Based on Part 1 of the Handbook of International Trade

1.1 The Rationale for Foreign Trade

There are two basic types of trade between countries:

1. Absolute Need: The receiving country cannot produce the goods/services (e.g., UK importing bananas, China importing copper).
2. Comparative Advantage: Countries import goods they could produce domestically because imported goods are cheaper, offer greater variety, or have superior quality/design.

The Law of Comparative Advantage

Articulated by 19th-century economist David Ricardo, this law concludes that global wealth increases when nations specialize in producing goods where they have a relative advantage and trade for the rest. For example, coal mined in open-cast Australian mines or with low-cost labor in China is shipped to the UK, where deep-mining is high-cost. Specialization is only limited by strategic defense needs, transport costs, and artificial barriers (tariffs/quotas).

1.2 Protectionism and Methods of Protection

During economic slumps, governments protect domestic jobs using Protectionism. Tools are categorized as tariff or non-tariff barriers.

• Tariffs: Import duties levied to generate revenue and make foreign competition difficult. Lowered significantly post-1945 via GATT and the WTO.
• Quotas: Numerical limits on import volume/value.
• Voluntary Export Restraints (VERs): Exporters agree to limit exports to pre-empt stricter measures.
• Domestic Subsidies: Financial aid to local manufacturers (common in EU/US agriculture).
• Import Deposits: Requiring importers to deposit a % of value with the government, hurting cash flow.
• Safety/Health Standards: Stringent technical specs acting as subtle deterrents.

1.3 Regional Trading Blocs & Organizations

Over 60% of world trade is regional. Models include Free Trade Areas (no internal tariffs, individual external tariffs), Customs Unions (common external tariffs), Common Markets (free movement of people/finance), and Economic Unions (common currency/policies, e.g., Eurozone).

Key global organizations include:

• IMF: Regulates exchange rates and provides loans to deficit nations.
• World Bank: Provides preferential loans for developing nations’ infrastructure and manages debt relief (HIPC Initiative).
• WTO (formerly GATT): Enforces ‘most-favoured nation’ treatment, reduces tariffs, and resolves disputes.

1.4 Balance of Payments & Exchange Rates

The Balance of Payments tracks all transactions with the rest of the world. It includes the Balance on Goods (visible trade) and Balance on Services (invisible trade like tourism, shipping, financial services). A persistent deficit (“disequilibrium”) forces a country to draw on reserves or borrow (often from the IMF). Remedies include import controls, export incentives, monetary measures (higher interest rates), or Devaluation (making exports cheaper and imports dearer).

Based on Part 2 of the Handbook of International Trade

2.1 The Marketing Concept vs. The Selling Concept

Marketing is about “making what we can sell, not selling what we can make.” It is a social exchange process centered on Customer Orientation and Profit. The marketing process is governed by the 4 Ps (Marketing Mix): Product, Place (Distribution), Price, and Promotion.

The PESTLE Analysis

International traders face “uncontrollables” in foreign markets. You must adapt to:

• Political/Legal: Regulations, stability, commercial practices.
• Economic: Development level, competition, mixed vs. state-planned economies.
• Socio-cultural: Religion, taste, language (e.g., white = death in Malaysia; purple = voodoo in parts of Africa).
• Technological: Obsolescence, maintenance levels, usage methods.
• Environmental: Green issues, health & safety, recycling.

2.2 Market Selection & Pareto’s Law

Before entering a market, evaluate it based on Potential (demand/growth), Accessibility (tariffs/logistics), and Similarity (cultural/legal alignment).

Pareto’s Law (The 80/20 Rule): Typically, 80% of your trade comes from 20% of your customers. Categorize markets into Class A (Key/Priority), Class B (Declining or Potential), and Class C (No priority, trade only at premium prices).

2.3 Product Modification & Cultural Pitfalls

Very few products are sold identically worldwide. Modifications are required for:

• Climate: Heavy AC for the Middle East; specialized wipers for monsoons.
• Raw Materials: Hindus refused British bone china upon learning it contained cow bones.
• Method of Use: Bicycles are workhorses in Holland, but leisure toys in the US. Depilatory creams are used by men in West Africa as an alternative to shaving.

2.4 Pricing Strategies & Differential Pricing

Exporters must understand the Price-Volume Relationship. The lowest price generates the highest volume, but not necessarily the highest profit. Differential Pricing (charging different prices in different markets) risks Parallel Exports (grey market goods finding their way back home) and Anti-Dumping Legislation (fines if export price is lower than the Current Domestic Value).

2.5 Distribution: Agents vs. Distributors

• Agents: Negotiate sales on your behalf for a commission. Do not take title to goods.
• Distributors: Buy goods at a discount, take ownership, and resell at a profit.

The Commission Calculation Trap

Many exporters lose money by confusing Mark-up with Margin. If you want to pay an agent a 10% commission on a $100 EXW product:

• Wrong: $100 + 10% = $110. Agent takes 10% of $110 ($11). You lose $1.
• Right: Mark up by 11.11%. $100 + $11.11 = $111.11. Agent takes 10% of $111.11 ($11.11). You keep your exact $100.

Based on Part 3 of the Handbook of International Trade

3.1 Overview of Legal Systems in Trade

International trade involves parties from different legal jurisdictions. Understanding the legal framework is essential for every exporter to protect their interests and avoid costly disputes. The two main sources of law are:

• Statutes (Acts of Parliament): Laws passed by the legislature that must be followed by all parties.
• Case Law (Precedent): Court decisions that establish legal principles for future cases. The concept of stare decisis means “let the decision stand” — higher court decisions bind lower courts.

Hierarchy of Courts

Public vs. Private Law

• Public Law: Constitutional law and Criminal Law — administered for the benefit of the general public.
• Private (Civil) Law: Includes Contract Law, Tort Law, Sale of Goods, Agency Law, and Consumer Credit. This is the area most relevant to international trade.

Sources of Law Relevant to Exporters

1. Statutes: Acts of Parliament (e.g., Sale of Goods Act 1979)
2. Decided Cases: Precedents set by courts
3. Delegated Legislation: Rules, Orders, Statutory Instruments made by government ministers
4. Trade Custom: Practices common in a particular trade that can be adopted into law. For example, by trade custom a Marine Insurance broker is held responsible for unpaid premiums of clients.
5. EU Law: Treaties, Regulations, Directives, and Decisions of the European Court of Justice

3.2 The Law of Contract

A contract is an agreement between two or more parties intended to have the force of law. Contracts can be made:

• In writing
• Orally (verbally)
• By conduct (e.g., boarding a bus, buying from a vending machine)
• By any combination of the above

Essential Ingredients of a Valid Contract

1. Offer and Acceptance: There must be a clear offer and an unqualified acceptance that matches exactly. A counter-offer rejects the original offer.
2. Consideration: Something in return. No promise without consideration can be enforced (except a Deed). Consideration must be real but need not be adequate.
3. Capacity: Both parties must have the legal right to enter into binding contracts.
4. Intention (ad idem): Both parties must intend to create legal relations and be making the same contract.
5. True Consent: Absence of operative mistake, duress, misrepresentation, or undue influence.

Offer vs. Invitation to Treat

An offer must be distinguished from:

• A declaration of intention
• A supply of information
• An invitation to treat (e.g., goods displayed in shop windows, advertisements, catalogues, price lists)

An offer can lapse by: death of either party, non-acceptance within stated time, non-acceptance within reasonable time, rejection, or revocation before acceptance.

Acceptance Requirements

• Must be unqualified — correspond exactly with the offer
• Must be communicated to the other party
• Silence does not imply acceptance
• Acceptance “subject to contract” means not binding until formalities completed

The Battle of the Forms

In B2B international trade, both buyer and seller exchange their own standard terms. The key rules are:

• The terms on the last document sent before performance began usually prevail.
• If a seller sends goods on receipt of a buyer’s order without countering with their own terms, the buyer’s terms apply.
• If the buyer is the last party to send their standard form, dispatching goods means accepting their terms by conduct.

Terms of a Contract

Terms are classified as:

• Express Terms: Agreed orally or in writing between parties.
• Implied Terms: Implied by statute, courts, previous dealings, or trade custom.

Terms are further classified by importance:

• Condition: Breach gives right to terminate the contract AND claim damages.
• Warranty: Breach only entitles damages, NOT termination.
• Innominate Term: Can be broken in minor or major way; courts decide remedy.

Breach of Contract — Remedies

Legal Remedies:

• Termination: For breach of condition — contract ends from date of breach.
• Rescission: Cancelling the contract (for misrepresentation).
• Action for agreed sum: Sue for the price of goods/services sold.

Equitable Remedies:

• Specific Performance: Court order to carry out the contract (limited circumstances).
• Injunction: Court order restraining a party from breaching.

Discharge of Contract

A contract can be discharged by:

1. Performance: Both parties complete their obligations.
2. Agreement: Both parties agree to cancel (novation).
3. Breach: One party fails to perform (including anticipatory breach).
4. Frustration: Unforeseen event makes performance impossible (e.g., government requisition, war). NOT self-induced.

Misrepresentation

A misrepresentation is a statement of fact, made before the contract, which is incorrect and induces the innocent party to enter the contract. Types:

• Fraudulent: Deliberate lie or statement known/suspected to be untrue.
• Negligent: Statement the seller ought to have realised was untrue.
• Innocent: Statement the seller reasonably believed to be true.

Remedies include rescission and/or damages depending on the type.

