importing and exporting related activities of an organization

Now You ARE READY FOR THE STEPS NEEDED TO COMPLETE AN import or export transaction. In Chapter 2 you learned the basics of start-up. Chapter 3 led you through the concepts of planning and negotiating a transaction. Chapter 4 explained how to compete in the Internet marketplace. This chapter covers the four remaining commonalities, which encompass paying for the goods and physically moving them from one country to another.

1. Finance your import/export transaction.

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2. Avoid risk.

3. Pack and ship your product (physical distribution).

4. Supply all documentation.

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FINANCING

Why do you need financing in the import/export business?

To start, expand, or take advantage of opportunities, all businesses need new money sooner or later. New money means money that you have not yet earned, but that can become the engine for growth.

For the importer, financing offers the ability to pay for the overseas manufacture and shipment of foreign goods destined for the domestic market. For the exporter, financing means working capital to pay for international travel and the marketing effort. New money can also be loans to foreign buyers to enable them to purchase an exporter's goods.

If you have done the homework phase well and have purchase orders for your product(s) in hand, there is plenty of currency available-banks or factors are waiting to assist you.

The Bank

Commercial banking is the primary industry that supports the financing of importing and exporting. Selection of a banking partner is an essential part of the teamwork required for international trade success. When shopping for a bank, look for the following:

1. A strong international department.

2. Speed in handling transactions. (Does the bank want to make money on your money- called the float?)

3. Relationship with overseas banks. (Does the bank have corresponding relationships with banks in the countries in which you wish to do business?)

4. Credit policy.

HOT TIP: In the import/export industry there is a saying: "Walk on two legs." This means choose carefully, then work closely with a good international bank and a customs broker or freight forwarder

Forms of Bank Financing

Loans for international trade fall into two categories: secured and unsecured.

Secured Financing

Banks are not high risk takers. To reduce their exposure to loss, they often ask for collateral. Financing against collateral is called secured financing and is the most common method of raising new money. Banks will advance funds against payment obligations, shipment documents, or stor age documents. The most common method is advancement of funds against payment obligations or documentary title. In this case, the trader pledges the

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goods for export or import as collateral for a loan to finance them. The bank maintains a secure position by accepting as collateral documents that convey title, such as negotiable bills of lading, warehouse receipts, or trust receipts.

How a Banker's Acceptance Works

Another popular method of obtaining secured financing is the banker's acceptance (B/A). This is a time draft presented to a bank by an exporter. (It differs from a trade acceptance between buyer and seller, in which a bank is not involved.) The bank stamps and signs the draft "accepted" on behalf of its client, the importer. By accepting the draft, the bank undertakes and recognizes the obligation to pay the draft at maturity, and has placed its creditworthiness between the exporter (drawer) and the importer (drawee). Banker's acceptances are negotiable instruments that can be sold in the money market. The B/A rate is a discount rate generally 2 to 3 points below the prime rate. With the full creditworthiness of the bank behind the draft, eligible B/As attract the very best of market interest rates. There are specific criteria for eligibility.

1. The B/A must be created within 30 days of the shipment of the goods.

2. The maximum tenor is 180 days after shipment.

3. The B/A must be self-liquidating.

4. The B/A cannot be used for working capital purposes.

5. The credit recipient must attest to no duplication.

Shipping documents: Commercial invoices, bills of lading, insurance certificates, consular invoices, and related documents. Draft: The same as a "bill of exchange." A written order for a certain sum of money to be transferred on a certain date from the person who owes the money or agrees to make the payment (the drawee) to the creditor to whom the money is owed (the drawer of the draft).

Unsecured Financing

In truth, unsecured financing is only for those who have a sound credit standing with their bank or have had long-term trading experience. It usually amounts to expanding already existing lines of working credit. For the small import/export business, unsecured financing will probably be limited to a personal line of credit.

Factors

A factor is an agent who will, at a discount (usually 5 to 8 percent of the gross), buy receivables. Banks do 95 percent of factoring; the remainder is done by private specialists. The factor makes a profit on the collection and provides a source of cash flow for the seller, albeit less than if the business had held out to make the collection itself.

For example, suppose you had a receivable of $1000. A factor might offer you a $750 advance on the invoice and charge you 5 percent on the gross of $1000 per month until

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collection. If the collection is made within the first month, the factor would keep only $50 and return $200. If it takes two months, the factor would keep $100 and return only $150.

The importer benefits from having the cash to reorder products from overseas. For a manufacturer, the benefit can be cash flow available for increased or new production.

Other Private Sources of Financing

The United States has several major private trade financing institutions, all in competition to support your export programs.

PEFCO. The Private Export Funding Corporation (PEFCO) was established in 1970 and is owned by about 60 banks, 7 industrial corporations, and an investment banking firm. PEFCO operates with its own capital stock, an extensive line of credit from the U.S. government's EXIMBank (see below), and the proceeds of its secured and unsecured debt obligations. It provides medium-and long-term loans, subject to EXIMBank approval, to foreign buyers of U.S. goods and services. PEFCO generally deals in sales of capital goods with a minimum commitment of about $1 million-there is no maximum. Contact: PEFCO, 280 Park Avenue (4-West), New York, NY 10017; phone: (212) 916-0300; fax: (212) 2860304; Web: www.pefco.com.

