8 months ago logistics, Transportation510

LIFETIME BASICS OF FOREIGN TRADE MANAGEMENT – 3 THINGS YOU NEED TO KNOW

In today’s world, foreign trade management  is inevitable for all countries.  Inasmuch as, no country can not produce sufficient quantities according to their needs.  Sometimes they have surplus, sometimes vice versa and sometimes they can never produce.  Countries, the production which is surplus sells the goods to foreign companies in order to have foreign currency.  In this way the countries which gain foreign currency want to buy the raw materials that the companies which do not have sufficient quantities in order to buy another countries.

 

Parallel to globalisation in the world, as the changing that having in foreign trade management removed the some concepts and processes, the new process has occurred.  As it is not a long term, also these concepts that will be changed unsuspectedly.  As this changing will have positive impact, on the other hand it will affect the serious. Knowing the basics of foreign trade management is imperative for logistics providers to meet required service quality levels. Furthermore, trade management cost for importers and exporters are significant in terms of visible and hidden cost. Know the basics will help the cost reduction and efficient flow of information.

 

There are Three Basics of FOREIGN TRADE MANAGEMENT:

  1. Incoterms
  2. Documents
  3. Payments Terms

 

1)    INTERNATIONAL COMMERCIAL TERMS – INCOTERMS

 

International commercial terms. Thirteen terms of sale accepted worldwide in assignment of costs and responsibilities between the buyer and the seller. Proposed, updated, and copyrighted by the International Chamber of Commerce (ICC), they serve as global standards for uniform interpretation of common contract clauses in international trade. The last revision (1999) is named ‘INCOTERMS 2000.’
(Source:http://www.businessdictionary.com/definition/INCOTERMS.html)

According to Incoterms, the buyers and the sellers which are in business relationship will know their rights and responsiblities with Incoterms.  Incoterms has been updated in 2013, but the companies generally want to use Incoterm 2000 to work with the foreign company due to simple and understandable.

Incoterms are consist of four groups,

1.1       GROUP E

  • EXW : EXWORKS (EXWORKS – EXW)

1.2       GROUP F

  • FOB : FREE ON BOARD
  • FCA : FREE CARRIER
  • FAS : FREE ALONGSIDE SHIP

1.3       GROUP C

  • CFR : COST AND FREIGHT
  • CPT : CARRIAGE PAID TO
  • CIF : COST, INSURANCE AND FREIGHT
  • CIP : COST, INSURANCE PAID TO

1.4       GROUP D

  • DDP : DELIVERED DUTY PAID
  • DAT : DELIVERED AT TERMINAL
  • DAP : DELIVERED AT PLACE

Definitions of the Incoterms are as below;

1.1       GROUP E

1.1.1    EXW: EXWORKS

Exporter is supposed to be ready their goods at the loading place such as factory, warehouse.  When the exporter have in stock their goods at that places, exporter’s responsibilities will be end.   Buyer arranges their transportation to load the materials from warehouse or the factory.  In this term, importer will supposed to all freight costs, insurance, risks and clauses.  Generally this term uses instead of FCA incoterm and frequently EXW is confused with FCA.

1.2       GROUP F

1.2.1    FCA:   FREE CARRIER

Seller’s obligation to hand goods over to the first carrier at the named place.  Buyer assumes the risks and costs of any further  transport executed.  Exports whihc generally executes in Turkey with in this incoterm.  But, due to not understood and known exactly, EXW and FOB incoterms use instead of FCA and write on the valuable documents.

1.2.2    FAS:    FREE ALINGSIDE SHIP

Exporter (seller) fulfills the obligations indicated loading port and alongside at the loading date by buyer, as the goods are keep available by buyer, exporter is completed their responsibilities. All risks will be fulfilled by buyer.  The significant difference between Incoterms 90 and 2000 is done at FAS and the export customs expenses will be realized by seller instead of buyer.  This term uses at maritime transport and river transport.

1.2.3    FOB:    FREE ON BORAD

In this delivery terms, exporter fulfills the delivery responsibilities when the goods passed the board of the vessel that is indicated shipment port and shipment date by buyer.  All risks and expenses will be undertaken by buyer.  In this delvery term, seller fulfills the export procedures at the customs.

Generally cost calculation realizes with FOB price offer from the buyers.  When we request the quotation from the buyer, buyer sends the quotation as FOB delivery term included domestic transportation in this offer.

Buyer includes the following expenses in order to calculate the cost.

  • Nett profit,
  • international transportation cost,
  • domestic transportation cost in which buyer’s country.

 

1.3       GROUP C

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1.3.1    CFR:    COST AND FREIGHT

In this delivery term, the goods is deliver to buyer as paid freight costs at which the dispatch port.  The risks of the goods is belonged to the buyer when the goods are passed the board of vessel.  Insurance is issued by buyer.  In order to issue the insurance policy, seller should inform to buyer the details of the transportation module and other details such as container number, vessel name and vessel flag.