3.3 Sale of Goods in International Trade

The Sale of Goods Act 1979 (amended 1994, 2002) governs the sale of goods. Key points for exporters:

Quality and Suitability

Goods must be of satisfactory quality — meeting the standard a reasonable person would regard as satisfactory, considering description, price, and all relevant circumstances. Aspects include:

• Fitness for all common purposes
• Appearance and finish
• Freedom from minor defects
• Safety
• Durability

Exclusion of Liability

International Supply Contracts are exempted from the Unfair Contract Terms Act 1977. This means:

• Conditions implied by S12-15 of the Sale of Goods Act CAN be excluded by appropriately worded exclusion clauses in international supply contracts.
• An international supply contract is one where parties’ places of business are in different states AND goods are carried between states, OR offer/acceptance done in different states, OR delivery is to a different state.

Delivery and Acceptance

• Wrong quantity: Buyer can accept or reject (subject to slight deviation rule for non-consumers).
• Acceptance occurs when: Buyer intimates acceptance, does act inconsistent with seller’s ownership, or keeps goods beyond reasonable time.
• Effect of acceptance: Reduces breaches of condition to breaches of warranty (damages only, no rejection).

Rights of the Unpaid Seller

• Seller’s Lien: Right to hold goods until payment received.
• Stoppage in Transit: Right to reclaim goods while in transit if buyer is insolvent.
• Right of Re-sale: After exercising lien or stoppage, seller can re-sell if goods are perishable, or after giving notice.
• Romalpa Clause: Reserves title to goods until paid for — places seller at top of creditors list in buyer’s insolvency.

Romalpa Clause (Retention of Title)

This is a powerful weapon for sellers. By inserting a Romalpa clause into the sale contract, the seller reserves legal title (ownership) of goods until they are paid for in full. If the buyer goes bankrupt before paying, the seller can legally reclaim goods, placing themselves ahead of the buyer’s secured bank creditors in liquidation proceedings.

3.4 EU Competition Law

EU Competition Law is contained in Articles 81 and 82 of the Treaty of Rome:

Article 81 — Anti-Competitive Agreements

Prohibits agreements between undertakings that prevent, restrict, or distort competition, including:

• Fixing purchase/selling prices
• Limiting production, markets, or investment
• Sharing markets or sources of supply
• Applying dissimilar conditions to equivalent transactions
• Making contracts subject to unrelated supplementary obligations

Article 82 — Abuse of Dominant Position

Prohibits abuse of dominant market position, including:

• Imposing unfair prices or trading conditions
• Limiting production to prejudice of consumers
• Applying dissimilar conditions to equivalent transactions
• Tying unrelated obligations to contracts

3.5 The Law of Agency

An Agent is a person employed by their Principal to make contracts with Third Parties. Agency is a contract and can be created orally, in writing, by conduct, or by necessity.

Types of Agent

Specialised Agents in International Trade

• Confirming Houses: Find suppliers for foreign buyers, confirm/guarantee the sale to the seller. If buyer doesn’t pay, the confirming house is liable.
• Del Credere Agents: Guarantee payment for additional commission. NOT liable if buyer refuses delivery — only if buyer takes delivery but doesn’t pay.
• Freight Forwarders / CTOs: May act as principal or agent depending on contract.

Commercial Agents Regulations 1993

Key provisions:

• Duty on agent to comply with principal’s reasonable instructions
• Duty on principal to provide necessary documentation and information
• Agent entitled to commission on repeat orders (even without new work)
• Minimum notice periods: 1 month (year 1), 2 months (year 2), 3 months (year 3+)
• Agent has right to claim compensation on termination (except for breach)

Key Clauses in an Agency Agreement

• Statement of parties and purposes
• Description of goods and territory
• Duties of principal (literature, samples, training, commission levels)
• Duties of agent (no competitive goods, no selling outside territory, maintain records, provide reports)
• Commission calculation and payment
• Limitation of powers
• Force majeure
• Duration, termination, notice period
• Governing law and arbitration
• Del credere clause

3.6 Conflict of Laws and Jurisdiction

When dealing with overseas buyers, the exporter must consider:

• Which court has jurisdiction?
• Which law will that court apply?

Recommended Conditions of Sale

Exporters should include:

• Every contract is subject to the seller’s conditions of sale
• Seller retains property in goods until payment received in full
• Seller entitled to add costs for variations between quotation and delivery dates
• All warranties/guarantees other than those stated are expressly excluded
• Contract governed by law of England; disputes submitted to London Court of Arbitration

Sovereign Immunity

The State Immunity Act 1978 limits sovereign immunity. A state has immunity only in its full official capacity. Commercial transactions between a foreign government and companies are NOT immune. Ships owned by the state are liable to seizure. Assets used for commercial purposes are liable to seizure; only diplomatic assets are immune.

Based on Part 4 of the Handbook of International Trade

4.1 The Export Office

The fundamental functions of an export department can be broken down into just two areas:

• Sales — order getting
• Shipping — order filling

Add to these the need for overall management control and the whole department revolves around those three functions.

Typical Export Office Structure

The Export Order Process — Logical Sequence

Whatever the size of the operation, there is a logical sequence of tasks necessary to develop an initial enquiry into a profitable payment:

1. Enquiry
2. Quotation
3. Order
4. Order Acknowledgement
5. Order Process and Progress
6. Packing and Marking
7. Space Booking
8. Documents Prepared:
   • Transport
   • Customs
   • Insurance
   • Payment
9. Goods Despatched
10. Payment Received

Handling the Enquiry

The enquiry is the beginning of the process. It may come from personal contact, advertising, recommendation, or a regular buyer returning. Careful examination should use a checklist:

• Does the enquiry require translating?
• Is it a new or regular customer?
• Are there UK export restrictions (e.g., export licensing)?
• Are there buyer’s country restrictions (e.g., import licensing)?
• Does the enquiry match our product/service specifications? What modifications are required?
• Can we produce the quantity required in the time required?
• What delivery terms are requested?
• What payment method and terms are requested?
• Has a status report been taken on the buyer?
• What is the most suitable mode of transport?
• Are there special packing/marking requirements?
• Are there special documentation requirements?
• What insurance is required?
• What ancillary (third party) costs need to be built into the price?

4.2 The Export Quotation

The quotation is where many businesses lose money. A proper export quotation must include:

Essential Information in a Quotation

Goods Description

The description of goods is directly relevant to tariff and non-tariff barriers at destination. Careful consideration of wording is needed even at this early stage. If choices exist, it can be advantageous to be selective with product descriptions.

Price — The Most Critical Element

Two key points:

1. The price makes no sense without a specific Incoterm (e.g., FCA, FOB, CIP, CIF).
2. The actual calculation must be accurate. Most exporters get EXW correct but additional costs are often “guesstimates.”

Delivery (Lead Time)

Terms and Method of Payment

The exporter’s estimate of risk should lead to sensible choices. Credit risk in international trade is worse than ever — many nations are effectively bankrupt. Credit risk management starts at the BEGINNING of the process, not at the end when trying to collect money.

Order Acknowledgement (Acceptance)

In English law, a quotation is an invitation to treat. The buyer’s order is an offer to buy. The seller’s acknowledgement is the acceptance. This means terms and conditions can be defined in the order acceptance — they become the SELLER’s terms.

4.3 Forms of Export Quotation

1. Verbal Quotation

Price and delivery given in meetings or by telephone. MUST be confirmed in writing immediately. “A verbal contract isn’t worth the paper it’s written on.”

2. Standard Letter/Email

Most common form. No specific format required as long as it contains all relevant information.

3. Tender Documents

Common when dealing with overseas governments or state buying agencies. Problems include:

• No standard format — time-consuming to complete correctly
• Requirement for Tender Bonds (bank guarantee compensating buyer if tenderer withdraws)
• Requirement for Performance Bonds (guarantee if seller doesn’t perform — can be valid for 6+ years)
• Most governments insist on unconditional (“on demand”) guarantees — buyer simply calls the bond and bank pays without proof of breach

4. Pro-Forma Invoice

Primary function: demonstrate what the final invoice will look like. Two major uses:

• Import Licensing: Developing countries require specific import licences. Buyer uses pro-forma to provide information to authorities before ordering.
• Advance Payment: Obtaining cash with order. Final invoice should be marked “For Customs Valuation Purposes Only.”

4.4 Risk Assessment

Before deciding payment method, carry out informed risk assessment:

The Payment Risk Ladder

Country Risk

Assessed by organisations like Dun & Bradstreet (International Risk and Payment Review):

Buyer Risk

Sources of information:

• Trade references: From other UK companies they deal with
• Bank report: At least confirms they exist
• Credit report: From specialist agencies (more expensive but detailed)
• Credit risk insurers: Provide written credit limits on new buyers

4.5 International Delivery Terms (Incoterms)

Incoterms are published by the International Chamber of Commerce (ICC Publication No. 560 — Incoterms 2000). They provide definitive definitions of 13 trade terms, breaking down seller’s and buyer’s duties.

What Incoterms Define

1. Costs: What is included/excluded in the quoted price
2. Delivery: Responsibilities for transport and documentation
3. Risk: The exact point where risk passes from seller to buyer

The Four Groups of Incoterms

Detailed Explanation of Key Incoterms

EXW — Ex Works

The “lazy exporter’s term.” Easiest for seller. Named place is invariably seller’s loading bay, BEFORE loading. Buyer responsible for collection, transport, export clearance, and all costs. Risk passes when goods “placed at disposal of buyer.” Seller has NO responsibility for loading.