OPIC. The Overseas Private Investment Corporation (OPIC) is a private, self-sustaining institution whose purpose is to promote economic growth in developing countries. OPIC's programs include insurance, finance, missions, contractors' and exporters' insurance, small contractor guarantees, and investor information services. For more information, contact: OPIC, 1615 M Street, NW, Washington, DC 20527; phone: (202) 336-8400; fax: (202) 408- 9859; Web: www.opic.gov.

Government Sources

Many nations are short on foreign exchange, and what they have is earmarked for priority national imports or large international credit commitments. Nevertheless, there are probably more sources of competitive financing available today to support exporting than at any other time in history. The major complaint is that not enough firms are taking advantage of the programs.

Small Business Administration (SBA). All nations support the growth of small business. For example, the U.S. government's Small Business Administration (SBA) guarantees eight- year working capital loans for about 2.25 percent over prime to small companies that can show reasonable ability to pay. The maximum maturity may be up to 25 years, depending on the use of the loan proceeds. The SBA's export revolving-line-of-credit guarantee program provides pre-export financing to aid in the manufacture or purchase of goods for sale to foreign markets and to help a small business penetrate or develop a foreign market. The maximum maturity for this financing is 18 months. The SBA, in cooperation with EXIMBank, participates in loans between $200,000 and $1 million.

EXIMBank. When U.S. exporters find buyers who cannot obtain financing in their own country, the Export-Import Bank of the United States (EXIMBank) may provide credit support in the form of loans, guarantees, and insurance for small businesses. EXIMBank is a

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federal agency to help finance the export of U.S. goods and services. Rates vary but are available for a 5-to 10-year maturity period.

Programs include medium-and long-term loans and guarantees that cover up to 85 percent of a transaction's export value, with repayment terms of a year or longer. Long-term loans and guarantees are provided for over 7 years but not usually more than 10 years. The Medium-Term Credit Program has more than $300 million available for small businesses facing subsidized foreign competition. The Small Business Credit Program also has funds available, with direct credit for exporting medium-term goods; competition is not necessary. The EXIM Working Capital Program guarantees the lender's repayment on capital loans for exports.

Agency for International Development (AID). A subordinate division of the U.S. State Department, AID provides loans and grants to nations for both developmental and foreign policy reasons. Under the AID Development Assistance Program funds are available at rates of 2 percent and 3 percent over 40 years. The AID Economic Development Fund has funds at similar interest rates. Generally, these funds are available through invitations to bid placed in the Commerce Daily Bulletin, a publication-available from the Government Printing Office, Washington, DC 20402.

International Development Cooperation Agency (IDCA). The IDCA Trade and Development Program loans funds on an annual basis to enable friendly countries to procure foreign goods and services for major development projects. Often, these funds support smaller firms in subcontract positions.

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AVOIDING RISK

Doing business always involves some risk, so you should expect across-border business to be no different. A certain amount of uncertainty is always present in doing business across international borders, but much of it can be hedged, managed, and controlled. All major exporting countries have arrangements to protect exporters and the bankers who provide their funding support. Avoiding and/or controlling risks in global trade is an everyday occurrence for importers and exporters. Understanding the instruments available for avoiding risk is not difficult but is vital. There are essentially four kinds of risks:

Most risks allow for a method of avoidance. Of course, there is no insurance against a dispute over quality or loss of market as a result of competition, but there are management instruments for three aspects of risk: not being paid, transport loss or damage, and foreign exchange exposure.

Avoidance of Commercial Risk

The seller wants to be certain that the buyer will pay on time once the goods have been shipped. The goal is at least to minimize risk of nonpayment. On the other hand, the buyer wants to be certain that the seller will deliver on time and that the goods are exactly what the buyer ordered.

These concerns are most often heard from anyone beginning an import/export business. Mistrust across international borders is natural; after all, there is a certain amount of mistrust even in our own culture. One key to risk avoidance is a well-written sales contract. In Chapter 3 you learned that an early step in the process of international trade is to gain contract agreement between yourself and your overseas business associate. The terms should include method of payment.

Getting Paid

Ensuring prompt payment often worries exporters more than any other commercial risk. The truth is that the likelihood of a bad debt from an international customer is very low. In the experience of most international businesses, overseas bad debts seldom exceed 0.5

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percent of sales. The reason is that in overseas markets, credit is still something to be earned as a result of having a record of prompt payment. Use common sense in extending credit to overseas customers, but don't use tougher rules than you apply to domestic clients.

The methods of payment, in order of decreasing risk to the seller and increasing risk to the importer, are open account, consignment, time draft, sight draft, authority to purchase, letter of credit, and cash in advance. Table 5-1 summarizes the various methods of payment.