 

1.3.2    CPT:    CARRIAGE PAID TO

In this delivery term, the freight cost and export procedures at exporter’s country is completed by seller.  CPT delivery term is an alternative term of CFR.  Buyer delivers the goods to seller which is nominated by buyer.  All expenses and risks are taken over by seller except international freight cost.

Insurance is issued by buyer and in order to prepare the insurance policy, buyer needs to have the details of the forwarder and the goods details.

The difference between CPT and FCA is that the freight cost paid by seller.

 

1.3.3    CIF:     COST, INSURANCE AND FREIGHT

In this delivery term, the freight cost and export procedures at exporter’s country is completed by seller.  In addition to CFR, insurance is issued by seller.  Exporter pays the international cost, domestic freight cost and issues the insurance policy.  According to another explanation, the seller delivers the goods on board the vessel or procures the goods already so delivered. (Source:http://www.mevzuat.net/fayda/teslimsekilleri.aspx#CIF)

This delivery term uses at the maritime transport.

 

  • CIP: CARRIAGE AND INSURANCE PAID TO

In addtion to CPT delivery term, exporter supposed to issue the insurance policy.  This delivery term uses another transportation models except seamarine transport.

This delivery term states that the seller must deliver the goods at a designated carrier or other person’s designated location and the seller must pay the transportation costs and the transportation contract that must be brought to the specified destination of the goods.
(Source: http://www.mevzuat.net/fayda/teslimsekilleri.aspx#CIF)

 

1.4       GROUP D

1.4.1    DAT:   DELIVERED AT TERMINAL

In this delivery term, the goods delivers at which terminal stated by buyer at the port, bonded warehouse and buyer’s factory as unloading expenses is paid by exporter.  After the unloading and deliver process, customs clearance and expenses is paid by buyer such as duty, vat and other expenses.

 

1.4.2    DAP:   DELIVERED AT PLACE

In this delivery term, exporter is supposed to deliver the goods at which unloading place is stated by buyer (port, customs place or airport) is attended the goods into the truck or container for buyer.  Customs clearance, vat, duty and other expenses are belong to buyer.

 

1.4.2    DDP:   DELIVERED DUTY PAID

In this delivery term, exporter is supposed to attend the goods in which is stated buyer’s country as the customs procedures has completed.  This terms has many risks for exporter.  In some countries customs procedures are very difficult and the process of customs clearance and duties are going on slowly.  If the exporter wants to sell the goods as in DDP term, seller must know the customs procedures in which seller’s country very well.  For example, Russian customs duties, Algerian customs duties and European countries duties are different each other and have caary different procedures.

Download transport obligations, cost and risk wall chart.

 

2)    THE DOCUMENTS IN USING FOREIGN TRADE

 

When we are in bussinesship with foreign countries, we must know the documents being used in foreign trade management.  That documents are very significant for the exporters and importers during the customs procedures as well as the payment procedures.

 

There are some valuable documents in foreign trade management to review as below,

 

  • Proforma invoice,
  • Commercial invoice,
  • Consulate invoice,
  • Packing list,
  • Freight Invoice,
  • Insurance policy,
  • Movement Certificate – ATR, EUR1

 

2.1       PROFORMA INVOICE

 

There is no any commercial liability with regard to exporters and importers, it uses to present an offer.  This proforma invoice is prepared at the purchase order by seller for buyer.  Proforma invoice in foreign trade management has the following details;

 

  • Seller name and address,
  • Buyer name and address,
  • Proforma invoice date and number,
  • Quantitiy,
  • Description of goods,
  • Delivery term,
  • Country of origin,
  • Unit price,
  • Total price,
  • Currency,
  • Payment term,

 

2.2       COMMERCIAL INVOICE

 

The purchase order is became clearer by buyer and seller then that invoice is prepared by seller.  According to the commercial invoice, buyer must pay the total invoice of the goods at the indicated date on the commercial invoice.  The commercial invoice must be issued without VAT.

 

Commercial invoice in foreign trade management has the following details;

 

  • Buyer’s name and address,
  • Commercial invoice date,
  • Invoice number,
  • Quantitiy,
  • Description of goods,
  • Delivery term,
  • Country of origin,
  • Nett and gross weight,
  • Package number,
  • Unit price,
  • Total price,
  • Currency,
  • HS Code (Customs Tariff Number)
  • Payment term, (if the payment terms is under letter of credit term, letter of credit number must be indicated on the commercial invoice)

 

2.3       CONSULATE INVOICE

 

Generally, this invoice is demanded by Arabic Countries and South America’s Countries.  The reason of the requested that invoice is the customs procedures at the importer’s countries.  In this case, exporter issues a commercial invoice and that invoice is approved by commercial embassy by seller.