FOB — Free On Board

Seller responsible until goods “have passed the ship’s rail at named port of shipment.” Major issue: FOB is only accurate for traditional conventional sea freight. Inappropriate for containerised, air, road, rail, express, or courier services.

FCA — Free Carrier

Replaces FOB for modern multimodal transport. Seller delivers goods to “carrier nominated by buyer at named place.” Named place is usually inland depot for LCL or seller’s premises for FCL.

CIF / CFR — Cost Insurance & Freight / Cost & Freight

Like FOB — appropriate only for conventional sea freight. Seller arranges and pays international carriage (and insurance for CIF). BUT risk ends when goods “pass the ship’s rail at port of shipment.” These are “shipment contracts” NOT “arrival contracts.”

CIP / CPT — Carriage & Insurance Paid / Carriage Paid To

Multimodal versions of CIF/CFR. Risk passes when goods delivered to “first carrier at named place.”

DDP — Delivered Duty Paid

Opposite of EXW. Most onerous for seller. Seller must place goods “at disposal of buyer, not unloaded, at named place of destination.” Seller arranges and pays import customs formalities, duty, tax, excise. These are “arrival contracts.”

4.6 Price Calculation

Accurate export pricing depends on the trade term. Components build up from EXW base:

Based on Part 5 of the Handbook of International Trade

The modern exporter faces not only a range of transport modes (sea, air, road, rail) but also a wide variety of specialized services within each mode. Understanding the full range of modern freight services is essential to competing effectively in world markets. This module covers freight forwarders, modes of transport, packing and marking, transport documentation, and dangerous goods regulations.

5.1 Freight Forwarders

Most exporters, and nearly all importers, use freight forwarders. Their basic function is to act as intermediaries between shippers (with goods to send) and carriers (with space to be filled).

Services Provided by Forwarders

• Advice: Specialist knowledge of transport and customs procedures that can save traders significant time and money, both in legal compliance and selection of optimum procedures.
• Documentation: Completion of the wide range of documents required for international shipments. Some exporters produce nothing but an invoice and leave all other documents to their agent.
• Customs Clearance: Arranging export and import customs declarations on behalf of traders. The majority of declarations are completed by agents on behalf of traders.
• Transport Booking: Booking space with carriers, often at more efficient rates than individual traders could negotiate.
• Groupage: Combining several exporters’ smaller consignments (Less than Container Loads – LCL) into one full container load (FCL).

Additional Services

• Packing and marking
• Storage
• Personal and business travel
• Personal effects
• Exhibition goods
• Courier services

Advantages of Using Freight Forwarders

• Expertise: Specialized knowledge in international trade procedures, often specializing in certain markets, types of transport, or types of goods.
• Contacts: Official contacts with carriers, Customs, receiving authorities, and warehouse keepers, plus personal and informal contacts that help avoid problems and find quick solutions.
• Facilities: Storage, packing, repacking, sorting, checking, and computer facilities for Direct Trader Input of Customs declarations.
• Convenience: Many exporters prefer to focus on manufacturing and selling, subcontracting physical distribution to third parties.

Disadvantages of Using Freight Forwarders

• Increased Cost: A third party attempting to make a profit means it costs more than doing it yourself, though savings generated may compensate for fees charged.
• Loss of Control: Some exporters find it difficult to accept third-party control of their business. Bottlenecks can occur when a forwarder represents many traders.

5.2 Modes of International Transport

Sea Freight

The two basic forms of ocean cargo carriers are:

Liners are the “buses” of the shipping world — they offer regular schedules between the same ports based on advertised sailing schedules and carry the majority of international sea transits. Tramps are the “taxis” — they carry generally bulk cargoes from anywhere to anywhere and negotiate rates per voyage.

Freight Conferences: Many liner services operating on the same routes voluntarily form Freight Conferences. They cooperate on rates and schedules. While the lines do not compete on rates, they benefit the shipper through cooperation on schedules, ensuring regularity of service. Shippers using Conference vessels only receive immediate discounts (usually 9.5%) or deferred rebates (usually 10%).

Types of Charter

• Voyage Charter: The vessel is chartered for one specific voyage between specified ports.
• Time Charter: The vessel is chartered for a period of time, possibly allowing repetitive voyages.
• Bareboat (Demise) Charter: The charterer takes over the vessel, often for periods up to 15 years, and operates it as if it were their own. Common in the oil industry.

Types of Sea Freight Services

• Conventional: Traditional break-bulk (non-unitised) cargoes. Now less common due to containerisation.
• Containerised (LO/LO – Lift On/Lift Off): The most common service. Based on moving goods in standard-sized units. Containers are built to ISO specification (6 or 12 metres). Types include:
  • Insulated and/or refrigerated (reefers)
  • Open topped
  • Curtain sided
  • Liquid and powder tanks
  • Half height (donkey)
  • Hazardous cargo tank containers (tanktainers)
• Specialist Barge Services: Vessels designed to carry floating lighters or barges, making use of inland waterway systems (the cheapest means of inland transport). Common versions include LASH (Lighter Aboard Ship) and BACAT (Barge Aboard Catamaran).

Advantages of Containerisation

• Multi-modal: Reduced risk of loss or damage because goods are not handled during transfer between transport modes. Allows door-to-door deliveries without handling.
• Through Documentation: Covers more than just the sea freight part of the journey. Through freight rates cover the greater part of the journey.
• Vessel Efficiency: Easy segregation of cargoes and minimized turn-round time due to speed of container handling.

Road Freight

Over 80% of UK exports to western Europe are moved by road freight. Since the UK is an island, road trailer loads depend on Roll On/Roll Off (RO/RO) services to cross the North Sea or Channel. The load may be accompanied (driver continues the journey) or unaccompanied (a subsequent carrier collects the trailer).

Rail Freight

Only a small proportion of UK exports (approximately 6%) are shipped by rail freight. The rail equivalent of RO/RO is the Train Ferry service (e.g., Dover to Dunkirk). The Channel Tunnel offers great potential for growth. European freight movers operate “Piggyback” services based on road trailers carried on specially designed rail wagons. Swapbodies are flat bed wagons without wheels, carried on rail wagons.

Air Freight

There has been an average increase in the volume of air cargo out of the UK of almost 9% per annum since 1992. Benefits include speed and security, competitive rates, and appreciation of Total Distribution Cost. Much cargo is carried on scheduled passenger aircraft. About 80% of scheduled air traffic is operated by members of IATA (International Air Transport Association), which cooperates on rates. ICAO (International Civil Aviation Organisation), a UN branch, governs relationships between member countries.

Groupage

Applies to all modes of transport. Describes the grouping of distinct export consignments into one unitised load. The most typical unit is the ISO container (carrying LCLs), but road trailers and rail wagons are also units. In air freight, the expression is Consolidation and the standard unit is the Unit Load Device (ULD), sometimes called an Igloo.

Express Operations

Specialize in relatively small consignments (up to 40 kilos) and use large networks of vehicles and aircraft to guarantee deliveries within specified time limits. May be linked with courier services specializing in documents and very light items.

5.3 Choosing a Mode of Transport

5.4 Freight Calculation

All carriers operate on the basis of open and firm tariffs. The principle governing calculation is the same for all modes: Weight or Measure (W/M). The carrier charges based on whichever gives the greatest return.

Factors Affecting Base Freight Rate

• Destination: Different rates for different destinations. Further destinations generally have higher rates. Also consider routing costs (canal links), port/harbour dues, berthing fees, lighterage, handling charges.
• Commodity: Up to 22 different commodity rates per destination. Higher value goods increase carrier’s liability. Stowage factor (weight-to-volume ratio) affects available capacity.
• Box Rates: For containerised movements, a “lump sum” charge for the box (FCL). Large shippers can negotiate favourable rates. Freight of All Kinds (FAK) rates average different commodities.
• Ad Valorem: Rare cases where freight is calculated as a percentage of goods value (e.g., “or 3% ad valorem”).

Adjustments to Basic Rate

• Conference Discounts or Rebate: 9.5% Immediate Discount or 10% Deferred Rebate.
• Currency Adjustment Factor (CAF): Adjusts for fluctuations in the US Dollar against the carrier’s revenue currency.
• Bunker Adjustment Factor (BAF): Reflects changes in fuel costs. “Bunkerage” derives from coal bunkers on original steam ships.

Sea Freight Calculation

Units used:

• Weight Unit: 1 Metric Tonne (1,000 kg) – gross weight including packing (tare weight)
• Volume Unit: 1 Cubic Metre (CBM or M³) – calculated as length × breadth × height

Road/Rail Freight Calculation

Same W/M principle, but common ratio is 1,000 kg or 3.3 CBM. Sometimes smaller units of 100 kg or 0.33 CBM for smaller consignments.

Air Freight Calculation

Tariff structure:

• General Cargo Rates (GC): For non-unitised mixed commodities
• Specific Commodity Rates (SC): For large quantities of specific commodities between specific ports (much lower than GC)
• Classification Rates: For special categories (live animals, cadavers, bullion) – discount or surcharge on GC rate
• Unit Load Device Rate (ULD): Air equivalent of “box rates” – ignores commodity, charges for specific unit up to maximum weight
• Freight of All Kinds (FAK): Rate per kilo subject to minimum weight requirement

Common ratio: 1,000 kg or 6 CBM. In practice, rates quoted per kilogram or per 6,000 cubic cm (a “volumetric unit” or “chargeable kilo”).

