Basic Guide to Import / Export

Please click links below to go to selected topic:

This page is intended for manufacturers and wholesalers who do not have experience and knowledge of international trade, but are interested in export or import of their products in the international markets and would like to have some general idea about import export transactions.

THE DIFFERENCES BETWEEN HOME & FOREIGN TRADE

Basically home and international trade are both commercial transactions but they differ a great deal because of the differences in languages, currencies, transport, legal and economic systems that exist in each country. The existence of numerous regulations for transport, banking and customs mandates knowledge and work of a specialist in these fields. As a result of international trade, the value of an expert person or middleman is greater than in domestic trade because there are more specialty and legal functions to be performed. The greater the amount of specialization introduced into the distribution, the greater is the number of expert persons employed between the producer and the retailer. This should result in a much higher efficiency at each stage of the transaction and a reduction of consequences of unwanted situations, but not an increase in the cost of distribution. This has been the effect of the introduction of division of labor into other branches. The commonly held view that the fewer parties involved (middlemen) the higher the profits will be for both the buyer and the seller. It is a misconception; that what is true for domestic trade is true for international trade but this can be very costly. It can be the case for the exporters and importers who avoid expert help and doing the work themselves in order to lower the cost and end up with a lot of expenses because of incorrectly prepared paperwork and performed procedures of specific country laws. The governments tend to be suspicious of imports and they are anxious to count the volume and value of the goods coming in and out of the country. Numerous documentary requirements and tax laws have been evolved over the years for control reasons and follow up on transitions of merchandise. There are further complicated international transactions like international transportation documentary requirements of all sorts of common and contract carriers, Letters of Credit and International Banking and collections.  Every government in the world regulates the companies in their premises whom are international trading companies, shippers, and/or their agents. They all must comply with the destination country specific requirements in order to get paid the primary beneficiary of the transaction. More often, any mistakes on these documents or procedures on either the part of the seller or buyer result in costly charges and delays for the delivery of the goods.

BASIC PRINCIPLES

When one first handles complicated international shipment transaction documents which can grow to hundred pages, the usual reaction is to forget what it is all about in the first place. In reality, it is like all business transactions, the basic principle is very simple, and one party has a customer who desire sellers’ goods. The firm making the sale has to get the goods from point of the manufacturers’ premises to the point of delivery that designated by the buyer. The fact that the customer is in another country and this may lead to complicated documentation, finance and transportation, but the fundamentals are always the same.

THREE TRANSACTIONS IN INTERNATIONAL TRADE

1) The physical movement of the merchandise: This is typically more complicated than a domestic movement because there are usually many terminals and trans shipments in an international shipment than in a domestic one.

2) International trade documents transition: Commercial documents (invoice, packing list, quality inspection and etc.), official documents (health certificate, import license, certificate of origin and etc.), transportation documents (bill of lading, trucker bill, railways bill, airway bill, ocean carrier bill and etc.).

3) Financial document transaction: Bank commitment letters, drafts, letter of credits, insurance policy, bid bond, performance bond, certificate of deposits, letter of guarantee etc.

DELIVERY TERMS (Incoterms)

Every sales contract should indicate the terms of delivery at the designated location and the responsibilities of each party in connection with the charges that are experienced in an international sale transaction. The basic price of the goods is their ex warehouse (works) price in the country of origin. In general, the packaging is included to this. It should be indicated as a separate line item in the pro-forma invoice stage when packaging is highly costly and requires special attention on some of machinery or sensitive goods. The following standard additions of other charges (if any) have to be made on the pro-forma invoice for further arrangement of the physical movement of the goods.

1- Domestic carrier charges to the port of exit.
2- The charges at the port dock for loading and handling the goods on to the ships/planes.
3- The freight charges (air/ocean) for carrying the goods from the port of exit to the port of destination.
4- Insurance of the goods while they are in transit.
5- The charge for carrying the goods from the port of destination to the importers warehouse.
6-Insurance: to cover the risk of carriage required as per trade regulation of most of the countries.

As a result of above conditions in the foreign trade, there are a lot of ways of quoting prices. So it is very important for both the importer and the exporter to state exactly what is included in a quoted price.