Open Account. The open account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment. Though the riskiest, this method is used by many firms that have a long-standing business relationship with the same overseas buyer. Needless to say, the key is to know your buyer and your buyer's country. You should use an open account when the buyer has a continuing need for the seller's product or service. Some experienced exporters say that they deal only in open accounts. But they always preface that statement by saying that they have close relationships and have been doing business with their overseas clients for many years. An open account can be risky unless the buyer is of unquestioned integrity and has withstood a thorough credit investigation. The advantage of this method is its ease and convenience, but with open-account sales, you bear the burden of financing the shipment. Standard practice in many countries is to defer payment until the merchandise is sold, sometimes even longer. Therefore, among the forms of payment, open- account sales require the greatest amount of working capital. In addition, you bear the exchange risk if the sales are quoted in foreign currency. Nevertheless, competitive pressures may force the use of this method.

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HOT TIP: Relationships between buyer and seller make the difference by reducing mistrust. Make an effort to meet and get to know your trading partner.

Consignment. In a consignment arrangement, the consignor (seller) retains title to the goods during shipment and storage of the product in the warehouse or retail store. The consignee acts as an agent, selling the goods and remitting the net proceeds to the consignor. Like open-account sales, consignment sales can be risky and lend themselves only to certain kinds of merchandise. Great care should be taken in working out this contractual arrangement. Be sure it is covered with adequate risk insurance.

Bank Drafts. Payment for many sales is arranged using one of many time-tested banking methods. Bank drafts (bills of exchange) are written orders that activate payment either at sight or at "tenor," a future time or date. Each is useful under certain circumstances.

A bank draft is a check, drawn by a bank on another bank, used primarily when it is necessary for the customer to provide funds payable at a bank in some distant location. The exporter who undertakes this payment method can offer a range of payment options to the overseas customer.

Time (Date) Draft. The time draft is an acceptance order drawn by the exporter on the importer (customer), payable a certain number of days after "sight" (presentation) or days from date to the holder. Think of it as nothing more than an IOU, or promise to pay in the future.

Documents such as negotiable bills of lading, insurance certificates, and commercial invoices accompany the draft and are submitted through the exporter's bank for collection. When the draft is presented to the importer's bank, the importer acknowledges that the documents are acceptable and commits to pay by writing "accepted" on the draft and signing it. The importer normally has 30 to 180 days, depending on the draft's term, to make payments to the bank for transmittal.

Sight Draft. The sight draft is similar to the time draft except that the importer's bank holds the documents until the importer releases the funds. Sight drafts are the most common method employed by exporters throughout the world. They are nothing more than written orders in standardized bank format requesting money from the overseas buyer. Although this method costs less than the letter of credit (defined below), it has greater risk because the importer can refuse to honor the draft.

Bill of lading: A document that provides the terms of the contract between the shipper and the transportation company to move freight between stated points at a specified charge. Commercial or customs invoice: A bill for the goods from the seller to the buyer. It is one method used by governments to determine the value of the goods for customs valuation purposes. At sight: A term indicating that a negotiable instrument is to be paid upon presentation or demand.

Authority to Purchase. Authority to purchase is occasionally used in the Far East. It specifies a bank where the exporter can draw a documentary draft on the importer's bank. The problem with this method is that if the importer fails to pay the draft, the bank has "recourse" to the exporter for settlement. Therefore, before consenting to an authority to

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purchase, the exporter may wish to specify "without recourse" and so state on drafts.

The major risk with the time, sight, and authority to purchase methods is that the buyer can refuse to pay or to pick up the goods. The method of avoidance is to require cash or a sight draft against documents. Unfortunately, banks are slow in transferring funds because they want to use the time float (short-term investment of bank money) to earn interest. Using a wire transfer can get around the delay.

Letter of Credit (L/C). Ideally an exporter deals only in cash, but in reality few businesses are initially able or willing to operate under those terms. Because of the risk of nonpayment due to insolvency, bankruptcy, or other severe deterioration, procedures and documents have been developed to help ensure that foreign buyers honor their agreements.

The most common form of collection is payment against a letter of credit (L/C). The L/C is the time-tested method whereby an importer's bank guarantees payment to the exporter if all documents are presented in exact conformity with the terms of the L/C. The procedure is not difficult to understand, and most cities have bank personnel familiar with the mechanics of L/Cs.

This method is well understood by traders around the world, is simple, and is as good as your bank. Internationally the term documentary credit is synonymous with letter of credit. L/Cs involve thousands of transactions and billions of dollars every day in every part of the world. They are almost always operated in accordance with the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, a code of practice that is recognized by banking communities in 156 countries. A Guide to Documentary Operations, which includes all the standard forms, is available from: ICC Publishing Corporation, Inc., 156 Fifth Avenue, Suite 302, New York, NY 10010; phone: (212) 206-1150; fax (212) 633-6025; Web: www.iccbooks.com.

An L/C is a document issued by a bank at the importer's or buyer's request in favor of the seller. It promises to pay a specified amount of money upon receipt by the bank of certain documents within a specified time or at intervals corresponding with shipments of goods. It is a universally used method of achieving a commercially acceptable compromise. Think of a letter of credit as a loan against collateral wherein the funds are placed in an escrow account. The amount in the account depends on the relationship between the buyer and the buyer's bank.

Standby LICs. Sometimes when dealing in an open account, the exporter requires a standby L C. This means just what the name implies-the LC is executed only if payment is not made within the specified period, usually 30 to 60 days. Bank handling charges for standby letters of credit are usually higher than for commercial (import) L/Cs.