5.5 Total Distribution Cost

A simple comparison of freight costs will always show air freight as more expensive than surface freight. However, Total Distribution Cost considers other transport-related factors:

5.6 Packing and Marking for Export

Correct packing and marking is vital. In virtually all export sales, the seller is responsible for adequate export packing and correct marking. Failure can be expensive in direct financial loss, time, and loss of customer goodwill.

Reasons for Greater Export Risks

• Distance: Statistically more likelihood of loss or damage over longer transits
• Increased Handling: Most loss and damage occurs during handling
• Quality of Handling: Quality may vary significantly overseas
• Environmental Conditions: More arduous conditions than domestic transits

Functions of Export Packing

• Protect: Against damage and pilferage
• Contain: So goods can be handled
• Identify: Bears marks enabling goods to be identified

Packing Methods

Factors Affecting Choice of Packing

• Nature of Goods: Bulky, fragile, valuable, special requirements (sweating, tainting)
• Destination: Distance, handling quality, climatic conditions, specific regulations (e.g., insecticide treatment for organic packing)
• Mode of Transport: Air freight generally needs less robust packing than sea freight
• Customer’s Requirements: May request specific packing type. Care if buyer requests inferior packing.
• Cost: Heavy packing increases freight charge (based on gross weight including tare). Second-hand packing risks inadequate protection and previous marks.

Marking for Export

For air, road, and rail movements, goods often carry the full address of the consignee (labelled). For sea freight, coded shipping marks are more common. SITPRO suggests marks should be “sufficient and necessary for goods in transit.”

Additional Marking Considerations

• Legibility: Lead and Port marks at least 7.5 cm high; Sub marks at least 3.5 cm high
• Indelibility: Marks must be permanent in all conditions
• Position: At least two (sometimes three) marks on different sides

5.7 Transport Documentation

All international trade documents can be categorized into four types:

1. Transport: Bill of Lading, Air Waybill, Road Waybill (CMR), Rail Waybill (CIM)
2. Customs: Intrastat, SAD, Export Invoice, Certificate of Origin, Status Documents, ATA Carnet
3. Insurance: Policy, Certificate, Declarations
4. Payment: Letters of Instruction, Bill of Exchange, Letter of Credit

Transport Conventions

International conventions standardize documentation and contracts of carriage, allowing exporters to deal with various nationalities of carrier using standard documentation:

The Bill of Lading – Functions

1. Receipt for Goods: Contains “apparent good order and condition” (Clean Bill). Claused Bills (e.g., “inadequate packing,” “one case short,” “three drums leaking”) override this and cause problems for exporters. They will never be acceptable to banks against Letters of Credit.
2. Evidence of Contract of Carriage: The B/L is not the contract itself but evidence of it. The actual contract is verbal, made when space is booked. Contains the Clause Paramount specifying which convention applies.
3. Document of Title: Most unique feature. Bills are issued in sets of 2 or 3 originals. One signed original must be presented to the shipping line at destination to release goods. Allows seller to restrict buyer’s access by withholding B/L. “To Order Blank Endorsed” B/L confers title to bearer.

Bill of Lading Glossary

• Received: Goods in carrier’s possession but not loaded. Can be stamped “Shipped on Board” to become Shipped B/L.
• Combined Transport: Covers door-to-door or depot-to-door movement under one contract.
• Transhipment: Goods via third port using two vessels. Banks may not allow transhipment.
• Groupage: Groupage operator issues House Bill of Lading (NVOCC) – inferior status to Shipping Company’s B/L.
• FIATA: Issued on behalf of International Federation of Freight Forwarders Associations. Acceptable as Ocean B/L against L/C.
• Short Form: Detailed clauses omitted; refers to carrier’s standard conditions and Clause Paramount.
• Lost/Destroyed Bills: Use Letter of Indemnity for release without valid B/L. Must be countersigned by bank.

Waybills

Types of Waybills:

• Air Waybill: Issued in sets up to 12 copies (3 originals). House Air Waybills acceptable if carrier countersigns.
• Road Waybill (CMR): Standard non-negotiable consignment note.
• Rail Waybill (CIM): Standard consignment note for international rail carriers.
• Sea/Liner Waybill: For short sea transits or low-risk markets. Goods released without presentation of B/L. Also called Express Bills.

Carrier’s Liability

The Transport Conventions define liability as “the value of the goods at place and time of collection,” subject to maximum limits. Current approximate maximums (based on Special Drawing Rights):

Exporters of high-value goods may negotiate higher limits with the carrier.

5.8 Dangerous Goods

The exporter of dangerous goods is responsible for:

1. Identification of goods
2. Packing and marking requirements
3. Documentary declarations

International Regulations

The UN Committee of Experts publishes the “Orange Book” every two years. This is incorporated into modal regulations:

Identification of Goods

• Use correct technical name, not brand/proprietary names (e.g., “Paraquet Dichloride in Solution” not “Gramoxone”)
• Include UN 4-digit code in written declarations
• Classify into 9 hazard classes:
  1. Explosives
  2. Gases (Flammable, Non-flammable, Toxic)
  3. Flammable Liquids (by flash point)
  4. Flammable Solids (spontaneous combustion, emit flammable gas in contact with water)
  5. Oxidising Substances (organic peroxides)
  6. Toxic Substances (infectious substances)
  7. Radioactive Materials
  8. Corrosives
  9. Miscellaneous Substances

Packing Groups

Documentary Declarations

• Surface freight (sea, road, rail): Dangerous Goods Note (DGN). Replaces Shipping Note. Written application for shipping space.
• Air freight: IATA Shipper’s Declaration for Dangerous Goods. Must be signed by the shipper, not the agent. Regular shippers must be trained on CAA approved IATA course (3 days, refresher every 2 years).

Special Air Freight Considerations

• Changes in temperature and pressure make some goods hazardous for air that are not for surface freight (e.g., barometers, dry ice, cellulose-based toys)
• Post-September 11, 2001, cargo security measures have become increasingly stringent for all transport modes
• Aviation and Maritime Security Act 1990 tightened definitions of “known” and “unknown” shippers

Based on Part 6 of the Handbook of International Trade

All exporters and importers must comply with Customs regulations and cannot abdicate that responsibility to a third party. Compliance is mandatory, and the consequences of non-compliance can be very expensive in terms of time and money. Ignorance is never an excuse. However, there is a logic to Customs controls, and improved understanding can present opportunities to reduce time and costs.

6.1 Overview of Customs Controls

Customs procedures can be rationalized into three categories:

1. EXPORT (DEPARTURE): All countries count goods leaving their territory. Most exports are “Non-Controlled” (or “innocent”) goods, subject only to statistical interest. Some goods (strategic, technological, cultural value) attract export licensing controls.
2. TRANSIT: Applies when goods physically move through other Customs territories between departure and destination. Common for road and rail movements. Transit procedures protect countries of transit from goods that might remain and attract import controls.
3. IMPORT (DESTINATION): There is no such thing as a “Non-Controlled” import. Imports attract tariff barriers (duty, tax, excise, levy, licensing, quotas) and non-tariff barriers (standards, cultural barriers, national buying habits). Imports generate revenue – Customs collects almost 65% of central government revenues in the UK.

The European Union Context

The UK is a member of a Customs Union, not just a free trade area. The distinction:

• Free Trade Area (e.g., NAFTA): Members give duty-free entry to each other’s goods but retain individual tariffs against non-members.
• Customs Union (e.g., EU): Members have free trade between themselves AND operate a Common Customs Tariff against non-members.

Key EU Concepts:

• Internal Frontiers: Borders between member states (removed since 1 January 1993 for the Single Market)
• External Frontiers: Borders with non-members (Common Customs Tariff applies)
• Four Freedoms: Free movement of goods, people, services, and capital

EU Member States (in order of joining): France, Germany, Italy, Belgium, Luxembourg, Netherlands, UK, Ireland, Denmark, Greece, Spain, Portugal, Austria, Sweden, Finland, Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia. (Bulgaria and Romania planned for 2007; Turkey in negotiations.)

Categories of Trading Partners:

1. EU Member States: INTRASTAT procedures (no export/import declarations)
2. EEA Member States (Norway, Iceland, Liechtenstein): SAD procedures
3. Non-Members (Rest of World): SAD/TIR/TIF procedures

6.2 Export Procedures

Since 1 January 1993, trade between the UK and other EU member states is not called export/import but DISPATCHES and ARRIVALS (trade statistics) or SUPPLIES and ACQUISITIONS (VAT).

INTRASTAT (EU Trade Statistics)

Three levels of declaration, depending on business level:

1. All VAT registered traders: Complete normal VAT returns showing total sales to EU customers (Box 8) and acquisitions from EU suppliers (Box 9).
2. Below annual threshold (£233,000 in 2003): Supply EC Sales Listing (ESL) usually quarterly, listing EU business with individual VAT numbers.
3. Above threshold: In addition to ESLs, supply Supplementary Statistical Declarations (SSD) monthly within 10 working days of month end.

Not declared under INTRASTAT: Temporary exports, packing, samples, exhibition goods.