Commercial invoice in foreign trade management has the following details;

 

  • Buyer’s name and address,
  • Commercial invoice date,
  • Invoice number,
  • Quantitiy,
  • Description of goods,
  • Delivery term,
  • Country of origin,
  • Net and gross weight,
  • Package number,
  • Unit price,
  • Total price,
  • Currency,
  • HS Code (Customs Tariff Number)
  • Payment term, (if the payment terms is under letter of credit term, letter of credit number must be indicated on the commercial invoice)

 

2.4       PACKING LIST

 

That document is prepared for the goods by seller the while goods are loaded into the truck or container.

 

Packing list in foreign trade management has the following details;

 

  • Exporter’s name and address,
  • Description of goods,
  • Unit, (i.e. qty, mt, kgs)
  • Unit weight,
  • Total nett weight,
  • Total gross weight,
  • Total package,
  • HS Code

 

2.5       FREIGHT INVOICE

 

That document is issued by forwarder according to agreed with exporter’s conditions and prices.  According to delivery terms, the freight invoice is paid by exporter or importer.

 

2.6       INSURANCE POLICY

 

The goods are assured for all risks by exporter or importer according to international trade circumstances during the moving from country to another country.  In order to issue the insurance policy, the delivery term is played significant role for exporters and importers.  Generally freight insurance is gathered two main group;

  • Total loss,
  • Extended coverage ( all risks)

 

2.7       MOVEMENT CERTIFICATES

The movement certificates are issued with regard to goods during the movements at the foreign countries.  This certificate is permitted to take the goods unpaid customs duties during the customs clearance.  This certificate is prepared at the EU countries.

There are significant movement certificates in foreign trade management as below,

  • ATR (It is for EU Countries)
  • EUR1 (It is for except EU Countries)

 

2.7.1    A.TR

According to Customs Union  Agreement, this certificate is prepared between Turkey and European Union countries.   This certificate is prepared by exporter or importer in order to benefit the reducing the customs duties.  This certificate has gross weight, total package, description of goods, exporter and importer name and address as well as HS Code.

 

2.7.2    EUR1

This document prepares between Turkey and Free Trade Agrement Countries.  This certificate is prepared by exporter or importer in order to benefit the reducing the customs duties.  Also this document is prepared by exporter or importer.  This certificate has gross weight, total package, description of goods, exporter and importer name and address as well as HS Code.

 

3)    PAYMENT TERMS

 

The payment terms are significant for the exporters and importers at the international trade.  According to payment terms, the liabilities are identified clearly by the foreign authorities.  The common payment terms in foreign trade management are as below;

 

  • Cash in advance,
  • Acceptance Credit,
  • Cash against documents,
  • Cash agains goods,
  • Letter of credit,

 

3.1       CASH IN ADVANCE

Amount of the goods that the subject to foreign trade management pays by buyer with banking transfer before the goods has not delivered to the forwarder of the importer or to directly importer.  According to Turkey Customs Legislation, importer must indicate that explanation CASH IN ADVANCE FOR IMPORT when the payment is being realized with banking transfer but for some materials that especially raw materials, according to Turkey Customs Legislation does not want to have this explanation at the swift message of the payment.

 

3.2       ACCEPTANCE CREDIT

 

In this payment term, the payment assures the total amount of the goods will be paid at the indicated maturity by buyer and seller with a policy.  If that policy is issued by exporter accepts only buyer then that policy means is trade acceptance.  When this policy is accepted by banks, that policy means is Banker’s acceptance.

 

3.3       CASH AGAINST DOCUMENTS

 

In this term has risks for buyer.  When the necessary documents which are agreed between buyer and seller is delivered to the bank, buyer pays the total amount of the commercial invoice to the bank.  According to this payment term, especially Turkey Customs Legislation, buyer pays extra 6% duty to the customs during the import procedures.

 

3.3       CASH AGAINST GOODS

 

In this term has risks for seller.  When the goods which are agreed between buyer and seller arrived to the port or customs place, buyer pays the total amount of the commercial invoice to the bank.  According to this payment term, especially Turkey Customs Legislation, buyer pays extra 6% duty to the customs during the import procedures.