Typically, if you don't already have an account, the bank will require 100 percent collateral. With an account, the bank will establish a line of credit against that account.

Commercial letter of credit charges are competitive, so you should shop around. Typical charges are shown in Table 5-2.

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Issuing, Confirming, and Advising Banks. As noted, letters of credit are payable either at sight or on a time draft basis. Under a sight L/C, the issuing (buyer's) bank pays, with or without a draft, when satisfied that the presented documents conform with the forms. An advising bank (most often the confirming or seller's bank) informs the seller or beneficiary that an L/C has been issued. Confirmation means that a local bank guarantees payment by the issuing bank. Under a time (acceptance) L/C, once the associated draft is presented and found to be in exact conformity, the draft is stamped "accepted" and can then be negotiated as a banker's acceptance by the exporter, at a discount to reflect the cost of money advanced against the draft.

Once the buyer and the seller agree to use an L/C for payment, and have worked out the conditions, the buyer or importer applies for the L/C at his or her international bank. Figure 5-1 is an example of a letter of credit application.

Types o f L / Cs. There are two types of letters of credit: revocable and irrevocable. Revocable credit means that the document can be amended or canceled at any time without prior warning or notification of the seller. Irrevocable credit means that the terms of the

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document can be amended or canceled only with the agreement of all parties thereto.

Using the application as its guide, the bank issues a document of credit incorporating the terms agreed to by the parties. Figure 5-2 exemplifies an L/C.

Figure 5-3 shows the three phases of documentary credit in their simplest form. In Phase I, the buyer's (issuing) bank notifies the seller through an advising bank or the seller's (confirming) bank that a credit has been issued. In Phase II, the seller then ships the goods and presents the documents to the bank, at which time the seller is paid. In Phase III, the "settlement" phase, the documents are transferred to the buyer's bank, whereupon the buyer pays the bank any remaining moneys in exchange for the documents. Thus, on arrival of the goods, the buyer or importer has the proper documents for entry.

Special Middleman Uses of the Letter of Credit. There are three special uses of commercial letters of credit for the import/export middleman: transferable, assignment of proceeds, and back-to-back L/Cs. Figure 5-4 compares the risks involved with each method.

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Fig. 5-1. Request to open a letter of credit

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Fig. 5-1. Request to open a letter of credit (Continued)

Transferable LIC. Figure 5-5 shows how the transferable L/C works. The buyer opens the L/C, which states clearly that it is transferable on behalf of the middleman as the original beneficiary, who in turn transfers all or part of the L/C to the supplier. The transfer must be made under the same terms and conditions as the original L/C with the following exceptions: amount, unit price, expiration date, and shipping date. In this instance the buyer and supplier are usually disclosed to each other.

Assignment of Proceeds. Figure 5-6 illustrates the assignment of proceeds method, and Figure 5-7 shows a typical letter of assignment. It should be noted that the proceeds of all letters of credit may be assigned. In this instance the buyer opens the [IC as the beneficiary and relies on the middleman to comply so that he can be paid. Any discrepancy in middleman documents will prevent payment under the IJC. The middleman instructs the advising bank to effect payment to the supplier when the documents are negotiated. In this way, buyers and sellers are not disclosed to each other.

Back-to-Back L/C. When using the back-to-back method, shown in Figure 5-8, the middleman must have a line of credit.

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Fig. 5-2. Sample letter of credit

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Fig. 5-3. The three phases of a letter of credit

Fig. 5-4. Comparison of L/C risks

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Fig. 5-5. Transferable letter of credit

The reason is that the middleman is responsible for paying the second (backing) L/C regardless of receipt of payment under the first (master) L/C. Great care should be exercised when using this method because discrepancies on the first L/C will result in nonpayment, and the middleman's ability to pay could be a substantial credit risk. Back-to- back L/Cs should be issued on nearly identical terms and must allow for third-party documents.

Cash in Advance. Cash in advance is the most desirable method of getting paid, but the foreign buyer usually objects to tying up his or her capital. On the grounds that seeing the merchandise is the best insurance, most foreign buyers try not to pay until they actually receive the goods. Furthermore, a buyer may resent the implication that he or she is not creditworthy.

Avoiding Bad Credit

Pick your customer carefully. Bad debts are more easily avoided than rectified. If there are payment problems, keep communicating and working with the firm until the matter is settled. Even the most valued customers have financial problems from time to time. If nothing else works, request your department of industry or commerce or the International Chamber of Commerce to begin negotiations on your behalf.

Information that is current and accurate is the backbone of good financing decisions. Basically there are two types of international credit information: (1) the ability and willingness of importing firms to make payment, and (2) the ability and willingness of foreign countries to allow payment in a convertible currency.

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Fig. 5-6. Assignment of proceeds

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Fig. 5-7. Typical letter of assignment

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Fig. 5-8. Back-to-back letter of credit

There are several sources of credit information on companies and their countries.