Single Administrative Document (SAD / C88)

Introduced 1 January 1988, replaced approximately 150 separate Customs documents across 18 European countries. Combines export, transit, and import declarations:

• Pages 2 & 3: Export
• Pages 1, 4, 5, & 7: Transit
• Pages 6 & 8: Import

Since 1 January 1993, SAD is no longer relevant for intra-EU trade (replaced by INTRASTAT) but remains important for trade with EFTA and non-EU countries.

New Export System (NES)

Launched at Port of Dover in March 2002, implemented at all UK maritime ports by October 2002. Key changes:

• No paper declarations – electronic pre-entries replace paper SAD
• Simplified Declaration Procedure (SDP): Initial electronic Pre-Shipment Advice (PSA) with minimum information, followed by electronic Supplementary Declaration within 14 days
• Local Export Control (LEC) replaced by Local Clearance Procedure (LCP)
• New procedure for processing export goods inland at Designated Export Places (DEPs)

Declaration Routes:

• Community System Providers (CSPs)
• Internet e-mail with EDIFACT attachments
• X400 e-mail with EDIFACT attachments
• Completion of web form online

Export Licensing Control

The Export of Goods (Control) Order contains Schedule 1 (the “Prohibition List”) – goods requiring export licence:

• Goods of Strategic Value: Military equipment, ships, aircraft, weapons, navigation systems
• Goods of Technological Value: Computer hardware, specialist testing and measuring equipment
• Goods of Cultural Value: Antiques, works of art

Dual Use Regulations: Even if goods are intended for entirely civil and peaceful purposes, if they could be used in a manner attracting control, they are deemed to attract control.

Processing Relief

• Inward Processing Relief (IPR): Goods imported from outside EU and subsequently re-exported can obtain relief from duty. Duty suspended at import (all goods must be re-exported within 6 months) or drawback claimed for goods re-exported.
• Outward Processing Relief (OPR): Goods exported for processing and re-imported attract relief on value before processing; duty only on “added value.”
• Returned Goods Relief: Goods returned within 3 years in same state can avoid duty and tax.

6.3 Transit Systems

True transit (goods entering a country at one point and leaving at another) applies only to international road and rail transits. Sea and air movements involve transhipment (under Customs control in bonded warehouses), not transit.

Why Transit Controls Exist

Countries of transit need assurance that goods allowed in will actually leave, and that revenues (duty, tax, excise) are collected if goods stay. Historically, this required duty deposits and vehicle examination at each post.

TIR (Transport Internationaux Routiers)

Established by Economic Commission for Europe, ratified by many countries worldwide including USA, Japan, Middle East, Eastern Europe. Solves two problems:

1. Duty Deposits: TIR Carnet issued by approved authority (FTA or RHA in UK). Guarantee by carrier (countersigned by bank/insurance company) acts as duty deposit. Customs in transit accept Carnet volets instead of deposits.
2. Vehicle Examination: TIR vehicles approved by Department of Transport (GV60 certificate) based on ability to be sealed and no concealed areas. Customs at departure seal goods; transit Customs only check seals intact.

TIR TABAC Carnets: Introduced September 1993 for high-value tobacco and alcohol movements, requiring higher guarantee levels due to significant Excise duties.

TIF (Transport International par Chemin de Fer): Equivalent system for rail wagons.

New Computerised Transit System (NCTS)

January 2003: European-wide electronic system linking approximately 3,000 customs offices across 22 countries. Phased introduction in UK. Aims to replace paper-based system with electronic declarations.

6.4 Import Procedures

EU Imports

Goods entering UK from another EU member state require no immediate import declaration. INTRASTAT procedures collect import statistics (arrivals) via VAT returns, ESLs, and SSDs. VAT is subject to Postponed Accounting System (PAS) – accounted for on “Tax due” side of VAT return.

For imports from non-EU members, the import element of SAD (pages 6 & 8) serves as import declaration. Most entries made by Clearing Agents using Direct Trader Input (DTI) procedures. Payment of VAT on import deferred until 15th of following month.

Import Controls

Duty

Usually ad valorem (percentage of CIF value). WTO negotiations reduced average worldwide duty from 24% in 1950s to under 4% today. However, countries can apply much higher rates on certain commodities to protect local manufacturers.

Tax

VAT (or equivalent) is standard fiscal charge on all sales. EU rates range from 15% to 38%. Other countries may impose Purchase Tax or Turnover Tax.

Excise

Revenue Duty on alcohol, tobacco, mineral fuels. Represents 25% of UK central government revenue. Specific duties (e.g., Euros per hectolitre for spirits) rather than ad valorem.

Levy

Specialized charge within EU, generally affecting agricultural products and items processed from them (e.g., sugar, starch, some foodstuffs).

Licensing

Many overseas countries, particularly developing ones, use specific import licensing to control every consignment. Required licence must be certain before shipments made.

Quota

Quantitative restrictions, usually to protect local manufacturers. May be duty-free quantity with full duty thereafter, or licences issued only for that quantity.

6.5 The Export Invoice

The export invoice is crucial to overseas Customs authorities. Five distinct types:

1. Commercial Invoice

Simplest situation. No special requirements. Company’s standard invoice, zero-rated for VAT.

2. Commercial Invoice with Declaration

Specific declaration typed on invoice. Wording differs by country but invariably declares origin of goods and that prices are correct export prices.

3. Certified Invoice

UK Chamber of Commerce certifies set of invoices. They stamp documents with certification stamp. In practice, they certify the signatory is authorized by the company, not that content is correct.

4. Legalised Invoice

Further stage of third-party verification. Certified invoices legalised by commercial section of importing country’s embassy. For Arab League countries, streamlined procedure through Arab British Chamber of Commerce (ABCC). Time: 5-7 days. Cost: £40-£60.

5. Consular Invoice

Particularly common in Central and Latin American countries. Unique consular invoice form completed and returned to Consulate for Consularisation. Consular Fees can be high (sometimes percentage of invoice value). Show as separate item on pro-forma invoice quotation.

Required Invoice Information

• Seller and Purchaser (not always same as exporter and importer)
• Goods description, quantity, and value
• Trade Terms (e.g., FCA, FOB, CIP, CIF)
• Terms and Methods of Payment
• Ancillary Costs (e.g., Freight and Insurance)
• Shipment details (points of departure and destination)
• Packing Specification: number and kind of packages, individual contents, sizes (cm), weights (Net and Gross kg), marks and numbers

6.6 Description – Tariff Classification

Customs use number classification systems (nomenclatures) rather than words. Development history:

1. Brussels Tariff Nomenclature (BTN): 1957, 4-digit code, used by almost 150 countries.
2. Customs Cooperation Council Nomenclature (CCCN): 1965, renamed BTN, still 4-digit.
3. Harmonized Commodity Description and Coding System (HS): 6-digit code, 25,000+ numbers. Adopted by majority of trading nations.
4. EC Combined Nomenclature (TARIC): 8-digit harmonization within EU and EFTA. Full UK import classification requires 11 digits.

Tariff Structure

Finding a Tariff Number

Logical process starts with finding appropriate chapter. HS contains 97 chapters, progressing from basic commodities to sophisticated products:

• Chapter 1: Live Animals
• Chapters 2-25: Agricultural Produce
• Chapters 26-38: Chemicals
• Chapters 39-49: Articles of Plastic, Leather, Wood, Paper, etc.
• Chapters 50-63: Textiles
• Chapters 64-84: Articles of Clothing, Ceramics, Glass, Iron, Copper, etc.
• Chapters 85-97: Machinery, Locomotives, Aircraft, Ships, Furniture, etc.

6.7 Origin

Origin determines whether goods qualify for free or preferential trade agreements. EU trade agreements:

Rules of Origin

• Wholly Produced: Proof of origin not normally a problem (e.g., minerals, crops).
• Sufficient Transformation: For processed goods, Customs require breakdown of component elements. In EU, minimum 60% of finished product value must be originating (wholly produced in that country).
• Deflection of Trade: Shipping goods via third country to establish erroneous origin is a serious offence. Repacking is never “sufficient transformation.”

Certificates of Origin

1. European EU C of O: Issued by Chambers of Commerce. Can be certified by Chamber or self-certified by exporter.
2. Arab British Chamber of Commerce C of O: Specific to Arab League trade. Certified and legalised along with invoices.
3. Certificates of Value & Origin: Form of export invoice. Origin declaration incorporated in invoice. May apply to ACP, OCT, or GSP countries.
4. Movement Certificates (EUR 1): Four-page document requiring authentication by UK Customs. For consignments below €6,000, replaced by invoice declaration.
5. ATR 1: Specific to trade with Turkey (Associate member of EU).

6.8 Value

The invoice value (Transaction Value) serves as base for ad valorem charges. Customs are wary of manipulation:

• Under-valuation: To minimize duties and taxes. Importer may have already paid in advance or arranged transfers for un-invoiced elements.
• Over-valuation: Infringement of exchange control regulations. Buyer moving hard currency out of country illegally.

If invoice value rejected, EU has 5 other methods of valuation.

6.9 Customs Management

Compliance is mandatory, but good management can reduce impact. Logic follows three stages:

1. AVOID Controls Completely (Legally)

2. MINIMIZE Costs

• Valuation: Legitimately exclude on-carriage, turnover taxes, commissions, royalties, documentation fees from customs value (varies by country).
• Outward Processing Relief: Goods exported and re-imported after processing attract relief on value before processing.

3. TAKE TIME

• Warehousing: Goods in Customs warehouse not subject to controls or payment until leaving. EU: up to 2 years. Limited handling allowed (checking, re-packing, no real processing).
• Deferment: Duty and tax deferred. UK approved traders/agents supply guarantees; duty deferred until 15th of following month. VAT deferred or accounted for on VAT returns for EC imports.

