Insurance and Freight can only be used for ocean transportation.
Syntax
CFR [Address of the dock in the Port of Destination where goods are delivered], Incoterms ® 2010.
CIF · Naigai Lines, 176 Higashi-Machi, Chuo-Ku,
Kobe 650-0031, Hyogo, Japan, Incoterms® 2010.

Cost, Insurance and Freight (CIF)
Responsibilities of the Exporter
The exporter must package the goods for the international voyage, provide the importer with the documents necessary to clear Customs in the importing country, as well as arrange and pay for pre-carriage, main carriage and insurance to the port of destination.
Responsibilities of the Importer
The importer must do everything else.
Point at which the responsibility for the good shifts from exporter to importer
When the exporter delivers the goods onboard the ship in the port of departure.

Cost, Insurance and Freight (CIF)
Insurance under CIF
Under the CIF Incoterms® rule, the exporter must provide insurance for the goods, but it is minimum insurance (coverage C of the Institute Cargo Clauses).
The amount of insurance is always 110 percent of the value of the goods.
Incoterms® rule Variant
It is possible for the exporter and the importer to agree to a higher level of insurance (coverage A). In this case, the Incoterms syntax changes to:
CIF · Naigai Lines, 176 Higashi-Machi, Chuo-Ku,
Kobe 650-0031, Hyogo, Japan, Incoterms® 2010, maximum cover.

Incoterms® Rules in Domestic Trade
The International Chamber of Commerce has intentionally designed the new (2010) Incoterms® rules to be used in domestic trade.
The main reason for this change is that domestic trade and international trade often use the same terminologies (for example, FOB is a frequently used domestic term of trade), but with different meanings. Consider a company doing business in several countries, all of which have a different understanding of FOB in addition to the ICC version.
In an attempt to simplify trade, the ICC would like domestic and international shipments to use ) Incoterms® rules.

Electronic Data Interchange (EDI)
For several Incoterms® rules, there is no transport document that is issued at the point where the responsibility shifts from the exporter to the importer (for example, a Bill of Lading).
Electronic Data Interchange has attempted to solve this problem.
Whenever there is no transport document possible, the exporter can still send an EDI “notice” to the importer, which acts as a proof of delivery for both parties. The exporter has a record of the notification sent, and the importer knows unambiguously when the goods were delivered to the quay or when they arrived in port.

Common Errors in Incoterms® Rules Usage (I)
Confusion with Domestic Terms of Trade
An inexperienced exporter will use “FOB factory” rather than the correct corresponding Free Carrier Seller’s Premises (FCA) Incoterms® rule.
Confusion with older Incoterms® rules
The International Chamber of Commerce modified the Incoterms® rules in 1980, 1990, 2000, and 2010. It eliminated some Incoterms® rules, modified others and created some new ones. For a number of reasons, several exporters have failed to adapt to these changes, and will use an obsolete Incoterms® rule.

Common Errors in Incoterms® Rules Usage (II)
Improper Use of a Correct Incoterms® rule
Some Incoterms® rules are sometimes specific to certain modes of transportation and types of cargo, and cannot be used for others.
The most frequent misuse is when FOB is used with an air shipment: FOB is designed to be used only with an ocean shipment term.
The correct Incoterms® rule to use for an air shipment should be Free Carrier (FCA), to clearly outline the responsibilities of the exporter and of the importer.

Common Errors in Incoterms® Rules Usage (III)
Not Specifying the Incoterms® rule version
Incoterms rules have changed from 2000 to 2010. Until the 2010 rules are solidly established, it would be advisable to always specify “Incoterms 2010”.
Since the FOB point of delivery changed from Incoterms 2000 to Incoterms 2010, some possible problems may develop should cargo be damaged during the loading of a ship if the version (2010) is not specified.

Incoterms® Rules as a Strategic Advantage
A strategic advantage can be gained by an exporter willing to facilitate the sale of its products by assisting a novice importer in the handling of a shipment.
On the other hand, an experienced importer may be intent on performing all or most of the tasks involved in the shipment.
Most exporters would gain by being flexible, offering a quote where they list several possible Incoterms:
FCA, 123 Main Street, Cleveland, Ohio, USA $ 245,000
FOB, M/V APL Florence, Miami, Florida, USA $ 258,000
DAT, Tecon Terminal, Santos, Brazil $ 285,000
and let the importer decide which Incoterms rule it would rather use.

DiscussionBoard Questions

Chapter 1:

In addition to the clusters of Silicon Valley of the U.S. and Sassuolo, Italy, Michael Porter identified a cluster for printing presses in Heidelberg, Germany. Others have written about clusters in Limoges, France for porcelain and in Valenza Po, Italy, for gold jewelry. What characteristics do industrial clusters have that other cities do not have? Can you think of other industrial clusters in the United States or abroad? 

Chapter 2:

How large an impact has international trade had on your own life, with the products that you own or have purchased in the recent past? Is your quality of life better or worse? Why?

Chapter 3:

What is your position on the realities, as well as the pros and cons of biofuel replacements for oil?  Was the ethanol made from the corn mandate really a scam? Why or why not? What about biodiesel? Hint: They are not the same. Believe it or not, this does have an infrastructure impact.

Chapter 4:

The role of bribery in international business continues and in many countries is increasing. Do you believe that U.S. executives are at a disadvantage as a result of our Foreign Corrupt Practices Act? Please discuss how much and why.

Chapter 5:

Internationally, the number of issues regarding trademarks, patents and copyrights continues to grow. The music business, for example, has been radically transformed. Where do you think it will end up as a result of its inability to protect its copyrighted works that are available on the Internet and other media? Why?

Chapter 6:

 A certain sogo shosha (Japanese Trading Company) always requests its suppliers to provide an EXW quote. Knowing what you know about trading companies, why do you think they have chosen to do this?

Chapter 7:

Top of Form

Many people claim that Letters of Credit will soon be replaced by a “Trade-Card.” What is this product, and why do people think it has such a bright future? Do you agree?

Bottom of Form