Lifetime Basics Of Foreign Trade Management – 3 Things You Need To Know

• Logistics Transportation

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

Parallel to globalization in the world, as the changes that having in foreign trade management removed some concepts and processes, a new process has occurred.  As it is not a long term, also these concepts will be changed unsuspectedly.  As this change will have a 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 the required service quality levels. Furthermore, trade management costs for importers and exporters are significant in terms of visible and hidden costs. Knowing 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 are accepted worldwide in the 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 who are in a business relationship will know their rights and responsibilities with Incoterms.  Incoterms was updated in 2013, but companies generally want to use Incoterm 2000 to work with foreign companies due to its simplicity and understanding.

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 THE PLACE

Definitions of the Incoterms are as below;

1.1       GROUP E

1.1.1    EXW: EXWORKS

The exporter is supposed to ready their goods at the loading place such as factory, or warehouse.  When the exporter has in stock their goods at that place, the exporter’s responsibilities will end.   Buyer arranges their transportation to load the materials from the warehouse or the factory.  In this term, the importer will supposed to all freight costs, insurance, risks, and clauses.  Generally, this term is used 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 generally execute in Turkey within this incoterm.  But, due to not being understood and known exactly, EXW and FOB incoterms are used instead of FCA and written on the valuable documents.

1.2.2    FAS:    FREE ALINGSIDE SHIP

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

1.2.3    FOB:    FREE ON BOARD

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

Generally, cost calculation is realized by a FOB price offer from the buyers.  When we request the quotation from the buyer, the buyer sends the quotation as FOB delivery term including domestic transportation in this offer.

Buyer includes the following expenses to calculate the cost.

• Net 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 are delivered to the buyer as paid freight costs at the dispatch port.  The risks of the goods belong to the buyer when the goods are passed the board of a vessel.  Insurance is issued by the buyer.  To issue the insurance policy, the seller should inform to buyer of 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 in the exporter’s country are completed by the seller.  CPT delivery term is an alternative term of CFR.  The buyer delivers the goods to the seller which is nominated by the buyer.  All expenses and risks are taken over by the seller except international freight costs.

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

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

1.3.3    CIF:     COST, INSURANCE AND FREIGHT

In this delivery term, the freight cost and export procedures in the exporter’s country are completed by the seller.  In addition to CFR, insurance is issued by the seller.  The exporter pays the international cost, and 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 is used for maritime transport.

• CIP: CARRIAGE AND INSURANCE PAID TO

In addition to the CPT delivery term, the exporter is supposed to issue the insurance policy.  This delivery term uses other transportation models except for sea marine 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 are delivered at which terminal stated by the buyer at the port, bonded warehouse, and buyer’s factory as unloading expenses are paid by the exporter.  After the unloading and delivery process, customs clearance and expenses are paid by the buyer such as duty, VAT, and other expenses.

1.4.2    DAP:   DELIVERED AT PLACE

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

1.4.2    DDP:   DELIVERED DUTY PAID

In this delivery term, the exporter is supposed to attend to the goods in which is stated buyer’s country as the customs procedures have been completed.  This term has many risks for exporters.  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 terms, the 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 from each other and have very different procedures.

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Download transport obligations, cost, and risk wall chart.

Identification of differences between IncoTerms

2)    THE DOCUMENTS IN USING FOREIGN TRADE

When doing business with foreign countries, we must know the documents used in foreign trade management.  Additionally, utilizing foreign exchange software can greatly assist in managing the financial aspects of international trade transactions. Those documents are very significant for the exporters and importers during the customs and payment procedures.

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

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

2.1       PROFORMA INVOICE

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

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

2.2       COMMERCIAL INVOICE

The purchase order becomes clearer by the buyer and seller then that invoice is prepared by the seller.  According to the commercial invoice, the 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,
• Quantity,
• 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 are under the letter of a credit term, the 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 American countries.  The reason for the request for that invoice is the customs procedures in the importer’s countries.  In this case, the exporter issues a commercial invoice and that invoice is approved by the commercial embassy by the seller.