Based on Part 7 of the Handbook of International Trade

The exporter faces a great many risks in conducting business internationally, quite apart from the fact that the buyers may not be particularly keen to buy their goods. Even assuming that we have an established market for our products and services, there still exist many potential practical problems in ensuring that such business actually leads to the receipt of sufficient revenues.

Three Major Categories of Risk

7.1 Cargo (Marine) Insurance

Many forms of insurance cover exist throughout the world but there is little doubt that Marine Insurance is one of the oldest. In the UK, the first rationalisation of the marine insurance market was devised by an Elizabethan Act of Parliament in 1601, to be followed by the development of the Corporation of Lloyd’s which allowed underwriters to offer insurance cover.

The principle of ‘averaging’ is at the heart of marine insurance: “so that… it cometh to pass that… the loss lighteth rather easily upon many than heavily upon few, and rather upon them that adventure not than those that do adventure.”

This means that if only one or two people carried all the risks of a sea voyage, they might be less inclined to adventure. In fact, it was an encouragement to trade internationally because the risks were shared by a large number of people: “…whereby all merchants, especially the younger sort, are allured to venture more willingly and more freely.”

Typical Breakdown of Cargo Loss Causes

General Average

This is one of the oldest principles of cargo insurance and still has relevance today. It covers the situation where: “there is extraordinary sacrifice or expenditure, intentionally and reasonably incurred, for the purpose of preserving the imperilled property involved in the common maritime adventure.”

This includes situations where:

• Goods are jettisoned to save the ship
• Goods are damaged by water used to extinguish a fire
• The vessel is diverted to a port of refuge
• Many other situations where loss of certain goods preserves the rest of the cargo

The basic principle is that all parties involved, including the vessel owners, contribute to the loss. General Average is declared and an Average Adjuster will eventually calculate the amount of the claim. It is often necessary for the cargo owners to sign a General Average Bond and for the insurers to provide a General Average Guarantee in order to obtain possession of the goods from the carrier.

Specific (Voyage) Policy vs. Open Policy

Institute Cargo Clauses (A, B, and C)

The update in 1983 saw the SG form replaced by the modern MAR (Marine All Risks) policy with attached clauses:

There is also an Institute Cargo Clauses (Air) which are the equivalent of Clause (A) but for air movements. War Clauses and Strikes, Riots and Civil Commotions Clauses (SRCC) are often added.

Principles of Insurance

1. Insurable Interest: The policy holder must have an insurable interest in the insured matter – they must “benefit from the safe arrival of the goods or be prejudiced by their loss.” Without this principle, insurance would simply be another form of gambling.
2. Indemnity: Most insurance is based on the insurers promising to indemnify the insured – to put them back into the situation they were in before the loss. In practice, the indemnity on cargo insurance policies is expressed as an amount of money, the insured value of the goods. The typical insured value is CIF or CIP + 10% (the additional 10% represents the buyer’s potential profit).
3. Uberrimae Fidei (Utmost Good Faith): The insurers are almost totally dependent on the insured to disclose any relevant information. Goods are declared “safe or not safe, lost or not lost.” Deliberate non-disclosure can lead to the policy being voided.
4. Subrogation: Once a claim is paid, the insurance company can take action against liable carriers in the name of the insured. The exporter must maintain rights of action against carriers by avoiding giving clean receipts and advising loss or damage within 3 days.
5. Proximate Cause: The insurers must establish the actual, “active, efficient cause” of the loss. If the proximate cause is not an insured risk, the claim will fail.

What is NOT Covered (Crucial Exclusions)

• Delay: If goods arrive late and lose market value (e.g., Christmas cards arriving on Boxing Day), insurance will not pay. Action may be possible against the carrier, but not the insurers.
• Wear and Tear: Normal wear and tear is never covered. The consequences of “the ordinary action of the wind and waves” is not covered.
• Inherent Vice: Predictable deterioration. Metal rusting in damp conditions, fruit rotting, concrete setting, perishables going off. The exporter must manage these risks through proper packing (priming, silicone gels, shrink-wrap).
• Ullage: Loss of liquid due to evaporation or “ordinary leakage or loss in weight or volume.”
• Wilful Misconduct of the Assured: Claims where there is evidence of insufficient or unsuitable packing are likely to fail. A Bill of Lading claused “inadequate packing” would invalidate any claim.

Claims Documents Required

1. Original Policy or Certificate: Proof of Interest (Insurable Interest), describes subject matter, insured value, and appropriate clauses.
2. Invoices and Packing Specifications: To assess percentage of part loss and identify where lost/damaged goods were packed.
3. Original Bill of Lading or Transport Document: Proves goods were in apparent good order when shipped; evidences contract of carriage.
4. Survey Report: Independent report of nature and extent of loss, ideally from approved agency (e.g., Lloyd’s Agent).
5. Landing Account/Weight Notes at Destination: Carrier’s record of out-turn of goods at destination.
6. Any Correspondence with Carrier/Other Parties: Insurers wish to maintain legal rights against other parties.

Contingency (Seller’s Interest) Insurance

Many exporters find situations where they make export shipments for which the buyer is responsible for cargo insurance (CPT, CFR, FCA, FOB sales). In some markets, particularly African ones, the importer’s country requires cargo insurance with a national insurance company. The risk is that loss or damage occurs and the buyer refuses to take up the goods or documents, or has not actually insured them. Seller’s Interest Insurance covers this contingency for a relatively small premium. The existence of such cover should not be revealed to the buyer.

7.2 Credit Insurance

The management of credit risk is a task which occupies an increasing amount of the time and resources of the typical exporter as the credit risk in world markets increases. In many markets, particularly third world countries, there is a probability of delay in payment and a distinct possibility of non-payment. Something like 75% of the countries in the world would be bankrupt if they were companies, in that their liabilities far exceed their assets.

This is the result of recurring world recessions, the increasing problem of third world debt, and the drop in basic commodity prices. The credit risk faced by international traders is greater than it has ever been.

The Two Categories of Credit Risk

Major Credit Insurance Providers

Important Principles of Credit Insurance

1. The security operates only when the exporter is not at fault. If there is a contractual dispute (e.g., regarding quality of goods), the insurance companies will not entertain a claim until the dispute is settled. The exporter must maintain high quality administration and documentation to prove performance of all contractual obligations.
2. The insurers expect the insured to minimise losses. Claims on carriers for loss or damage should be made as soon as possible, within 3 working days. The insured must act as “a prudent man uninsured.” The policy is not a safety net for lack of concern.

7.3 Exchange Risk Management

It is becoming increasingly common for UK exporters to do business with overseas buyers in currencies other than Pounds Sterling. The currencies used would invariably be the ‘hard’ convertible currencies of developed countries, particularly the US Dollar and the Euro. Movements in exchange rates are broadly subject to supply and demand within the market for currencies.

The simple risk faced by the exporter is that the calculated export price, based predominantly on pounds sterling costs, converted to a foreign currency price at the current exchange rate, has to be calculated some time in advance of the eventual receipt of those funds. The pounds sterling revenues may be less than planned when the export sale was agreed.

Four Methods of Managing Exchange Risk

Forward Exchange Contract Calculation Rules

1. You are the bank: All rates are quoted and calculated from the point of view of the bank.
2. Banks buy high and sell low: This is logical from the bank’s point of view.
3. Add a discount: Represents a currency which is weakening (its value is falling against the contract currency).
4. Deduct a premium: Represents a currency which is strengthening (its value is rising against the contract currency).

Example: Option Forward Exchange Contract

We contract to sell 100,000 Euros (€) to the bank in exchange for Pounds Sterling. The Euros to be available sometime between the beginning of Month 1 and the end of Month 3:

Remember: YOU ARE THE BANK. THE BANK BUYS HIGH AND SELLS LOW. The bank will take the most favourable rate to itself for the period of the option – the lowest selling rate and the highest buying rate.

Option rate (1 to 3 months): 1.49 – 1.63

The Euros are sold to the bank which converts them at the buying rate of 1.63 to the pound. The exporter thus receives £61,349.69 (less bank charges).

Summary: Managing All Three Risks

None of the solutions mentioned above are compulsory. Traders have a perfect right to choose not to insure against these risks and may have good reasons not to. However, the better the level of professionalism displayed by the trader, notably in terms of shipping the goods, credit control and payment collection, then the less important becomes the “safety net” of the insurance policy.

Based on Part 8 of the Handbook of International Trade

As the majority of companies trading internationally are profit-making, it is fairly obvious that the receipt of payment is essential to that purpose. It is clearly the responsibility of the exporter to operate in a way which maximises, and ideally guarantees, the possibility of payment being received in full and on time.

8.1 Business Finance Fundamentals

Legal Entities for Business

Types of Incorporated Companies

• Private Limited Company (Ltd.): May not offer shares to public; share transfers restricted; only summarised accounts published. Most common form.
• Public Limited Company (PLC): May offer shares to public; minimum share capital of £50,000; shareholders attend/vote at AGM.
• Quoted Public Company: Shares traded on Stock Exchanges; price reflects market expectations of future dividends.