Information About Domestic Firms

• Commercial banks

• Commercial credit services, such as Dun & Bradstreet

• Trade associations

Information About Foreign Firms

• National Association of Credit Management (NACM)

• Foreign credit specialists in the credit departments of large exporting companies

• Commercial banks, which check buyer credit through their foreign branches and correspondents

• Commercial credit reporting services, such as Dun & Bradstreet

• Consultations with EXIMBank and the Foreign Credit Insurance Association (FCIA)

• The U.S. Commerce Department's World Trade Directory Reports

Information About Foreign Countries

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• World Bank

• Chase World Information Corporation

• Institutional Investor magazine

• National Association of Credit Management (NACM)

Avoiding Shipping Risks

Marine cargo insurance is an essential business tool for import/export. Generally, coverage is sold on a warehouse-to-warehouse basis (i.e., from the sender's factory to the receiver's platform). Coverage usually ceases a specific number of days after the shipment is unloaded. Policies are purchased on a per shipment or "blanket" basis. Freight forwarders usually have a blanket policy to cover clients who do not have their own policy. Most insurance companies base cargo insurance on the value of all charges of the shipment (freight handling, etc.) plus 10 percent to cover unseen contingencies. Rates vary according to product, client's track record, destination, and shipping method.

Ocean cargo insurance costs about $0.50 to $1.50 per $100 of invoice value. Air cargo is usually about 25 to 30 percent less.

Avoiding Political Risk

No two national export credit systems are identical. However, there are similarities, the greatest of which is the universal involvement of government through the export credit agency concerned and of the commercial banking sector through the workings of the system.

Most countries have export-import banks. In the United States, EXIMBank provides credit support in the form of loans, guarantees, and insurance. All EXIM branches cooperate with commercial banks in providing a number of arrangements to help exporters offer credit guarantees to commercial banks that finance export sales. The Overseas Private Investment Corporation (OPIC) and the Foreign Credit Insurance Association (FCIA) also provide insurance to exporters, enabling them to extend credit terms to their overseas buyers. Private insurers cover the normal commercial credit risks; EXIMBank assumes all liability for political risk.

For more information on FCIA, contact: FCIA, Marketing Department-11th Floor, 40 Rector Street, New York, NY 10006; phone: (212) 306-5000; fax: (212) 306-5218.

The programs available through OPIC and FCIA are well advertised and easily available. Commercial banks are essentially intermediaries to EXIMBank for export guarantees on loans (beginning at loans up to 1 year and ending at loans of 10 to 15 years). FCIA offers insurance in two basic maturities: (1) a short-term policy of up to 180 days, and (2) a medium-term policy from 181 days up to 5 years. You may also obtain a combination policy of those maturities. In addition, FCIA has a master policy offering blanket protection (one policy designed to provide coverage for all the exporter's sales to overseas buyers).

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Avoiding Foreign Exchange Risk

When the dollar is strong-as strong as it was in the early 1980s-traders prefer to deal in the dollar. When the opposite is true, traders begin to deal in other currencies. Of course, the dollar is as good as gold because it is a politically stable currency that is traded internationally. Because of its stability, it has become the vehicle currency for most international transactions.

So long as exporters deal only in their own currency, there is no foreign exchange risk. However, the strength and popularity of currencies are cyclical, and the dollar is not always the leader. Often, an exporter is faced with the prospect of pricing products or services in currencies other than dollars. Importers must buy foreign currency to pay for products and services from risk-avoiding foreign suppliers that demand payment in their own currency. In the current era of floating exchange rates, there are risks of exposure whenever cash flows are denominated in foreign currencies.

Exposure: The effect on a firm or an individual of a change in exchange rates.

Forward or future exchange rate: The rate (agreed-on price) that is contracted today for the delivery of a currency at a specified date in the future.

Hedging (covering): Use of the forward foreign exchange market to avoid foreign currency risk.

Successfully managing currency risk is imperative. No longer can an importer or exporter speculate by doing nothing, then pass foreign exchange losses on to customers in the form of higher prices. The best decision for an import/export business is to hedge or cover in the forward market when there is risk of exposure. To do otherwise is to be a speculator, not a businessperson. Use the forward rate for the date on which payment is required. This avoids all foreign exchange risk, is simple, and is reasonably inexpensive. The cost of a forward contract is small-the difference between the cost of the spot market (today's cost of money) and the cost of the forward market. Major international banks and brokerage houses can help you arrange a foreign exchange forward contract. Spot and forward markets are quoted daily in the Journal of Commerce and the Wall Street Journal.

Agency/Distributor Agreements

Chapter 3 explored your relationship with overseas distributors. A manufacturer or import/export business will seldom agree to all a distributor's conditions. Most terms are negotiable, and a firm that is not internationally known may have to grant more demands than one that enjoys a more favorable position. The following tips may help you avoid risk in doing business with distributors:

1. Put the agency agreement in writing. The rights and obligations resulting from a written agreement require no extraneous proof and are all that is necessary to record or prove the terms of a contract in most countries.

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2. Set forth the benefit to both parties. Well-balanced agreements should not place an excess of profitless burden on one of the parties. Performance of the agreement may be im possible to enforce against a party that has no apparent benefit from it.

3. Give clear definition and meaning to all contract terms. Many English terms that are spelled similarly in other languages have entirely different meanings. Require that the English version prevail when there is doubt. To avoid conflict, use INCOTERMS (see Chapter 2).