Commercial invoice in foreign trade management has the following details;

• Buyer’s name and address,
• Commercial invoice date,
• Invoice number,
• Quantity,
• 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 are under the letter of a credit term, the letter of credit number must be indicated on the commercial invoice)

2.4       PACKING LIST

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

The 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 net weight,
• Total gross weight,
• Total package,
• HS Code

2.5       FREIGHT INVOICE

That document is issued by the forwarder according to the agreed exporter’s conditions and prices.  According to delivery terms, the freight invoice is paid by the 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.  To issue the insurance policy, the delivery term plays a significant role for exporters and importers.  Generally, freight insurance is gathered into two main groups;

• Total loss,
• Extended coverage ( all risks)

2.7       MOVEMENT CERTIFICATES

The movement certificates are issued for goods during the movements to foreign countries.  This certificate is permitted to take the goods unpaid customs duties during the customs clearance.  This certificate is prepared in 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 the Customs Union  Agreement, this certificate is prepared between Turkey and European Union countries.   This certificate is prepared by the exporter or importer 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 Turkey and Free Trade Agreement Countries.  This certificate is prepared by the exporter or importer to benefit the reducing the customs duties.  Also, this document is prepared by an 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 against 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, the importer must indicate that explanation CASH IN ADVANCE FOR IMPORT when the payment is being realized with banking transfer but for some materials 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 the buyer and seller with a policy.  If that policy is issued by an exporter that accepts only buyers then that policy means trade acceptance.  When this policy is accepted by banks, that policy means is Banker’s acceptance.

3.3       CASH AGAINST DOCUMENTS

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

3.3       CASH AGAINST GOODS

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

3.4       LETTER OF CREDIT

A letter of credit is 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, the beneficiary commits that the total amount of the invoice at the indicated date and conditions be paid to the beneficiary’s bank at the indicated maturity.  There are some conditions to open the letter of credit for the applicant and beneficiary.  The documents will requested from the beneficiary during the customs procedure and the payment will be made according to the requested documents.  If the indicated documents are not issued by the letter of credit conditions there will be discrepancies in the letter of credit.  In this case, the beneficiary’s bank will send the documents to the beneficiary to check and control the customs procedures the requested documents will be accepted or not for the customs.  If the requested documents are not accepted by the beneficiary, the bank which is the buyer(beneficiary) will inform the applicant’s bank about discrepancies in the documents and there will be reservations about the documents.  To solve the discrepancies, the applicant must pay attention during the requested documents are issued.

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

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

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

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

IMPORT

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

Importers; real persons who have an identity number registered with the customs office 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 by the provisions of the current legislation.
(Source: https://gumrukleme.com.tr/gumrukleme-terimleri-sozlugu/ithalat-nedir/)

Import processes play a significant role for all countries due to the customs duty and to measure the import and export rates for the countries.  Import processes are being completed simply in the EU Countries, the countries which are out of the EU are completed the restrictedly.  The customs duties change per country’s roles and legislation.  That is why the exports and importers must be aware of the legislation during the business 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 by the applicable legislation and international customs, and payment of their prices within the scope of exchange legislation.
(Source: Hakan Akın, 2014, p.369)

The documents required for Import are:

• Certificate of Origin
• Certificate of Manufacture
• Certificate of inspection
• Certificate of Analysis
• Phyto-Sanitary Certificate
• Certificate of Certification
• Certificate of Free Sale
• Import License
• Certificate of Insurance

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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 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

The documents required for Export are:

• Shipper Export Declaration
• Export License
• Returned Goods

CONCLUSION

All exporters and importers must know the above subjects during the exporting and importing.  Those foreign trade management ways can damage the importers and exporters if their 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 addition, if there is a lack of valuable documents, the importer must pay the extra customs duties.  Moreover, if the documents that are indicated on the letter of credit are 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 conflict between importers and exporters.

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

These are all the basics of foreign trade management one needs to know. The 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

• http://www.businessdictionary.com/definition/INCOTERMS.html
• http://www.mevzuat.net/fayda/teslimsekilleri.aspx#CIF
• http://www.mevzuat.net/fayda/teslimsekilleri.aspx#CIF
• https://www.gov.uk/guidance/letters-of-credit-for-importers-and-exporters
• https://gumrukleme.com.tr/gumrukleme-terimleri-sozlugu/ithalat-nedir/
• http://www.investopedia.com/terms/e/export.asp#ixzz4d6RaVjTJ
• Hakan Akın, 2014, 10th Edition, Yeni İşimiz Dış Ticaret, Ankara, Türkiye

About Author:

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

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