Sources of Funding

• Retained Profit: After Corporation Tax and dividends, remainder designated as retained profit shown as reserves in balance sheet.
• Equity (Share Capital): Ordinary shares (variable dividend, voting rights) and Preference shares (fixed dividend, no voting rights). Cumulative preference shares carry forward unpaid dividends.
• Debt (Loan Capital): Debentures (written acknowledgements of debt with fixed interest), secured loan stock, unsecured loan stock, convertible loan stock.
• Short-term Finance: Bank overdrafts, loans. Bank’s security is a legal floating charge over all assets.

Working Capital

Working capital is the difference between current assets and current liabilities – the funds available to run the business after all debts are paid. Components include:

• Fixed Assets: Plant, equipment, buildings, vehicles (subject to depreciation)
• Current Assets: Stock, work in progress, debtors, cash
• Current Liabilities: Overdraft, trade creditors

Exports and Working Capital: An exporter needs to watch working capital even more closely because: (1) The time involved in shipping goods to distant customers means the “debtors” figure is likely to be larger; (2) Large debtors may stay large because of increased bad debts and difficulty of chasing delayed payments overseas.

Financial Reporting

• Balance Sheet: Shows what company owns and owes at one moment. Always balances because everything owned must have been paid for from somewhere.
• Profit and Loss Account: Cost of manufacture → Gross Profit → Net Profit (after deducting incidental expenses).
• Management Information: Sales orders, cash flow forecast, credit status, outstanding orders, sales analysis, stock levels, dispatches, debtors’ ledger, aged debtors’ report.

Business Costs

Budgeting – Five Rules

1. A budget is not a licence to spend money, but part of the process of delegating responsibility.
2. When preparing a budget, always start with the sales forecast.
3. Implementing the budget involves: motivation, communication, monitoring.
4. The actual figures will always be different from budgeted ones; it is the size of the variance which matters.
5. Budgeting is a continuous, rolling process: “monitor, revise, monitor.”

Absorption Costing vs. Marginal Costing

8.2 International Payment Methods

The exporter has to make a choice regarding the appropriate terms and method of payment right at the beginning of the process when the quotation is first made.

Terms vs. Method

• TERMS of payment: The time allowed for payment (credit period). Usually expressed as sight payment (no credit period) or in blocks of 30 days (60, 90, 180 days) following a specified date (sight of documents, date of shipment, or invoice date).
• METHOD of payment: The means by which money will be paid. The exporter has a range of choices offering varying degrees of security.

The Payment Risk Ladder

Factors Affecting Payment Method Choice

1. The Market: Certain methods are more common in particular markets. High-risk markets (West Africa) → Cash in Advance or L/C. Developed markets (Germany) → Open Account. Country risk ratings available from Dun & Bradstreet (DB1 to DB7 scale).
2. The Buyer: Previous experience, trade references, bank reports, credit reports, credit risk insurers. The seller’s perception of buyer risk can override “rule of thumb.”
3. The Competition: If competitors offer longer credit periods or less secure methods as a marketing tool, the exporter may need to match them.

Open Account Payment Methods

SWIFT (Society for Worldwide Interbank Financial Telecommunications) is an automated inter-bank system similar to BACS in the UK, offering secure and rapid financial transfers between international departments of banks. An export invoice should specify: Full company name, business address, bank name, account holder name, bank branch address, account number, sort code, and SWIFT code.

Documentary Collections & Bills of Exchange

A Bill of Exchange is defined as: “an unconditional order in writing, addressed by one person (the drawer) to another (the drawee), signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person or to bearer (the payee).”

Documents Against Payment (D/P) vs. Documents Against Acceptance (D/A)

Avalised Bills of Exchange

A Termed Bill accepted by the Drawee is not a guarantee of payment on maturity. However, it is possible to arrange for the accepted Bill to be avalised by the buyer’s bank. The bank adds its “Pour Aval” endorsement (guarantee) to the accepted Bill. This provides a bank’s promise to pay rather than the buyer’s. The accepted Bill can then be discounted – receiving a discounted amount of the Bill value at time of acceptance rather than waiting for maturity. Financial institutions specialising in Forfaiting will advance funds at good rates.

8.3 Documentary Letters of Credit (L/C)

The ultimate form of bank guarantee used in international trade is the Letter of Credit – a letter from a bank promising to pay an amount of money. The typical operation involves Documentary Letters of Credit which promise to pay only if the documents stated on the L/C are provided by the exporter. They are very much conditional guarantees of payment.

The L/C Process Flow

1. Seller and buyer agree payment by Letter of Credit
2. Buyer arranges for L/C to be opened by their bank (Opening/Issuing Bank) at time of order
3. L/C passed to exporter (Beneficiary) through Issuing bank’s correspondent bank in exporter’s country (Advising Bank)
4. Exporter checks L/C acceptability immediately
5. If amendments needed, request them immediately through Advising/Confirming bank
6. Exporter manufactures, packs, ships goods to produce compliant documents
7. Documents presented to UK bank who checks compliance
8. If no discrepancies, bank pays exporter
9. Documents sent to Issuing bank for reimbursement

Key Parties in L/C Transaction

Typical Documentary Requirements

1. Drafts (Bills of Exchange): Often drawn on Issuing or Confirming bank. Reflect whether L/C is payable at Sight or contains a credit term. Must contain clause referring to relevant L/C.
2. Export Invoices: In prescribed format, sufficient numbers. Any required certifications and legalisations. May include Certificates of Origin or status documents.
3. Insurance Policy or Certificate: Necessary if contract requires exporter to arrange cargo insurance (CIF, CIP). Cover must be for risks and amount specified.
4. Transport Documents: Bills of Lading, Air Waybills, Road/Rail Consignment notes, or Freight Forwarder’s receipts.
5. Additional Documents: Packing Specifications, Consular Invoices, Inspection Certificates, Clean Reports of Findings, Standards Certificates, Phytosanitary Certificates, Veterinary Certificates, Halal Certificates, etc.

The Doctrine of Strict Compliance

Examples of Typical Bank Rejections

• ABC Engineering Ltd. described as AVC Engineering Ltd. on L/C – rejected despite being obviously the beneficiary
• 20,000 RELLS of Insulating Tape described on L/C; exporter uses correct ROLLS on invoice – rejected
• 5.000 Kgs. described as 5,000 Kgs. – rejected for incorrect description (comma vs. period)

The justification is that if payment were made by the UK bank with no discrepancies found, the Issuing bank might find such discrepancies and refuse to pay the Advising bank.

Top 10 Most Common L/C Discrepancies

1. Late shipment
2. Documents not presented in time (within time allowed or 21 days)
3. Absence of documents requested in the L/C
4. Claused Bills of Lading/Carrier Receipts
5. No evidence of goods “shipped on board”
6. Description of goods on invoice differs from L/C
7. Documents inconsistent with each other
8. Insurance not effective from date of shipment
9. Bill of Exchange not drawn up in accordance with L/C
10. Invoices or Certificates of Origin not certified as requested

L/C Checklist for Exporters

• Is the L/C irrevocable?
• Is it confirmed by an acceptable bank?
• Is your name and customer’s name complete and spelled correctly?
• Do expiration and shipping dates give sufficient time?
• Is the L/C amount sufficient and currency correct?
• Is the description and quantity of goods correct?
• Are partial shipments permitted?
• Is transhipment permitted?
• Can you obtain properly executed documents to conform with L/C?
• Can you produce and submit documents in time allowed (21 days from shipment if no fixed time)?

Types of Letters of Credit

What Happens When Documents Are Rejected?

1. Correct and Re-present: Discrepancies corrected and documents re-presented to bank. (The 60-80% rejection rate is on FIRST presentation; second presentation often succeeds.)
2. Loss of Security: If errors cannot be corrected, the security of the L/C is lost. Bank may contact buyers via Issuing bank informing of discrepancies. Buyers then have right to accept or reject documents.
3. Documents “for collection”: Documents dispatched to Issuing bank “for collection” – reverted to Bill of Exchange to collect payment.
4. Documents “in trust”: Sent to overseas bank for buyer to inspect “in trust.”
5. Auction Risk: If goods arrive at destination and buyer legitimately rejects documents, goods not cleared or re-exported will eventually be auctioned. Priority for auction revenues: Customs → Demurrage → Warehousing → Auctioneer fees → Other charges → Carrier’s charges → LAST: owners of goods (the exporter).

8.4 Factoring

It is possible for exporters to avoid the problems of collecting overseas debts by factoring them to specialist financial institutions. The factors take over the invoices of the exporter and pay a percentage of their value, calculated on the trader’s average credit period and level of bad debts, often paid at the end of an agreed period from invoice dates.

Advantages: Exporter can accurately predict receipts with all cash flow advantages. Larger factors operating internationally are very adept at credit control and debt collection.

Disadvantages: Costs more than successful self-collection. May not wish to pass debt collection to third parties who do not consider customer relations or business implications. “Passing the buck.”

8.5 Countertrade

Over the last twenty years there has been an enormous increase in countertrade throughout the world. Some estimates suggest that in anything up to 33% of world trade, countertrade at least forms part of the negotiations, although final payment might actually be made in currency. Severe hard currency shortages in many developing countries lead to countertrade being seen as the only way international trade can occur.

Forms of Countertrade

Based on Part 9 of the Handbook of International Trade

The landscape of international trade is rapidly evolving. From the digitization of paperwork to the shifting centers of global economic gravity, modern traders must embrace technology and understand global market trends to stay competitive. This final module examines how Information and Communications Technology (ICT) is transforming export documentation and identifies the key trends shaping world trade in the 21st century.