4. Expressly state the rights and obligations of the parties. The agency contract should contain a description of the rights and duties of each party, the nature and duration of the relationship, and the reasons for which the agreement may be terminated.

5. Specify a jurisdictional clause. If local laws allow it, specify a jurisdiction to handle any legal disputes that may arise. When possible, use arbitration. Basic arbitration rules and principles are universal. Clauses in the contract should identify the arbitration body or forum. Model arbitration clauses may be obtained from the American Arbitration Association, 140 West 51st Street, New York, NY 10020; phone (212) 484-4000, fax: (212) 765-4874; or from the U.S. Council for International Business, 1212 Avenue of the Americas, New York, NY 10036; phone: (212) 354-4480; fax: (212) 575-0327; Web: www.uscib.org.

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PHYSICAL DISTRIBUTION (SHIPPING AND PACKING)

Physical distribution, often referred to as logistics, is the means by which goods are moved from the manufacturer in one country to the customer in another. This section discusses two vital aspects for which the importer/exporter should have an appreciation: shipping and packing.

Shipping

The import/export business can directly arrange its own land, ocean, and air shipping of international cargo. Inland transportation is handled in much the same way as a domestic transaction, except that certain export marks must be added to the standard information shown on a domestic bill of lading. Also, the inland carrier must be instructed to notify the ocean or air carrier.

Water Transportation

There are three types of ocean service: conference lines, independent lines, and tramp vessels. Conference lines are associations of ocean carriers that have joined together to establish common rates and shipping conditions. Conferences have two rates: the regular tariff and a lower, contract rate. You can obtain the lower rate if you sign a contract to use conference vessels exclusively during the contract period. Independent lines accept bookings from all shippers contingent on the availability of space, and are often less expensive than conference lines. An independent usually quotes rates about 10 percent lower than a conference carrier in situations where the two are in competition. Tramp vessels usually carry only bulk cargoes and do not follow an established schedule; rather, they operate on charters.

Regardless of the type of carrier you use, the carrier will issue a booking contract, which reserves space on a specific ship. Unless you cancel in advance, you may be required to pay even if your cargo doesn't make the sailing. You must be insured with ocean marine insurance. An insurance broker or your freight forwarder can arrange the coverage for you.

Marine insurance: Insurance that compensates the owner of goods transported overseas (by ship or air) in the event of loss that would not be legally recovered from the carrier.

Air Transportation

Air freight continues to grow as a popular and competitive method for shipping international cargoes. The growth has been facilitated by innovation in the cargo industry. Air carriers have excellent capacity, use very efficient loading and unloading equipment, and handle standardized containers. The advantages are (1) the speed of delivery, which gets perishable cargoes to the place of destination in prime condition, (2) the ability to respond to unpredictable product demands, and (3) the rapid movement of repair parts.

Air freight moves under a general cargo rate or a commodity rate. A special unit load

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rate is available when approved air shipping containers are used.

Land Transportation

Transportation over land has become less regulated and, therefore, more competitive and efficient. The largest import/export market (NAFTA) can be served directly by road and rail. Importers and exporters look primarily to land transportation to move their goods to the nearest port of departure or as one leg of a sea/land/air combination often referred to as intermodalism.

Intermodalism

The movement of international shipments via container using sequential transportation methods is the system of the future. The concept makes use of the most efficient and cost- effective methods to move goods.

Load Centers. The load center concept stimulated the sophistication of today's intermodal world. As ships grew to hold more containers, they became more expensive to operate. One way to reduce costs was to hold down the number of port calls. In order to fill the ships at fewer ports, the cargo had to be funneled into load centers. The simplification and organization of movements of cargo have become the "fair-haired child" of transportation specialists. An entirely new set of terms has developed around the concept.

Land Bridges. A microbridge routes a container to or from any port in a given country. A minibridge moves a container that originates or terminates in a domestic port other than the one where it enters or leaves the country. A land bridge off-loads a container at any domestic port, ships it cross-country by rail, then reloads it aboard a vessel for final movement to a foreign destination. The RO RO (roll onroll off) capability of containerized cargo is the foundation of intermodalism.

An example of intermodalism is a container of goods originating in Europe but destined for Japan. The cargo could be rolled off a European ship by truck then onto a train in Newport News, Virginia (RO/RO), where it would be joined by another container trucked in from Florida (minibridge), also destined for Japan. The containers would be moved by train across the United States (land bridge) and then rolled onto a ship in Long Beach, California, to complete the movement to Tokyo. Figure 5-9 illustrates the intermodal concept.

HOT TIP: If the details of transportation and all the "newfangled" ideas are not for you, then see your nearest freight forwarder, as explained in Chapter 7.

Packaging and Marking for Overseas Shipment

Whether importing or exporting, you must ship your product thousands of miles in an undamaged condition. Your package must protect against breakage, dampness, careless storage, rough handling, thieves, and weather. Insurance might cover the loss, but lost time and the ill will of your overseas trading partner are a high price to pay. It has been estimated that as much as 70 percent of all cargo loss could be prevented by proper packaging and marking.

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An excellent source on all aspects of packing and packaging is the Modern Packaging Encyclopedia, published annually by McGraw-Hill.