 

3.4       LETTER OF CREDIT

A letter of credit is basically a guarantee from a bank that a particular seller will receive a payment due from a particular buyer. The bank guarantees that the seller will receive a specified amount of money within a specified time. In return for guaranteeing the payment, the bank will require that strict terms are met. It will want to receive certain documents – for example shipping confirmation – as proof.
(Source: https://www.gov.uk/guidance/letters-of-credit-for-importers-and-exporters)

 

According to another explanation of the letter of credit, beneficiary commits that the total amount of the invoice at the indicated date and conditions pays to the beneficiary’s bank at the indicated maturity.  There are some conditions to open the letter of credit for appicant and beneficiary.  The documents which will requested from beneficiary during the customs procedures that the payment will be paid according to requested documents.  If the indicated documents do not issued to accordance with the letter of credit conditions there will be disrepancies on the letter of credit.  In this case, the beneficiary’s bank will send the documents to the beneficiary in order to check and control at the customs procedures the requested documents will be accpeted or not for the customs.  If the requested documents is not accepted by the beneficiary, the bank which is buyer(beneficiary) will inform the applicant’s bank about discrepancies on the documents and there will be reservation on the documents.  In order to solve the discrepancies, the applicant must pay attantion during the requested documents is issued.

 

There are facilities for the buyer (beneficiary) and seller (applicant) as below,

 

  • Beneficiary and applicant asseure themselves for the payment.
  • Applicant knows that the payment will be paid by beneficiary’s banks at the maturity.
  • Beneficiary knows that the goods will be loaded at the indicated date on the letter of credit.

 

The kinds of the letter of credit in foreign trade management are as below;

  • Revocable lettter of credit and irrevocable letter of credit,
  • Confirmed and unconfirmed letter of credit,
  • Revolving letter of credit,
  • Red clause and gren clause letter of credit,
  • Back to back letter of credit,
  • Transferable letter of credit,
  • Stand by Credits,
  • Deffered payment letter of credit,

 

IMPORT

 

Means the entry of a good into the customs territory of Turkey from other countries or free zones in accordance with the applicable import legislation and customs legislation or other other entry and transactions to be considered as importation by the Undersecretariat.

 

Importer; real persons who have an identity number registered with the customs office in order to carry out the import transactions or legal entities having a resident registration number in Turkey and partnerships in which they do not have legal personality status and are authorized to make legal savings in accordance with the provisions of the current legislation.
(Source: https://gumrukleme.com.tr/gumrukleme-terimleri-sozlugu/ithalat-nedir/)

 

Import processes play significant role for all countries due to the customs duty and to measure the import and export rates fort he countries.  Import processes is being completed simply at the EU Countries, the countries which are out of the EU is completed the restrictedly.  The customs duties change per country roles and legislation.  That is why the exports and importer must be aware of the legislation during the businessship when dealing with foreign trade management.

 

Import is the importation of all kinds of products except customs and import legislation except for the goods for which the import is prohibited in accordance with the applicable legislation and international customs, and payment of their prices within the scope of exchange legislation.
(Source: Hakan Akın, 2014, p.369)

 

EXPORT

 

An export is a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade. The sale of such goods adds to the producing nation’s gross output. If used for trade, exports are exchanged for other products or services in other countries.
(Source: http://www.investopedia.com/terms/e/export.asp#ixzz4d6RaVjTJ)

 

Another means that goods and services that are freely circulating within a country’s territory (grown, produced or imported from other countries) are to be sold / sent to other countries.

Actual Exports: The export of goods subject to the provisions of customs legislation shall be carried out on board and on board, and shall be considered as actual exports in customs legislation or completion of the bulk and other goods coming from one place or several places.

There are kind of exporting ways in foreign trade management;

  • Front-bound export
  • Consignee export
  • Export of imported goods
  • Exported to Free Zone
  • Unpaid non-quota Export

 

CONCLUSION

 

All for exporters and importers must know the above subjects during the exporting and importing.  Those foreign trade management ways can demage to the importers and exporters if the processes of them used wrongly.   The documents are significant for importers, exporters, forwarding companies and the banks that according to those documents, importers start to clearance process with those documents, in addtition, if there is lack of the valuable documents, importer must pay the extra customs duties.  Moreover, if the documents which are indicated on the letter of credit is prepared not accordance with the conditions of the letter of credit, there will be extra charges for the exporters as well as spending much more time to submit the documents to the bank.

Furthermore, Incoterms (delivery terms) must be known deeply by importers and exporters to avoid the conflict between importers and exporters.

All in all, the subjects which are documents, payment terms, incoterms must be known and followed up every year.  The banks, importers, exporters, freight companies and insurance companies are accountable all for those subjects due to fulfill the properly.

This is all the basic of foreign trade management one needs t know. Topic is much more complicated if you want to dive into it. Let me know if you want to add other basics on this topic of foreign trade management?

 

REFERENCES

About Author:

 

This is the guest post from Altan Kabakçı, MSc . Altan currently holds a position of Logistics and Procurement Manager in SMART ENERGY GROUP INC, and based in Turkey. Altan hold a Masters Degree in International Trade and Logistics Management from Aston American University.

 

Recommended Reading

International Logistics: the Management of International Trade Operations

How to Day Trade: A Detailed Guide to Day Trading Strategies, Risk Management, and Trader Psychology


 

 

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