9.1 ICT and Export Documentation

SITPRO – The Simpler Trade Procedures Board

The most important organisation in the UK charged with developing systems for the electronic production of export documents is SITPRO Limited, formerly The Simpler Trade Procedures Board. Set up in 1970 as the UK’s trade facilitation agency and reconstituted as a company limited by guarantee in April 2001, SITPRO is one of the Non-Departmental Public Bodies for which the Department of Trade and Industry has responsibility.

SITPRO is dedicated to encouraging and helping business trade more effectively and to simplify the international trading process. Its focus is the procedures and documentation associated with international trade.

SITPRO’s mission is to use its unique status to improve the competitive position of UK traders by facilitating change through:

• Identification and removal of barriers in the international trading process;
• Identification and promotion of best trading practices;
• Delivery of practical, value for money electronic commerce and associated trading solutions; and
• Influencing future trade policies.

SITPRO offers a wide range of services, including advice, briefings, publications and checklists covering various international trading practices. It manages the UK aligned system of export documents and licenses the printers and software suppliers who sell the forms and export document software.

Electronic Data Interchange (EDI)

In simple terms EDI can be described as ‘the transfer of structured data by agreed message standards from one computer system to another, by electronic means.’ In essence, EDI is a means of paperless trading and was a natural evolution from paper documents as data carriers, to computer and telecommunication systems as automatic carriers and processors of data.

In traditional business processes, such as ordering and invoicing, paper documents contain structured information in various ‘boxes’. In EDI this information is mapped into a structured electronic message. In operation EDI is the interchange of these agreed messages between trading partners to ensure speed and certainty and better business practice in the supply chain.

EDI allows the electronic transmission of a wide range of information between businesses which would otherwise be paper based. Since its introduction in the late seventies its use as a replacement for paper-based systems has increased dramatically. The concept involves defining a standard format for the transmission of data between two businesses, which allows the whole transaction process to be automated.

The difference between EDI and other types of E-Business is that while E-Business can be thought of as the exchange of electronic information in any format, EDI is done through a standardised format. This makes it especially useful for large volumes of repetitive documents such as purchase orders and order acknowledgments and, increasingly, standard documents used in international trade eg invoices, certificates of origin, transport documents, Customs declarations etc.

EDI Standards:

• ANSI X.12: The American National Standards Institute (ANSI) has a group of EDI standards called ‘X.12’. These standards can be customised for use within specific industries. ANSI X.12 is widely used in North America.
• EDIFACT: Electronic Data Interchange for Administration, Commerce and Transport – a more recent standard that is gradually becoming accepted, particularly in Europe.

Benefits of EDI

The use of EDI has brought substantial benefits and savings to companies that have implemented it. One of the principal reasons for using EDI is to eliminate the mountain of paper documents which is produced, moved, handled, corrected, transcribed and copied in normal business.

Trends and Developments in EDI

The main reason for using EDI is that it provides a standardised rigid format for exchanging data. However this is also a disadvantage in that it is relatively inflexible. Setting up ad-hoc relationships cannot normally be done as relationships and data formats have to be formally agreed before any transactions can take place.

Traditional EDI is now under threat by newer technologies based on Extensible Markup Language (XML). XML is the world standard platform for electronic business transactions.

The key benefits of XML are:

• It can be read by both humans and computers;
• It facilitates the optimal structuring of data;
• It can be extended to accommodate future needs;
• It is free and/or inexpensive;
• It is widely available;
• It is easy to learn;
• It is supported by all major software vendors.

XML-based EDI allows the transfer of data between companies without the format of the data having to be rigidly pre-defined and therefore companies can carry out e-business with new trading partners much more easily. XML-based technology is well suited to use over the Internet, which has a much lower cost than the Value Added Networks of conventional EDI.

WebElecTra

WebElecTra has been designed by SITPRO to help traders take advantage of e-commerce developments to help with the process of international trade. SITPRO has been working hard to take the essence of trading best practice and put it into a simple system which supports On-Line completion of the standard forms necessary for international trade.

Traders and freight forwarders can log on to WebElecTra compliant web sites and complete trading documentation electronically. SITPRO guarantees that WebElecTra branded systems will conform to the national and international documents which meet UN standards.

These documents include purchase orders, standard shipping notes, dangerous goods notes, export cargo shipping instructions, Customs C88s and many others, and are the correct Government sponsored version of the forms needed for International trade. SITPRO also guarantees that these forms will be kept up to date.

All WebElecTra branded web sites also carry comprehensive help and validation eg assistance with completing the different parts of the forms, and validation of data entered. In addition, an advanced set of trading business rules is being built in so that the system will prompt the user for extra information or additional procedures when it detects that they are needed for particular goods, destinations etc.

Bolero.net

International trade has traditionally been fraught with financial, logistic and time inefficiencies, costing world business hundreds of billions of dollars every year. Created by the world’s logistics and banking communities, bolero.net is getting rid of these inefficiencies by moving world trade onto the Internet, allowing documents and data to be exchanged online between all parties in the trade chain.

bolero.net offers:

• Global buy-in: Seven out of the world’s top ten banks have signed up to bolero.net, as well as major trading houses such as Mitsui and Marubeni; and carriers such as K Line, Cosco and Evergreen.
• Open platform: Unlike “proprietary” developments that force businesses down one particular path, bolero.net is committed to providing a neutral, open system.
• Certainty: A ground-breaking, globally patented legal infrastructure creates ‘certainty’. Every member of the bolero.net community is properly vetted and bound by its structures.
• Security: bolero.net matches and exceeds the comfort factor that businesses currently have when conducting trade transactions by paper. bolero.net’s messaging system is operated by S.W.I.F.T, an organisation that sets the gold standard for operational integrity.
• Information exchange: boleroXML is a validated, global, cross-industry XML standards solution that allows all parties of a trade chain to seamlessly “talk” to each other by automating their information exchange.

boleroXML Documents

The objective of boleroXML is to enable users of bolero.net to take full advantage of electronic commerce by providing a set of standard electronic documents that will facilitate interoperability amongst the members of the community.

Current BoleroXML documents include:

Export Documentation Software Providers

In addition to the developments described above there are a large number of commercial providers of software packages designed to produce all the documents that an international trader might require. A selection of the main providers in the UK includes:

9.2 Global Trading Trends

The IMF projections for the percentage growth of imports and exports of selected geographical groupings for the period from 2003 to 2007 reveal important patterns in world trade. Understanding these trends is essential for any exporter planning market entry strategies.

Global Trends Overview

The IMF estimates that the value of global exports of goods and services rose from $9,178 billion in 2003 to $12,684 billion in 2005 and projects further increases to $15,891 billion for 2007. The annual growth rate rose sharply from 5.2% in 2003 to 10.3% in 2004 and is forecast to remain above 7% through 2007.

These are healthier growth rates than those recorded in the final decade of the last century except for year 2000 when world merchandise exports grew 11% before falling 1.5% in 2001.

Advanced Economies

As a whole, the projected growth rates in exports and imports for advanced economies are one to one and half percentage points below the world average. In 2006 and 2007, growth rates for goods are expected to be marginally higher than for goods and services combined. Over the five year period growth rates of imports and exports are roughly in balance.

Major Advanced Economies (G7)

Focusing on the G7 advanced economies, except for 2006, growth rates in both exports and imports are slightly lower than for the complete group of advanced economies.

Euro Area

Growth rates of exports by the group of eurozone countries have been significantly lower by up to 2% than for the total grouping of advanced economies with 2004 a particularly poor year. However, the gap is forecast to narrow to less than one% in 2006 and 2007 and may reflect the mild recovery of some eurozone economies, notably Germany.

Central and Eastern Europe (CEE)

Export growth of the CEE countries, which include the eight that are now EU members, has outstripped the world average and, in particular, those of the euro area. Growth rates of CEE exports are expected to remain 3% or 4% ahead of eurozone rates for 2006 and 2007. The differential for imports is rather less. Comparison with the eurozone is relevant to the decisions of the CEE8 whether and when to join the euro area.

CIS and Mongolia

Double digit growth in imports through to 2007 puts the CIS plus Mongolia well ahead of the world average and advanced economies as a target market for exporters. Surprisingly, in view of Russian exports of oil and gas the growth rates in exports are comparatively modest, lagging behind the world and advanced economies average and pointing to growing current account imbalances.

Middle East

Import growth rates are also in double digits from 2004 onwards and are forecast to exceed those of the CIS and Mongolia in 2006 and 2007. Export growth rates for goods are forecast to remain above the world average until 2007. There is an emerging current account issue for the region but not as acute as for the CIS.

Africa

Until 2007 when exports are expected to take off, growth rates of goods and services will remain 2 or 3% below the world average. However, growth rates in imports rose to double digits in 2005 and will continue to grow faster than exports through 2007. The endemic imbalances in the foreign trade of most African countries remain of grave concern to the G8 and all those seeking progress in the WTO Doha round of negotiations.

Newly Industrialized Asian Economies

Growth rates in the volume of exports, reflecting the performance of China’s economic powerhouse and the growing but still nascent economy of India, will remain ahead of the world average. However, growth for the grouping has fallen back to single digits from the heady rates of 13.6% and 17.8% in 2003 and 2004.

Reassuringly, the growth rates of imports are converging with those of exports, providing contrary evidence to the claim that China and other dynamic Asian economies are the major sources of global trade imbalance.

IMF Projections Summary Table