Breakage. Ocean cargo is often loaded roughly onto ships by stevedores using forklifts, slings, nets, and conveyors. During the voyage, rough water and storms can cause loads to shift and sometimes crash into other containers. Even small packages sent through the mails can be squeezed, thrown, or crushed.

Assume the worst when packaging for overseas delivery. Use stronger and heavier materials than you do for domestic shipments. On the other hand, don't overpack-you pay by weight and volume. For large ocean shipments, consider standardized containers that can be transferred from truck or rail car without opening.

Fig. 5-9. The intermodal concept

Pilferage (Theft). Use strapping and seals, and avoid trademarks or content descriptions.

Moisture and Weather. The heat and humidity of the tropics as well as rainstorms and rough weather at sea can cause moisture to seep into the holds of a ship. From that moisture comes fungal growths, sweat, and rust. Waterproofing your shipment is essential for most ocean shipments. Consider plastic shrink-wrap or waterproof inner liners and coat any exposed metal parts with grease or other rust inhibitors.

Marking (Labeling). Foreign customers have their needs, shippers have theirs, and terminal operators have theirs. Each will specify certain marks (port, customer identification code, package numbers, and number of packages) to appear on shipments. Other markings such as weight, dimensions, and regulations that facilitate clearing through customs can be specified. Figure 5-10 is a sample of markings.

Checklist for Shipping

• Write your customer's name and address or shipping code on the package.

• Use black waterproof ink for the stencils.

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• Include port of exit and port of entry on your label.

• Don't forget package and case number.

• Include dimensions (inches and metric units).

• Mark exports "Made in U.S.A." to get through customs in most foreign countries.

• Express gross and net weight in pounds and/or kilograms.

• Don't forget cautionary markings such as "This side up" and "Handle with care" in both languages.

• Don't use brand names or advertising slogans on packages.

• Make sure that shipments of explosives or volatile liquids conform to local law and international agreements.

Fig. 5-10. Example of markings

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DOCUMENTATION

"Attention to detail" is the byword when preparing documentation. The naive pass off paperwork as a by-product of the transaction, but the experienced trader knows that shipments can be detained on the pier for weeks because of inattention. As ex-Yankee catcher Yogi Berra once said, "It ain't over till it's over," and that's the way it is in international trade. The exporter doesn't get his or her money and the importer doesn't get his or her goods unless the paperwork is complete and accurate. Therefore, be attentive to detail.

Basically, documentation falls into two categories: shipping and collection.

Shipping Documents

Shipping documents permit an export cargo to be moved through customs, loaded aboard a carrier, and shipped to its foreign destination. These documents include:

• Export licenses

• Packing lists

• Bills of lading

• Export declarations

Collection Documents

Collection documents are those needed for submission to the importer (in the case of a draft) or to the importer's bank (in the case of an L/C) in order to receive payment. These documents include:

• Commercial invoices

• Consular invoices

• Certificates of origin

• Inspection certificates

• Bills of lading

When a negotiable bill of lading is endorsed by the shipper, you can use it as a sight draft or for L/C shipments. Other documents sometimes required for collection are manufacturing and insurance certificates and dock or warehouse receipts. Keep in mind that customs house brokers and freight forwarders are specialists in documentation as well as physical distribution.

Collection: The procedure whereby a bank collects money for a seller against a draft drawn on a buyer abroad, usually through a correspondent bank.

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The Documents

This section describes the various documents in detail and provides samples of each.

Certificate of Origin. The certificate of origin certifies to the buyer the country in which the goods were produced. A recognized officer of the manufacturing corporation usually signs the certificate of origin of merchandise. Some countries require a separate certificate, sometimes countersigned by a chamber of commerce and possibly even visaed by the resident consul at the port of export. These statements are required to indicate preferential rates of import duties such as "most favored nation." Often, as little as 35 percent of a nation's materials and/or labor can qualify it for favorable duties. Some nations require special forms, while others accept a certification on the shipper's own letterhead. Figure 5- 11 is an example of a certificate of origin.

Checklist for Certificates of Origin

• The letter or form should originate from the address of the manufacturer of the product.

• A responsible and knowledgeable person within the manufacturing company (an officer of the corporation) must sign the letter.

• The letter or form will not be accepted if it is from an outside sales office or distributor. It cannot be signed by a salesperson.

• The letter should clearly state where the product in question was manufactured.

Commercial Invoice. The commercial invoice is a bill that conforms in all respects to the agreement between importer and exporter. It may have the exact terms of the pro forma invoice first offered in response to a quotation, or it may differ in those terms that were the result of final negotiations. In any case, there should be no surprises for the importer. The commercial invoice should (1) itemize the merchandise by price per unit and any charges paid by the buyer, and (2) specify the terms of payment and any marks or numbers on the packages. Figure 5-12 shows a commercial invoice.

Consular Invoice. A consular invoice (not required by all countries) is obtained from the commercial attache or through the consular office of that country in the port of export. When required, it is in addition to a commercial invoice and must conform in every respect to that document as well as to the bill of lading and any insurance documents. Its purpose is to allow clearance of a shipment into the country that requires it. Figure 5-13 presents an example.