In the international trade, the payment for the goods normally takes place under a collection arrangement or a documentary credit. In both cases the seller draws a bill of exchange. But these days it is more usual to employ either a bank draft (bankers check) or a bank transfers with SWIFT transmission which funds are transferred from one bank to another. Under the collection arrangement, a bank at the buyers country is instructed to present that bill to the buyer and on buyers acceptance, or payment depending on the terms of contract of export sale to deliver the bill of lading and other shipping documents to him as the bill of lading will enable him to take delivery of the goods when the ship arrives with the goods. Whereas under a documentary credit, finance is provided for the seller by a bank in his own country on delivery of the shipping documents to the banks. This is done either by the bank discounting or purchasing the sellers bill drawn on the buyer or by the seller drawing directly on the bank for payment. In the case of documentary drafts, the draft is drawn by seller on foreign buyer which can be either a sight or time draft. Drafts are usually accompanied by a full set of shipping documents. They are nothing more than a bill of exchange with various shipping documents e.g. bill of lading, insurance certificate etc. required in connection with that particular transaction which are surrendered to the buyer upon payment or acceptance as the case may be in order that he can obtain the shipment from the carrier and clear it through customs. While in the case of documentary credits that is letter of credits which are also known as reimbursement credit, they are classified operationally as either an import or export credit depending on who the bank's customer is. It is a document issued on behalf of an overseas customer by a banker agreeing to pay the purchase price of an article provided it is supported to him in a way specified in the letter of credit. This method of payment requires the opening of a credit at a bank in the country of the seller.There is various payment methods that have involved over the years to accommodate the different payment method requirements of exporters/importers involved in international trade. Collection arrangements and the documentary credits are governed by international regulations sponsored by the international chamber of commerce and applied by most banks in the world. Collection arrangements are governed by the "UNIFORM RULES FOR THE COLLECTION OF COMMERCIAL PAPER" and being issued with the title "UNIFORM RULES FOR COLLECTION" as publication no 322 and "DOCUMENTARY CREDITS" by the "UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS" and published in the ICC publication no 400.

Again the reader is strongly recommended to read the latest issues/publications of the mentioned ICC publications in order to have an idea about the most suitable payment method suitable for his own particular needs currently used in the international trade. It is again another misconception that the payment risks are greater in the international than the payment risks that exist in the home trade. The risks for payments in foreign trade are almost non existence except for force major cases if the seller and the buyer correctly apply the rules and regulations issued in the above mentioned publications of ICC through the intermediary of a sound commercial bank. The banks do things exactly according to the instructions of their clients within the framework of the above mentioned ICC rules and the terms and conditions of the sale agreement signed by the exporter and importer to an extend that  if one of the parties to the contract, the exporter or the importer does not fulfill their obligations exactly as per the written instructions and the conditions of the sales agreement the whole transaction comes to a halt until further instruction, this in turn cause losses in the operation of the sale agreement. Either the seller can not get his payment or the buyer can not clear or take the delivery of goods from customs. The reason of this is a simple one because the banks can only do/check things according to the things written on the documents and will not do anything that is not written/stated in the documents of the transaction. So it is very important that the exporter and the importer has to  mention everything in their bank instructions they want  and carry out the operation as per these instructions if they don't want to have a problem and risky export import transaction.

A SAMPLE SALE/PURCHASE CONTRACT USED IN INTERNATIONAL TRADE

The sale/purchase contracts used in the international trade are different than the contracts used in the home trade and contain more terms and conditions than the ones used in home trade. A typical sale/purchase contract used in foreign trade should generally include the following term and conditions listed in the below table.

1) Subject/product
2) Quantity, packing, weight.
3) Quality; specs, sampling, testing, analysis, inspection
4) Carriage, loading / discharging conditions
5) Price (as per inco terms)
6) Payment (as per uniform rules for collection)
7) Insurance
8) Performance; penalties, premiums
9) Force Major
10) Arbitration
11) Others

-correspondence address
-Banking charges,
-Cancellation of contract

The above list by no means is a complete one nor every sale/purchase contract contains the same number and order of conditions mentioned here as above. Every sale/purchase contract has its own particular sets of terms and conditions which makes it different from one another.

But the fact remains the same for all sale contracts that it is the most important piece of document of the whole export/import transaction which determines / governs all aspects of an export/import operation and as such the full attention has to be given in the reparation of all the terms and conditions mentioned in the contract in order not to have any problems or disputes during its application and operation. Like the work of a computer you get what you put into your sale/purchase contracts. Since this a briefing, it is not possible to mention every aspect and factors of foreign trade here. It is hoped that the reader finds the above information useful and helpful for the preparation of his likely future export/import businesses.

Send mail to info@etradestone.com with questions or comments about this web site.
Copyright © 2003 etradestone.com
Last modified: 12/20/05