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Fig. 5-11. Certificate of origin

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Fig. 5-12. Commercial invoice

Commercial attache: The commercial expert on the diplomatic staff of an embassy or large consulate in a foreign country.

Certificate of Manufacture. The certificate of manufacture certifies that the goods ordered by the importer have been produced and are ready for shipment. It may be used in cases when the manufacturer has moved ahead in production with only a down payment, thus allowing the importer to avoid allocation of the full amount too far in advance. Generally, invoices and packing lists are forwarded to the importer along with the

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certificate. Figure 5-14 shows a certificate of manufacture.

Export Licenses. Export licensing procedures are described in detail in Chapter 7 as one of the six topics unique to exporting. They apply to products that a government wants to control closely for either strategic or economic reasons. Certain weapons, technologies, and high-tech products are often set forth on a commodity control list (CCL). Export Administration regulations detail all licensing requirements for commodities under the jurisdiction of the Bureau of Export Administration (BXA), International Trade Administration. Once it has been determined that a license is needed, the "Application for Export License" must be prepared and submitted to the OEA. (See Figure 7-1 in Chapter 7.)

Insurance Certificates. Insurance certificates provide evidence of coverage and may be a stipulation of a contract, purchase order, or commercial invoice in order to receive payment. The certificate indicates the type and amount of coverage and identifies the merchandise in terms of packages and markings. You should make certain that the information on the certificate agrees exactly with invoices and bills of lading. A sample certificate is given in Figure 5-15.

Inspection Certificates. Inspection certificates protect the importer against fraud, error, or poor quality performance. The inspection is most often conducted by an independent firm, but it is sometimes performed by the shipper. An affidavit that certifies the inspection is often required under terms of a letter of credit. For example, a Taiwanese firm wanted to import used diesel generators from the United States. That company insisted that an independent engineer certify satisfactory operation of each generator, at specifications, prior to shipment. Figure 5-16 shows a sample.

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Packing Lists. Apacking list accompanies the shipment and describes the cargo in detail. It includes the shipper, the consignee, measurements, serial numbers, weights, and any other data peculiar to the shipment. The completed list is placed in a waterproof bag or envelop and attached with the words "Packing list enclosed." Figure 5-17 shows a packing list.

Shipper's Export Declaration. In the United States the shipper's export declaration (SED) is prepared by the exporter or freight forwarder for the federal government. It is a data collection document required on all exports in excess of $2500. The declaration is prepared to provide statistical information to the Bureau of the Census and to indicate the proper authorization to export. It is the basis for measuring the volume and types of exports leaving the country. The document requires complete information about the shipment, including description, value, net and gross weights, and relevant license information, thus closing the licensing information loop back to the BXA. Figure 5-18 shows a completed SED.

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Fig. 5-14. Certificate of manufacture

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Bills of Lading. A bill of lading is a contract between the owner of the goods (exporter) and the carrier. It is both evidence that the shipment has been made and a receipt for the goods that have been shipped. Figure 5-19 is an air waybill, or bill of lading for an air carrier. Figure 5-20 is an ocean bill of lading. While e-commerce has not yet reached the bill of lading, it is getting close. Several shipping lines have automated part of the process, and there are indications that a system to replace paper bills of lading with electronic communications will soon be marketed.

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Fig. 5-16. Inspection certificate

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Fig. 5-17. Packing list

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Fig. 5-20. Ocean bill of lading

The straight bill of lading is a nonnegotiable instrument that consigns the goods to an importer or other party named on the document. Once the transaction is consummated, the seller and/or the seller's bank loses title control because the goods will be delivered to anyone who can be identified as the consignee.

The order bill of lading is a negotiable instrument. Unlike the straight bill, it represents the title to the goods in transit and the original copy must be endorsed before it is presented to the bank for collection. In other words, the order bill can be used as collateral in financing-as documentation to discount or sell a draft. L/C transactions specify to whom the endorsement is to be made. Typically, order bills are made "in blank," or to the order of a third party such as a bank or broker. Air bills of lading are usually straight (i.e., nonnegotiable). Ocean bills of lading can be straight or "to order."

To verify shipping performance, the carrier indicates the condition of the goods upon acceptance. A bill of lading marked clean on board means that the carrier accepted the cargo and loaded it on board the vessel without exception.

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A foul bill indicates an exception-the carrier noted some damage on the bill of lading. Discuss the problem with your carrier or freight forwarder to make sure you have an opportunity to exchange any damaged goods and obtain a "clean" bill.

The next chapter explains, from A to Z, how to set up and build your import/export company. It discusses how to decide on a name, how to go about obtaining start-up funds, and, most important, how to think through and write a business plan.

"HOW DO I START MY OWN IMPORT/EXPORT BUSINESS?"

That question is universal. The language might be different, but in any country in the world you will hear the same words.

The answer depends on these questions: Have you done your homework? What is your product? Do you have contacts? Who will buy your product? Is it profitable? Do you have a marketing plan?

By incorporating what you've learned about the fundamentals of import/export in Chapters 2 through 5 with the methods explained in this chapter, you should be ready to start your own import/export business.

The first part of this chapter describes the mechanics of start-up. The second part shows you how to develop a business plan so that you can raise capital and grow.

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